For most homeowners, solar panels are not directly tax deductible as a personal expense. However, the distinction matters: a tax deduction reduces your taxable income, while the federal solar tax credit directly reduces your tax bill. For residential homeowners who bought and own their system, the Section 25D tax credit was the main federal incentive — but that credit expired December 31, 2025. Businesses installing solar get both a tax credit AND depreciation deductions. Understanding what’s available in 2026 is essential before making any solar investment decision.
Tax Deduction vs. Tax Credit: The Key Difference
These two terms are often confused, and the distinction has real dollar implications.
Tax deduction: Reduces your taxable income. If you’re in the 22% tax bracket and deduct $10,000, you save $2,200 on your tax bill (22% of $10,000). The value depends entirely on your tax bracket.
Tax credit: Reduces your actual tax bill dollar-for-dollar. A $3,000 tax credit reduces your taxes by $3,000, regardless of your tax bracket. Credits are generally more valuable than deductions of the same amount.
The former federal residential solar credit (Section 25D) was a tax credit — 30% of system cost applied directly against your federal income tax liability. This credit expired for homeowners on December 31, 2025. It was not a deduction, but it was the most valuable federal solar incentive that existed for homeowners.
Can Homeowners Deduct Solar Panel Costs?
No — homeowners cannot deduct residential solar panel costs as a federal income tax deduction. Home improvements, including solar panel installation, are not deductible as personal expenses under the US Tax Code.
There is one indirect path where solar can affect your taxes as a homeowner: if you eventually sell your home, the cost of solar panels generally adds to your home’s cost basis, which can reduce your capital gains when you sell. However, for most homeowners (single filer gains up to $250,000 excluded; married filing jointly gains up to $500,000 excluded), this has no practical tax impact since home sale gains fall under the exclusion threshold.
Some state income tax systems do have solar-specific deductions or credits — these vary by state and are separate from federal tax treatment.
What Federal Solar Incentives Exist in 2026 for Homeowners?
The Section 25D residential clean energy credit, which provided homeowners a 30% tax credit on solar panel purchases, expired December 31, 2025 under the One Big Beautiful Bill signed July 4, 2025. As of 2026, there is no federal tax credit or deduction for homeowners who purchase and own a solar system.
Options for homeowners in 2026:
Solar lease or PPA: Under a solar lease or Power Purchase Agreement, the solar installation company owns the system — you pay for solar power instead of buying the panels. The installer (not you) claims the Section 48E commercial solar credit (still active through 2027). This can result in lower lease/PPA rates because the installer’s economics include the credit. You get no federal tax benefit but have lower upfront cost (often $0 down).
State incentives: Many states have their own solar incentives independent of the federal system. Notable examples include New York (25% state tax credit, up to $5,000), Massachusetts (15% credit up to $1,000, plus net metering), Maryland (30% credit up to $5,000 for installations through 2027), Hawaii (35% state credit), and South Carolina (25% credit). Check your state’s energy office for current availability.
Property and sales tax exemptions: Most states exempt solar panel equipment from sales tax and exclude solar installations from increasing your assessed property value for tax purposes. These are passive savings, not credits, but they meaningfully reduce the cost of going solar.
Can Businesses Deduct Solar Panels?
Yes — businesses have significantly more favorable tax treatment for solar installations in 2026.
Section 48E Investment Tax Credit (ITC): Businesses, including sole proprietors and real estate investors, can claim a 30% tax credit on commercial solar installations. This credit is active through 2027 under current law. Unlike Section 25D (which applied to homeowners), Section 48E was renewed and extended by the One Big Beautiful Bill. The credit applies to the full installed system cost, including labor.
MACRS Depreciation: Businesses can depreciate solar equipment over 5 years using the Modified Accelerated Cost Recovery System (MACRS). In 2026, 20% bonus depreciation is available (stepped down from 100% in 2022, then 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026). This creates a first-year depreciation deduction of 20% of the equipment cost (after reducing the basis by 50% of the ITC), with the remaining balance depreciated over 5 years.
Example business tax calculation (2026):
$50,000 solar system for a business
Section 48E credit: $50,000 × 30% = $15,000 (reduces taxes dollar-for-dollar)
Depreciable basis: $50,000 − ($15,000 × 50%) = $42,500
Year-1 bonus depreciation (20%): $42,500 × 20% = $8,500 additional deduction
Remaining MACRS depreciation: $34,000 over 5 years at accelerated rates
A business in the 37% tax bracket effectively receives $15,000 (credit) + substantial depreciation deductions, resulting in after-tax cost well below the sticker price.
What About a Home Office?
If you have a legitimate home office deduction, you may be able to deduct a proportional share of home energy costs as a business expense. However, solar panel installation cost is a capital improvement, not an operating expense — it’s treated differently from utility bills.
A home office user could potentially depreciate the solar system cost proportional to the home office percentage (e.g., if your home office is 15% of total home square footage, you might depreciate 15% of the solar system cost as a business asset under MACRS). This is a complex area requiring guidance from a tax professional, as the IRS scrutinizes home office and home business claims closely. Consult a CPA before claiming solar depreciation for a home-based business.
Is Solar Loan Interest Tax Deductible?
This depends on the loan type:
Unsecured personal solar loan: Interest is not tax deductible. Personal loan interest has not been deductible since the Tax Reform Act of 1986.
Home Equity Loan or HELOC secured by your home: Interest may be deductible if the funds are used to substantially improve your home (which solar installation qualifies as). The mortgage interest deduction limit applies ($750,000 of qualified residence loans for married filing jointly). This deduction is only meaningful if you itemize deductions rather than taking the standard deduction — and with the standard deduction at $29,200 for married filing jointly in 2025/2026, most homeowners do not itemize. Consult a tax professional for your specific situation.
PACE financing: Interest on PACE (Property Assessed Clean Energy) loans is not deductible as mortgage interest because PACE is structured as a special assessment, not a mortgage lien. The IRS has specifically stated that PACE assessments do not qualify for the mortgage interest deduction.
State-Level Solar Tax Benefits
Many states offer solar-specific incentives that function as deductions or credits at the state income tax level. These vary significantly and change frequently. Currently active examples include:
Arizona: Personal income tax credit of 25% of solar costs, up to $1,000.
New York: 25% of installed cost, up to $5,000 state tax credit (separate from federal).
Maryland: 30% credit up to $5,000 for systems installed through the program’s funding limit.
South Carolina: 25% credit on the first $5,000 of cost.
Hawaii: 35% credit, up to $5,000 for single-family residential systems.
Property tax exemptions (preventing solar from increasing your property tax assessment) are available in: Arizona, California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Texas, Virginia, and Wisconsin, among others.
Sales tax exemptions on solar equipment purchases are available in many states including California, Arizona, Colorado, Maryland, Massachusetts, New Jersey, North Carolina, and others. These are worth checking before purchase — a 7-10% sales tax on a $20,000 system represents $1,400–$2,000 in savings.
Frequently Asked Questions
Can I deduct solar panels on my federal tax return?
As a homeowner, no — solar panel costs are not directly deductible as a personal expense on your federal return. The Section 25D residential clean energy credit that used to provide a 30% tax credit (not deduction) expired December 31, 2025. Businesses can deduct solar costs through the Section 48E investment tax credit and MACRS depreciation.
Did the solar tax credit expire?
The residential homeowner tax credit (Section 25D) expired December 31, 2025. The commercial/installer credit (Section 48E) remains active through 2027. If you lease your solar system or sign a PPA, the installer still claims the Section 48E credit, which typically results in lower rates compared to purchasing — the credit savings are passed through partly to consumers.
Are state solar tax credits still available?
Yes — many states maintain their own solar tax credits and incentives independent of the federal system. New York, Maryland, South Carolina, Hawaii, and Arizona have particularly strong state credits. Sales tax and property tax exemptions are also widely available. Check your state’s energy or revenue department for current programs.
Can a landlord deduct solar panels?
Yes — rental property owners can deduct solar panel costs as a business expense because rental properties are treated as business assets. The Section 48E commercial credit applies to rental property solar installations, and MACRS depreciation allows the cost to be deducted over 5 years. This makes solar significantly more financially attractive for rental property owners than for homeowners.
Is it worth going solar in 2026 without the federal tax credit?
It depends on your state’s incentives, local utility rates, and your financing situation. In states with strong net metering and high electricity rates (California, Hawaii, Massachusetts, New York, Connecticut), solar still has payback periods of 8–14 years and strong lifetime returns. In states with weak net metering or low electricity rates, the math is tighter without Section 25D. Getting a free quote from a local installer and running the numbers for your specific situation is the best approach.
Summing Up
Solar panels are not tax deductible as a home expense for federal income tax purposes. The once-significant Section 25D residential tax credit expired at the end of 2025. In 2026, homeowners still have meaningful options: state-specific tax credits, property and sales tax exemptions, and solar leases/PPAs where the installer passes through Section 48E credit savings. Businesses, landlords, and commercial property owners continue to benefit from strong federal incentives (Section 48E credit plus MACRS depreciation) making commercial solar highly financially advantageous. If you’re evaluating solar for your home or business, call (855) 427-0058 for a free consultation with a local installer who can walk through current incentives in your specific state.
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