Preface: “One of the most exciting opportunities created by renewable energy technologies like solar is the ability to help the world’s poorest develop faster – but more sustainably too.” – Ed Davey
The Investment Energy Credit for Businesses
Section 48 of the Internal Revenue Code provides a tax credit for businesses that invest in properties that conserve or produce certain types of energy. The credit is generally worth 30% of the cost of the property if conditions are met. Bonus credits can increase the total value of the credit even more.
There is also a Production Tax Credit under Section 45 that can be claimed for the production of clean electricity on a per kilowatt-hour basis, but we will only address the Investment Tax Credit here. You cannot take the Investment Tax Credit and the Production Tax Credit on the same property.
Types of energy property that can be used to claim the credit include: geothermal, fuel cell, microturbine, small wind, biogas, microgrid controllers, energy storage, solar illumination, combined heat and power systems, waste energy recovery, and clean hydrogen production.
This credit is only available for depreciable property for which original use begins with the taxpayer.
The credit can be taken by individuals if they are sole proprietors or if they are partners or shareholders in pass-through entities that pass through part of the credit to them. Like all business credits, it is non-refundable, and any unused portion can be carried forward for up to 20 years.
The credit is claimed on Form 3468 parts I & VI. Part I reports the facility where the property has been installed, and Part VI claims the Energy Credit.
The 1MW Exception
A separate claim must be filed for each facility for which the credit is claimed. If the facility produces more than 1 megawatt of alternating current or equivalent, you must file an application with the Department of Energy confirming that you agree to meet prevailing wage and apprenticeship requirements. Once the facility is in service, you must notify the DOE and confirm that the requirements were met. Failure to make these notifications will result in the credit being only 6% instead of 30%.
To put this limit in perspective, consider that 1 megawatt is enough electricity to power about 600 homes.
Domestic Content Bonus Credit and Energy Community Bonus Credit
The Domestic Content Bonus Credit adds an additional 10% to the credit if you attach a signed declaration that all steel, iron, or manufactured products that are a part of the facility were produced in the United States.
The Energy Community Bonus Credit adds an additional 10% to the credit if the facility is located in either:
- A brownfield site; or
- The site of a coal mine closed after 1999 or a coal-fired power plant closed after 2009; or
- A statistical area with at least the national average of unemployment and at least 0.17% direct employment in or at least 25% local tax revenue related to coal, oil, or natural gas
The Domestic Content Bonus Credit and Energy Community Bonus Credit are not mutually exclusive. However, these two types of bonus credit are each worth only 2% instead of 10% unless the energy project has either:
- Maximum net output of less than 1 megawatt; or
- Its construction began before January 29, 2023; or
- It meets the prevailing wage and apprenticeship requirements
Low-Income Communities Bonus Credit
For solar and wind facilities, the credit may also be increased:
- An additional 10% if installed on Indian land; or
- An additional 10% if installed in a low-income community; or
- An additional 20% if part of a qualified low-income residential building; or
- An additional 20% if part of a qualified low-income economic benefit project
You must apply and be approved to receive any kind of Low-Income Communities Bonus Credit.
In principle, if you were eligible for both the Domestic Content and Energy Community Bonus Credits and qualified for either the low-income residential building or qualified low-income economic benefit project part of the Low-Income Communities Bonus Credit, you could recoup 70% of your costs as a tax credit.