Tax Policy

About Solar Tax Policy

The U.S. has a long history of supporting energy infrastructure through the U.S. tax code. The investment tax credit (ITC) for solar and storage has supported private investment in manufacturing and project construction, a vital part of meeting our nation’s energy policy goals, lowering electricity bills, and driving job growth. The credits enacted or amended as part of the Inflation Reduction Act (IRA) in 2022 further incentivized the development of solar and storage projects that pay prevailing wages and employ apprentices; use domestically made steel and manufactured products; are located in geographic areas that previously relied on fossil fuel infrastructure and jobs; and are located in or serve low-income areas.

The IRA also added other policy innovations to the tax code, including reinstating solar’s eligibility for the production tax credit (PTC); allowing taxpayers to transfer clean energy credits; permitting certain entities like nonprofits and governments to receive cash instead of credits; providing credits for interconnection costs; and establishing new technology-neutral electricity production and manufacturing tax credits, including for solar and storage.

In 2025, the One, Big, Beautiful Bill Act (OBBBA) significantly tightened the timeline for solar projects. Under the new requirements, any solar project that begins construction after July 4, 2026, must be placed in service by December 31, 2027. The OBBBA left unchanged the phasedown for the energy storage ITC, which begins in 2034, and the manufacturing tax credit for solar and storage components, which begins in 2030.

The OBBBA also introduced complex Prohibited Foreign Entity (PFE) requirements. Taxpayers must comply with most of these rules beginning in 2026 for the ITC, PTC, and the manufacturing tax credit, though certain requirements apply beginning post-enactment of OBBBA.

To qualify, taxpayers are required to pass three PFE screening tests:

• Entity test: Is the taxpayer owned, controlled, or influenced by a PFE?
• Payment test: Do contracts, financing, or licensing arrangements give a PFE “effective control”?
• Project/component (material assistance) test: Does too much of a project or component’s supply chain come from a PFE?

Quick Facts about the Solar ITC

• The ITC is a technology-neutral clean energy (including solar and storage) tax credit under Section 48E, effective beginning in 2025, replacing the prior technology-specific Section 48 ITC.
• The base 6 percent credit increases to 30 percent if the project pays workers prevailing wages and employs qualified apprentices.
• For systems under 1 MW, including third-party-owned systems installed on a residence that a homeowner may lease, the base tax credit is 30 percent.
• Three additional bonus credits are potentially available:
  • Domestic content (additional 10 percent): the project is built with 100 percent U.S.-made structural steel and iron, and at least 40-55 percent U.S.-made manufactured products like modules and inverters (the threshold percentage will depend on the year the project began construction).
  • Energy communities (additional 10 percent): the project is located in or adjacent to a census tract with a closed coal mine or coal-fired power station; in a statistical area with average or above-average unemployment and certain levels of historical fossil fuel-related employment; or on a brownfield site.
  • Low-income communities: the project is located in a low-income area or on Indian lands (additional 10 percent); or on low-income multifamily housing or provides at least 50 percent of the project’s economic benefits to low-income households (additional 20 percent). Unlike the other bonus credits, the low-income communities bonus credit must be applied for and awarded by the Departments of Energy and Treasury, and is capped at 1.8 GW per year.
• The OBBBA ended tax credits under Section 25D for solar and storage homeowners on December 31, 2025, but certain commercial projects on residences can still qualify for the ITC.