26 U.S.C. § 48 — Energy credit

(a) Energy credit. For most businesses, this is the main rule. Your energy credit for a tax year equals the "energy percentage" times the basis (roughly, the cost) of each piece of "energy property" you place in service that year. The energy percentage is usually 6 percent. This 6 percent rate applies to: fuel cell property; solar equipment that generates electricity, heats or cools a building, or makes hot water (but only if construction began before January 1, 2025 for the solar-lighting and electrochromic-glass types); geothermal equipment; small wind property; waste energy recovery property; energy storage technology; biogas property; microgrid controllers; and combined heat and power system property. Any other kind of energy property gets 0 percent — and the law says that 0 percent can never be bumped up by any other part of this section. The energy percentage does not apply to the part of a property's cost that counts as a "qualified rehabilitation expenditure" — that already gets its own separate credit. "Energy property" is defined narrowly. It must be one of eleven listed kinds of equipment: solar-electric, solar-heating/cooling, or solar-process-heat equipment (not pool heaters); solar-lighting or electrochromic-glass equipment (only if construction began before January 1, 2025); geothermal equipment (electricity generation counts only up to the point before it reaches the transmission lines); fuel cell or microturbine property; combined heat and power property; small wind property; ground-source heat pump equipment (only if construction began before January 1, 2035); waste energy recovery property; energy storage technology; biogas property; or microgrid controllers. On top of being one of those types, the property must also: be newly built by the taxpayer, or bought new (its "original use" must start with the taxpayer); be the kind of property you're allowed to depreciate; and meet any performance and quality standards the Secretary of the Treasury sets by regulation, in place when the property is bought. Property already earning a production credit under section 45 for that year or an earlier year doesn't count as energy property here. If property was financed with tax-exempt bonds, rules like those under section 45(b)(3) apply to reduce the benefit. Owners of certain electricity-producing facilities that would normally qualify for the section 45 production credit can instead elect to treat the facility's property as energy property here, at a 6 percent rate — but then they give up the section 45 credit for that facility entirely. This election is only available for specific kinds of facilities (listed types of section 45 facilities placed in service after 2008, with construction beginning before January 1, 2025) and requires an irrevocable election, plus the qualifying property must be depreciable tangible personal property (or other tangible property, not a building, used as an integral part of the facility) that is new and built or bought by the taxpayer. Wind facilities that make this election and were placed in service before January 1, 2022 get their credit cut — by 20 percent if construction began in 2017, 40 percent if in 2018, 60 percent if in 2019, and 40 percent if construction began between 2020 and 2021. This cut does not apply to "qualified offshore wind facilities" — wind facilities located in U.S. inland navigable waters or coastal waters, regardless of when construction began. For interconnection costs: energy property also includes amounts the taxpayer pays for "qualified interconnection property" — equipment needed to connect small energy projects (5 megawatts AC or less) to the electric grid, that gets capitalized rather than expensed. This covers new or upgraded transmission or distribution equipment required at or beyond the interconnection point, built or paid for by the taxpayer, whose original use begins with a utility under an interconnection agreement. "Utility" here means a state-, federal-, or cooperative-regulated electricity transmission or distribution system operator. Interconnection costs get their capital account reduced the same way section 50(c) reduces other credited property. Certain energy projects get their credit multiplied by 5. This bonus applies to a project — one or more energy properties that are part of a single project — if it's small (under 1 megawatt of electric or thermal output), or if construction began before 60 days after the Secretary published guidance on wage and apprenticeship rules, or if the project actually meets those wage and apprenticeship rules. Those wage rules (called "prevailing wage requirements") say the taxpayer must make sure workers building the project — and, for five years after it's placed in service, workers who alter or repair it — are paid no less than the prevailing wage the Department of Labor sets for similar work in that area. Rules like those in section 45(b)(7)(B) apply to corrections and penalties if wages fall short. If a project fails to actually meet the wage requirement over that five-year window (even after any correction), the Secretary must claw back the extra credit, under rules like section 45(a)'s recapture rules — though the project doesn't stop being "investment credit property" because of that. Apprenticeship requirements (rules like section 45(b)(8)) apply too, as a condition of getting the 5x bonus. A separate bonus applies for using domestically made steel, iron, and manufactured products (rules like section 45(b)(9)(B)): it adds 2 percentage points to the energy percentage, or 10 percentage points if the project also qualifies for the 5x bonus above. If a taxpayer elects direct payment of the credit under section 6417, rules like section 45(b)(10) reduce it in a similar phaseout pattern. Projects placed in service in an "energy community" (as defined by cross-reference to section 45(b)(11)(B)) get another bonus: 2 percentage points, or 10 points if the project also meets the 5x-bonus wage/apprenticeship requirements. Owners of solar or hydrogen-related facilities have two more special elections. First, owners of certain clean-hydrogen production facilities can elect to treat their equipment as energy property here instead of claiming the hydrogen production credit under section 45V or the carbon-capture credit under section 45Q for that facility — giving up those other credits. The energy percentage they get depends on how clean the hydrogen is: 1.2 percent, 1.5 percent, 2 percent, or 6 percent, matching increasingly clean lifecycle-emissions tiers defined in section 45V(b)(2). The facility must have been placed in service after December 31, 2022, must not have already claimed the section 45V or 45Q credit, the taxpayer must make an irrevocable election, and an independent third party must verify the facility actually produces hydrogen as clean as expected. If actual verified production turns out dirtier than expected, the Secretary can claw back the extra credit through regulations. Finally, the Secretary must write regulations to administer this whole subsection, including recordkeeping and reporting rules. (b) Progress expenditures. If you're paying for energy property in stages before it's finished, rules like those that applied under section 46(c)(4) and (d), as they existed before the 1990 Revenue Reconciliation Act, apply here too. (c) Definitions. Several terms used above are defined here. "Qualified fuel cell property" is a fuel cell power plant with at least 0.5 kilowatt of capacity (1 kilowatt if it uses a "linear generator assembly") and better than 30 percent electricity-only efficiency. The credit for this property is capped at $1,500 per 0.5 kilowatt of capacity. A "fuel cell power plant" is an integrated system with a fuel-cell stack or linear-generator assembly plus supporting parts that converts fuel to electricity electrochemically or electromechanically. A "linear generator assembly" can't have rotating parts. This category ends for property whose construction doesn't begin before January 1, 2025. "Qualified microturbine property" is a stationary microturbine power plant under 2,000 kilowatts with at least 26 percent electricity-only efficiency (measured under standard test conditions). Its credit is capped at $200 per kilowatt of capacity. A "stationary microturbine power plant" is an integrated system — gas turbine engine, combustor, recuperator or regenerator, generator, and supporting parts — that converts fuel into electricity and heat, plus the secondary equipment needed to safely connect it to the power grid. This category also ends for construction not begun before January 1, 2025. "Combined heat and power system property" is a system that uses one energy source to make electrical or mechanical power together with usable heat (including heating and cooling). At least 20 percent of its useful energy must be thermal energy not used for power, and at least 20 percent must be electrical or mechanical power. Its energy-efficiency percentage — useful output divided by the fuel's lower heating value, measured in Btu — must exceed 60 percent, and construction must begin before January 1, 2025. If the system is bigger than 15 megawatts of electrical capacity (or 20,000 horsepower mechanical, or an equivalent mix), the credit is scaled down proportionally; systems over 50 megawatts (or 67,000 horsepower) don't qualify at all. Equipment that just transports fuel to, or distributes energy from, the facility doesn't count as part of the system. Systems designed to run on at least 90 percent biomass don't have to meet the 60 percent efficiency test, but their credit is scaled down based on how close they come to it. "Qualified small wind energy property" is property using a wind turbine with a nameplate capacity of 100 kilowatts or less. This category ends for construction not begun before January 1, 2025. "Waste energy recovery property" generates electricity solely from heat given off by buildings or equipment whose main purpose isn't making electricity. It can't be bigger than 50 megawatts. If it's part of a combined heat and power system, it's treated as combined heat and power property instead — unless the taxpayer elects otherwise. This category ends for construction not begun before January 1, 2025. "Energy storage technology" means equipment that receives, stores, and delivers energy for later conversion to electricity (or, for hydrogen, that stores energy), with at least 5 kilowatt-hours of capacity — except property mainly used to move people or goods. It also includes "thermal energy storage property": a system connected to a building's heating/cooling system that stores heat or cold in a medium for later use, heating or cooling a residential or commercial building's interior (not a swimming pool, a combined heat and power system, or a building itself). Older, smaller storage property can qualify if it's upgraded to reach the 5-kilowatt-hour threshold, but only the cost of the upgrade counts, not the original property's cost. This category ends for construction begun after December 31, 2024. "Qualified biogas property" is a system that converts biomass into a gas that's at least 52 percent methane (or that concentrates gas up to that purity), and captures the gas for sale or use — not for burning it off. Cleaning and conditioning equipment for that gas counts too. This category ends for construction begun after December 31, 2024. A "microgrid controller" is equipment that's part of a "qualified microgrid" and that monitors and controls that microgrid's energy resources and loads. A qualified microgrid is an electrical system that can generate between 4 kilowatts and 20 megawatts, that can run either connected to the regular grid or independently disconnected from it, and that isn't part of a "bulk-power system" under the Federal Power Act. This category ends for construction begun after December 31, 2024. (d) Coordination with Treasury grants. If the Treasury Secretary gives a taxpayer a cash grant under section 1603 of the American Recovery and Reinvestment Tax Act of 2009 for a piece of property, that taxpayer can't also claim the energy credit or the section 45 production credit for that property, for the year of the grant or any later year. If the taxpayer had already claimed this credit in an earlier year for progress expenditures on that property, the government takes some of it back: the tax owed for the year of the grant goes up by however much of that earlier credit was actually allowed, and any leftover business-credit carryforwards get reduced to match. The grant amount itself is calculated without regard to any basis reduction the earlier credit caused. Grants like this aren't counted as taxable income, but they do count when figuring the property's basis — though that basis still gets reduced under section 50(c), the same way it would be if a credit (not a grant) had been claimed. (e) Bonus for low-income-community solar and wind. If the Secretary allocates a business "environmental justice solar and wind capacity limitation" to a small solar or wind facility, that facility's energy percentage goes up — by 10 percentage points if it's simply located in a low-income community or on Indian land, or by 20 percentage points if it's part of a qualifying low-income housing or economic-benefit project. That bonus is capped: the extra credit for the whole facility can't exceed the share that its allocated capacity represents of the facility's total nameplate capacity (measured in DC). A "qualified solar and wind facility" is a facility that makes electricity only from wind property or from qualifying solar equipment, has a maximum output under 5 megawatts (AC), and either sits in a low-income community or on Indian land, or is part of a "qualified low-income residential building project" or a "qualified low-income economic benefit project." A residential building project qualifies if the solar or wind facility is installed on rental housing that takes part in specific listed federal or tribal housing-assistance programs, and the financial benefit of the electricity is shared fairly among the building's residents. An economic benefit project qualifies if at least half the financial benefit of the electricity goes to households earning under 200 percent of the poverty line or under 80 percent of the area's median income. Getting electricity at a below-market price counts as a financial benefit either way. "Eligible property" for this bonus is energy property that's part of a facility where the taxpayer elected to treat it as energy property under subsection (a)(5), or that's solar or ground-source-heat-pump property (including qualifying storage installed with it). The Secretary had to set up an allocation program within 180 days, built to run efficiently — including letting one applicant bundle several projects in one application. Allocations are capped at an "annual capacity limitation" of 1.8 gigawatts (DC) for each of 2023 and 2024, and zero after that. Unused capacity carries over to the next year, but nothing can carry past 2024 except as separately allowed under section 48E(h)(4)(D)(ii). A facility's bonus doesn't apply to property placed in service more than 4 years after its allocation; capacity that expires that way gets treated as unused and rolls forward under the same carryover rule. If property stops qualifying for this bonus, the Secretary must claw back the extra credit — under rules like section 50(a)'s recapture — though, again, the property doesn't stop being investment credit property just because of that. If a taxpayer fixes the problem within 12 months of learning about it, the recapture can be waived — but only once per facility.