Guide to the Federal Investment Tax Credit for Commercial Solar Photovoltaics
Disclaimer: This guide provides an overview of the federal investment tax credit for those interested in
commercial solar photovoltaics, or PVSee photovoltaic(s)..
It does not constitute professional tax advice or other professional financial guidance. And it should not be used as the only source of information when making purchasing decisions, investment decisions, or tax decisions, or when executing other
binding agreements.
Overview
- The solar investment tax credit (ITC)
is a tax credit that can be claimed on
federal corporate income taxes for 30%
of the cost of a solar photovoltaic (PVSee photovoltaic(s).)
system that is placed in service during
the tax year.1 (Other types of renewable
The U.S. Department of Energy Solar Energy Technologies Office supports early-stage research and development to improve the affordability, reliability, and performance of solar technologies on the gridSee electrical grid.. The office invests in innovative research efforts that securely integrate more solar energy into the gridSee electrical grid., enhance the use and storage of solar energy, and lower solar electricityEnergy resulting from the flow of charged particles, such as… costs.
energy are also eligible for the ITC but
are beyond the scope of this guidance.)
- In December 2020, Congress passed an
extension of the ITC, which provides
a 26% for systems commencing
construction in 2020-2022, 22% for
systems commencing construction
in 2023, and 10% for systems
commencing construction in 2024 or
thereafter. Any PVSee photovoltaic(s). system placed in
service after 2025, regardless of when
it commenced construction, can receive
a maximum tax credit of 10%.2 - Typically, a solar PVSee photovoltaic(s). system that is
eligible for the ITC can also use an
accelerated depreciation corporate
deduction.
Overview
To be eligible for the business ITC (section 48 of the tax code), the solar PVSee photovoltaic(s). system must be:
- Used by a business subject to U.S. federal
income taxes (i.e., it cannot be used by a
tax-exempt entity like a charity) - Located in the United States or U.S.
territories (though can only be used
against federal income tax obligations)3 - Systems must use new and limited
previously used equipment4 - Not used to generate energy for heating
a swimming pool.
The eligible ITC percentage scales down
over time as follows: - 30% tax credit for projects
commencing construction between
January 1, 2006, and December 31,
2019, but placed in service before 2026
(before 2024 for projects commencing
construction in 2019 and which use the
IRS continuity safe harbor. See below
for further detail on “continuity safe
harbor”).
- 26% tax credit for projects
commencing construction between
January 1, 2020, and December 31,
2022, but placed in service before 2026
(before 2025 for projects commencing
construction in 2020 and which use the
IRS continuity safe harbor. See below
for further detail on “continuity safe
harbor”). - 22% tax credit for projects
commencing construction between
January 1, 2023, and December 31,
2023, but placed in service before 2026. - 10% tax credit for projects
commencing construction after
December 31, 2023, or plac
- A solar project is considered to have
commenced construction if: - At least 5% of final qualifying project
costs are incurred. Expenses have to
be “integral” to generating electricityEnergy resulting from the flow of charged particles, such as…,
and equipment and services have to
be delivered (or delivered within 3.5
months after payment). - Or, “physical work of significant
nature” is commenced on the project
site or on project equipment at the
factory. Physical work has to be
“integral” to the project. Preliminary
activities on site (e.g., clearing the site
or building a fence or an access road)
do not count as “integral.”
Both tests require that the project make
continuous progress towards completion
once construction has begun, which the
IRS considers satisfied automatically if
the project is placed in service no later
than four calendar years (or ten years,
for projects that meet the definition of
being constructed on federal land6) after
the calendar year in which construction
began (these four and ten year time
periods are known as “continuity safe
harbor”). Projects can still potentially
satisfy the continuity safe harbor beyond
four years, depending on their individual
facts and circumstances, however,
because this is not guaranteed, owners
may bear additional risk.7
Eligible Expenses
The ITC is calculated by multiplying
the applicable tax credit percentage
(10%–30%) by the “tax basis,” which is
the amount invested in eligible property.
Eligible property includes the following:
- Solar PVSee photovoltaic(s). panels, inverters, racking,
balance-of-system equipment, and sales
and use taxes on the equipment - Installation costs and indirect costs
- Step-up transformers, circuit breakers,
and surge arrestors - Energy storage devices (if charged by
a renewable energy system more than
75% of the time)8
Other Incentives and the ITC
Electric Utility and State
Government Rebates
Under most circumstances, solar PVSee photovoltaic(s).
system rebates provided by a utility or
state government are considered taxable
income and do not affect the tax basis
when calculating the ITC. For example,
if the tax basis is $1,000,000 for a PVSee photovoltaic(s).
system installed at a retail business
that commenced construction before
December 31, 2019 and was placed in
service before December 31, 2023, and
the state government gives a one-time
rebate of $100,000, the ITC
would be calculated as follows:
0.3 * $1,000,000 = $300,0009
One exception is if the rebate is provided
by a utility to a customer for purchasing
or installing any “energy conservation
measure,” including solar PVSee photovoltaic(s)., at a
residence.10 When this is the case, the
utility rebate is subtracted from the tax
basis, reducing the amount of the ITC
claimed; however, the rebate is not
considered taxable income. For example,
if the tax basis is $1,000,000 for a PVSee photovoltaic(s).
system installed at an apartment complex
and the utility gave a one-time rebate of
$100,000, and the project commenced
construction before December 31,
2019 and was placed in service before
December 31, 2023, the ITC would be
calculated as follows:
0.3 * ($1,000,000 – $100,000) = $270,000
Other Incentives
The following are some examples of
incentives and policies associated with
a solar PV system that typically do not
reduce the tax basis related to the ITC (but
some may be considered taxable income):
- Revenue from the sale of renewable
energy credits or other environmental
attributes associated with the electricityEnergy resulting from the flow of charged particles, such as…
generated by the solar PVSee photovoltaic(s). system11 - Payments for a state performance-based incentive
- State and local income tax credits
- State and local property tax exemptions
on the equipment - Taxable state or nonprofit grants
- Loan guarantees
- Tax-exempt and subsidized energy
financing (in 2009 or after) - Depreciation deductions (see below).
Accelerated Depreciation and
the Depreciation Bonus
Accelerated Depreciation
A taxpayer who claims the commercial
ITC for a solar PVSee photovoltaic(s). system placed in
service can typically also take advantage
of accelerated depreciation (Modified
Accelerated Cost-Recovery System, or
MACRS) to reduce the overall cost of a
PVSee photovoltaic(s). installation. To calculate the income
on which federal corporate taxes are
owed, a business takes the difference
between its revenues and expenses, plus
or minus any adjustments to income.
Because depreciation is considered
an expense, having a larger amount to
depreciate during the tax year results in a
smaller overall tax liability. Note that while
the ITC is a tax credit—a dollar-for-dollar
reduction in taxes owed—depreciation
is a deduction, meaning it only reduces a
business’s taxes by the depreciation amount
multiplied by the business’s tax rate (see
below for an example).
When the commercial ITC12 is claimed,
accelerated depreciation rules allow the
full tax basis minus half the ITC to be
depreciated over a five-year MACRS
depreciation schedule using a halfyear convention13 (where any unused
depreciation can be carried forward
indefinitely)14. Under the rules of this
depreciation schedule, taxpayers are
allowed to deduct a larger portion of this
amount in earlier years, giving them the
benefit of a greater immediate reduction
in federal tax liability
Bonus Depreciation
A business with a solar PVSee photovoltaic(s). system placed
in service between January 1, 2008, and
September 8, 2010, or between January 1,
2012, and December 31, 2017, can elect to
claim a 50% depreciation bonus. Systems
placed in service between September
9, 2010 and December 31, 2011 or
between January 1, 2018 and December
31, 2022, can elect to claim a 100%
bonus depreciation. Starting in 2023, the
percentage of capital equipment that can
be expensed immediately drops 20% per
year (e.g., 80% in 2023 and 60% in 2024)
until the provision drops to 0% in 2027.15
Example of a Calculation
A generic example can help illustrate
how each incentive could be calculated
and applied at a business. Consider a
business that commenced construction of
a $1,000,000 solar PVSee photovoltaic(s). system in 2023,
placed it in service in 2025, and uses the
calendar year as its tax year. What is the
net effect of claiming the ITC, bonus
depreciation, and accelerated depreciation
on its 2025 tax liability?
ITC Calculation
As indicated above for a solar PVSee photovoltaic(s). property that commenced construction in 2023 and was eligible for a 22% ITC,
when the tax basis is $1,000,000, the 22%
ITC reduces tax liability by $220,000.
Bonus Depreciation Calculation
Because the business is claiming the ITC,
its depreciable basis for the system after
applying the ITC is 89% (100% – 22%/2)
of the tax basis:
0.89 * $1,000,000 = $890,000
To calculate the bonus depreciation for
a solar PVSee photovoltaic(s). property placed in service
in 2025, the business multiplies the
depreciable basis by 40%:
0.4 * $890,000 = $356,000
Accelerated Depreciation Calculation
In the example, the business uses
accelerated depreciation to determine
what amount of depreciation it will
deduct in each year from 2025 to 2030.
Assuming this five-year recovery
period, a half-year convention, and a
200% declining balance method, IRS
Publication 946 Table A-1 lists the
depreciation rate as 20% for Year 1.
The business calculates its accelerated
depreciation deduction by taking
the difference between the original
depreciable basis and the amount
claimed for the bonus depreciation and
multiplying by the depreciation rate:
0.20 * ($890,000 – $356,000) = $106,800
Total Impact on Tax Liability
Assuming the business has a federal
tax rate of 21%, the net impact of
depreciation deductions is calculated as:
0.21 * ($356,000 + $106,800) = $97,188
Therefore, the total reduced tax liability
for 2023 from depreciation deductions
and the ITC is:
$220,000 + $97,188 = $317,188
The business will continue to claim
accelerated depreciation deductions for
tax years 2026, 2027, 2028, 2029, and
2030—but the specific depreciation rate
will vary by year.16
Unused Tax Credits
Carryback and Carryforward Rules
Unused tax credits related to the
commercial ITC may be carried back
1 year and forward 20 years. After 20
years, one- half of any unused credit can
be deducted, with the remaining amount
expiring.
Tax Equity Financing
When a business developing a solar
project does not have a large tax liability,
tax equity financing may be an option
to take full advantage of federal tax
benefits. The business can partner with a
tax equity investor who has a relatively
large tax appetite and can make use of
the tax benefits. There are the following
three commonly used models, although
the specific arrangements can be quite
complicated:
- Sale-Leasebacks: The developer sells
the solar PVSee photovoltaic(s). system to a tax equity
investor who leases the system back to
the developer. - Partnership Flips: The developer
and investor form a partnership, and
the economic returns “flip” from the
investor to the developer after the investor
makes use of the tax benefits and achieves
target yields. - Inverted Leases: The developer leases
the system to the investor, structuring
the agreement in a way that allows the
investor to use the tax benefits.
Other Issues
Tax-Exempt Entities
Generally, if the solar PVSee photovoltaic(s). system is used
by a tax-exempt entity such as a school,
municipal utility, government agency, or
charity, the ITC may not be claimed.
In some states, a tax-exempt entity
can indirectly benefit from federal tax
benefits related to solar by entering
into a third- party ownership (TPO)
arrangement. Specifically, a tax-exempt
entity can agree to purchase the
electricityEnergy resulting from the flow of charged particles, such as… produced by a solar PVSee photovoltaic(s). system
owned and installed by a solar company
(who claims the associated federal tax
benefits) for an agreed- upon number
of years at a set price. This type of TPO
arrangement is called a power purchase
agreement (PPA). As of June 29, 2019,
at least 28 states and Washington, D.C.
authorize this type of TPO, 7 states
prohibit them, and their legal status is
or minus any adjustments to income.
Because depreciation is considered
an expense, having a larger amount to
depreciate during the tax year results in a
smaller overall tax liability. Note that while
the ITC is a tax credit—a dollar-for-dollar
reduction in taxes owed—depreciation
is a deduction, meaning it only reduces a
business’s taxes by the depreciation amount
multiplied by the business’s tax rate (see
below for an example).
When the commercial ITC12 is claimed,
accelerated depreciation rules allow the
full tax basis minus half the ITC to be
depreciated over a five-year MACRS
depreciation schedule using a halfyear convention13 (where any unused
depreciation can be carried forward
indefinitely)14. Under the rules of this
depreciation schedule, taxpayers are
allowed to deduct a larger portion of this
amount in earlier years, giving them the
benefit of a greater immediate reduction
in federal tax liability
A Note on Recapture Rules
Though the ITC can be claimed in full
for the year in which the solar PVSee photovoltaic(s).
system is placed in service, the
business claiming the ITC must
retain ownership of the system until
the sixth year of the system’s
operation, or the business will be
required to repay a portion of the tax
credit. Because the ITC “vests” at a
rate of 20% per year over five years,
any “unvested” portion is recaptured
(i.e., repaid to the Department of the
Treasury) if something happens
during the five years that would have
made the project ineligible for the
ITC in the first place. For example, if
the business claims the ITC and
then sells the system a year later,
after it has only vested 20%, it will
have to repay 80% of the amount it
claimed from the ITC to the
Department of the Treasury.
Structures and Building Integrated PVSee photovoltaic(s).
Structures holding the solar PVSee photovoltaic(s). system may be eligible for the
ITC if the solar PVSee photovoltaic(s). system is designed with the primary goal of
electricityEnergy resulting from the flow of charged particles, such as… generation and other uses of the structure are merely
incidental.18 Though structural components typically do not
qualify for the ITC, the IRS noted an exception for components
“so specifically engineered that it is in essence part of the
machinery or equipment with which it functions.”19
Claiming the ITC
To claim the ITC, a taxpayer must complete and attach IRS Form
3468 to their tax return. Instructions for completing the form are
available at http://www.irs.gov/pub/irs-pdf/i3468.pdf (“Instructions
for Form 3468,” IRS).
More Information
Ask Questions
Internal Revenue Service (IRS), 1111 Constitution Avenue,
N.W., Washington, D.C. 20224, (800) 829-1040.
Find Resources
- The federal statute regarding the ITC: 26 U.S.C. § 48 at www.
govinfo.gov. - Updated information on the status of the ITC: DSIRE at www.
dsireusa.org.
Endnotes
1 126 U.S.C. § 48, https://www.govinfo.gov/content/pkg/USCODE-2011-title26/pdf/
USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartE-sec48.pdf.
2 Solar PVSee photovoltaic(s). systems that commenced construction on or before December 31, 2019 were
eligible for a 30% tax credit.
3 The IRS has ruled the ITC can be claimed by U.S. corporations, citizens, or partnerships
that own solar in U.S. territories; however, companies and individuals are not eligible to
receive the tax benefits if they do not pay federal income tax, which means most Puerto
Ricans and Puerto Rican companies are ineligible. Therefore, solar assets in U.S. territories
would most likely need to be owned by outside U.S. investors to take advantage of the ITC
(Farrell, Mac, Lindsay Cherry, Jeffrey Lepley, Astha Ummat, and Giovanni Pagan. 2018.
Reimagining GridSee electrical grid. Solutions: A Better Way Forward for Puerto Rico. Prepared for the
Global Collaboratory PanelSee photovoltaic (PV) panel.. https://sipa.columbia.edu/sites/default/files/embedded-media/
Reimagining%20Grid%20Solutions_Final%20SIPA%20REPORT_0.pdf).
4 No more than 20% of the eligible value of the PVSee photovoltaic(s). system can be classified as used
equipment.
5 Tax Cuts and Jobs Act of 2017; Consolidated Appropriations Act, 2021.
6 “Beginning of Construction for Sections 45 and 48; Extension of Continuity Safe Harbor
for Offshore Projects and Federal Land Projects.” IRS. Notice 2021-05.
7 “Beginning of Construction for the Investment Tax Credit under Section 48.” IRS.
Notice 2018-59. https://www.irs.gov/pub/irs-drop/n-18-59.pdf. The IRS provided a
one-year extension to the Continuity Safe Harbor for projects that began in 2016 or 2017,
and a new safe harbor for satisfying the 3.5 month rule for property or services purchased
after September 15, 2019 and received by the taxpayer no later than October 15, 2020.
“Beginning of Construction for Sections 45 and 48; Extension of Continuity Safe Harbor
to Address Delays Related to COVID-19.” IRS. Notice 2020-41. https://www.irs.gov/pub/
irs-drop/n-20-41.pdf
8 Additional considerations apply when the energy storage device is also used to store
energy generated from a source other than the solar PVSee photovoltaic(s). system. For more information, see:
• IRS. 2013, February 22. IRS private letter ruling 121432-12. http://www.irs.gov/pub/
irs-wd/1308005.pdf.
• Elgqvist, Emma, Kate Anderson, and Edward Settle. 2018. Federal Tax Incentives for
Energy Storage Systems. Golden, CO: National Renewable Energy Laboratory. NREL/
FS-7A40-70384. https://www.nrel.gov/docs/fy18osti/70384.pdf.
9 If the project commenced construction between January 1, 2020, and December 31,
2022, and it was placed in service before 2026, the ITC is calculated as 0.26 * $1,000,000
= $260,000.
10 26 U.S.C. § 136, https://www.govinfo.gov/app/details/USCODE-2011-title26/USCODE2011-title26-subtitleA-chap1-subchapB-partIII-sec136.
11 IRS. 2010, September 3. IRS private letter ruling 201035003. https://www.irs.gov/pub/
irs-wd/1035003.pdf.
12 For projects claiming a 30% ITC, project owners can depreciate 85% of the tax basis,
or 100% – 30%/2 = 85% (26 U.S.C. § 168, https://www.govinfo.gov/app/details/USCODE2017-title26/USCODE-2017-title26-subtitleA-chap1-subchapB-partVI-sec168).
13 A half-year convention is a tax principle that treats equipment as if it were installed
in the middle of the tax year (regardless of when it was actually installed), allowing half a
year’s depreciation for the first tax year. The half-year convention effectively spreads the
five-year MACRS depreciation over six years, with the first year being calculated as half of
the 200% declining-balance basis.
14 Before 2018, any unused depreciation could be carried back 2 years and forward 20
years, but that changed with the passage of the Tax Cuts and Jobs Act of 2017 (“Who
Needs Sec. 179 Expensing When 100% Bonus Depreciation is Available?” Thomson
Reuters Tax and Accounting. October 5, 2018. https://tax.thomsonreuters.com/news/
who-needs-sec-179-expensing-when-100-bonus-depreciation-is-available/).
15 The bonus depreciation, after 2018, is available for purchased new and used equipment.
(Martin, Keith. 2017, December. “How the US Tax Changes Affect Transactions.” Norton
Rose Fulbright Project Finance Newswire. https://www.nortonrosefulbright.com/en-us/
knowledge/publications/68becf68/how-the-us-tax-changes-affect-transactions).
16 IRS. 2015. How to Depreciate Property. Publication 946, Cat. No. 13081F. http://www.
irs.gov/pub/irs-pdf/p946.pdf.
17 DSIRE (Database of State Incentives for Renewables and Efficiency). 2019. Third-Party
Solar PVSee photovoltaic(s). Power Purchase Agreements. Updated June 2019. https://www.dsireusa.org/
resources/detailed-summary-maps/ (“Detailed Summary Maps”).
18 Meehan, Chris. “Solar Carports, Incentives and the Investment Tax Credit: It’s
Complicated, Kinda.” Solar-Estimate. Last updated August 1, 2019: https://www.solarestimate.org/news/solar-carports-incentives-investment-tax-credit-113017.
19 IRS. 2010, October 29. IRS private letter ruling 201043023. https://www.irs.gov/pub/
irs-wd/1043023.pdf.
For more information, visit: energy.gov/eere/solar
DOE/EE-2316 • January 2021