The Investment Tax Credit – Section 48 is a tax incentive allowing taxpayers to claim a credit for energy property placed into service during a taxable year. This incentive was enhanced in the Inflation Reduction Act, which expanded the eligible energy property and increased the value of this credit. It also introduced the option of direct pay, allowing the credit to be directly paid to non-profit and government entities.
Eligible Energy Property
- Solar panels
- Geothermal systems
- Combined heat & power
- Waste energy recovery
- Small wind energy
- Energy storage
- Fuel cell property
- Biogas property
- Microgrid controllers
Energy Credit Amount
The base credit amount is 6% of the basis for the qualified energy system.
The increased credit amount is 30% or five times the base credit. A taxpayer qualifies for the increased credit by meeting any of the below conditions:
- The Prevailing Wage & Apprenticeship Requirements (PW&A) are met on the project
- The project began construction prior to February 2023
- The project has a maximum net output of less than 1 MW of electrical or thermal energy
For each bonus credit, a taxpayer can receive an additional 2% (base) or 10% (increased). If they meet the increased credit and all bonus requirements, the maximum credit is 70% of the basis for the qualified energy system. A taxpayer may receive an additional credit for meeting any of the below criteria.
1. Domestic content bonus credit: The taxpayer can receive additional credit if the project uses a percentage of products produced and manufactured in the United States. The percentage requirements increase for projects starting construction after December 31, 2024.
2. Energy communities bonus credit: The taxpayer can receive additional credit if the project is located in an energy community, including the following examples:
- A brownfield site
- An area that has direct employment or tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas and has an unemployment rate at or above the national average
- A census tract with a coal mine or coal-fired electric generating unit that has been retired
Limitations to Electing Section 48
- The credit cannot be applied to energy property that has qualified for the Production Tax Credit (PTC) – Section 45
- The credit is reduced if the project is financed by tax-exempt bonds
- The credit cannot be applied to any energy property that received a Section 1603 grant in the same tax year
Alternative Methods for Claiming the Credit
Direct Payment: The Investment Tax Credit has an election to make eligible credits refundable, allowing direct payment of the credit. The below entities that do not have a tax liability are approved to receive direct payment from the Treasury Department in the amount of the credit:
- Tax-exempt organizations
- State or local government (or political subdivision)
- Tennessee Valley Authority
- Indian tribal government
- Alaska native corporation
- Rural electric corporation
Transfer of Credit: Eligible entities can transfer their energy credits to another taxpayer, except when direct pay is elected.
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