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Commercial / Business Tax Credit Guide

Guide to the Federal Investment Tax Credit for Commercial / Business

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Solar Photovoltaics 

Disclaimer: This guide provides  an overview of the federal investment  tax credit for those interested in  commercial solar photovoltaics, or PV.  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. 


  • 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 (PV)  system that is placed in service during  the tax year.1 (Other types of renewable energy are also eligible for the ITC but  are beyond the scope of this guidance.) 

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 grid.  The office invests in innovative  research efforts that securely integrate more solar energy into  the grid, enhance the use and storage of solar energy, and lower solar electricity costs.

  • 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 PV system placed in  service after 2025, regardless of when  it commenced construction, can receive  a maximum tax credit of 10%.2
  • Typically, a solar PV system that is  eligible for the ITC can also use an  accelerated depreciation corporate  deduction. 

Eligible Projects 

To be eligible for the business ITC  (section 48 of the tax code), the solar PV 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 placed in service  after December 31, 2025.5 

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 electricity,  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 PV 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

For current information on incentives,  including incentive-specific contact  information, see the Database of State  Incentives for Renewables and Efficiency  (DSIRE) at

Electric Utility and State  

Government Rebates 

Under most circumstances, solar PV  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 PV  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 PV, 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 PV  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 electricity  generated by the solar PV 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 PV 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  PV 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 half year 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 PV 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 PV 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 PV  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 PV 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 PV 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 PV 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  electricity produced by a solar PV 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  

unclear in the rest.17 Additionally, the  ITC cannot be claimed if a tax-exempt  entity simply leases the solar equipment,  which is another common type of TPO  arrangement used in the residential and  commercial sectors; thus, in states that  do not allows PPAs, tax-exempt entities  cannot use the TPO arrangement to  capture tax benefits. 


Eligible solar PV equipment purchased  through debt financing qualifies for the  ITC. However, individuals (including  partnerships or limited liability companies), S corporations, and closely held C corporations financing a solar PV  project by borrowing on a “nonrecourse basis” face additional rules that may  delay claiming of the ITC. Borrowing on  a nonrecourse basis means the borrower  is not personally liable to repay the loan,  and the lender primarily relies on the  solar PV project as collateral. In general,  the portion of the solar PV project paid  through nonrecourse financing is not  immediately included when calculating the  ITC (although several exceptions exist);  instead, in future tax years, the taxpayer  can claim the ITC on the portion of the  loan principal (but not the interest) as it  is repaid. 

A Note on Recapture Rules 

Though the ITC can be claimed in full  for the year in which the solar PV  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 PV 

Structures holding the solar PV system may be eligible for the  ITC if the solar PV system is designed with the primary goal of  electricity 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 (“Instructions  for Form 3468,” IRS).  

More Information 

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.
  • Updated information on the status of the ITC: DSIRE at www.  


1 126 U.S.C. § 48, USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartE-sec48.pdf

2 Solar PV 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 Grid Solutions: A Better Way Forward for Puerto Rico. Prepared for the  Global Collaboratory Panel. Reimagining%20Grid%20Solutions_Final%20SIPA%20REPORT_0.pdf). 

4 No more than 20% of the eligible value of the PV 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. 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. 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 PV system. For more information, see: • IRS. 2013, February 22. IRS private letter ruling 121432-12. 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/ 

Aerial view of solar panels on the rooftop of a building in  Rancho Cordova, California. Photo credit Michele Parry. 


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, 2011-title26-subtitleA-chap1-subchapB-partIII-sec136

11 IRS. 2010, September 3. IRS private letter ruling 201035003. 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, 2017-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. 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. knowledge/publications/68becf68/how-the-us-tax-changes-affect-transactions). 

16 IRS. 2015. How to Depreciate Property. Publication 946, Cat. No. 13081F. http://www.  

17 DSIRE (Database of State Incentives for Renewables and Efficiency). 2019. Third-Party  Solar PV Power Purchase Agreements. Updated June 2019. (“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:

19 IRS. 2010, October 29. IRS private letter ruling 201043023. irs-wd/1043023.pdf

For more information, visit: DOE/EE-2316 • January 2021


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