Investment Tax Credits: Section 48, 48E, Bonuses, and Recapture

The federal investment tax credit for clean energy is a dollar-for-dollar reduction in income tax that businesses and certain tax-exempt organizations can claim when they invest in qualifying property such as solar panels, wind turbines, geothermal systems, or energy storage. For property placed in service after December 31, 2024, the credit lives in Section 48E of the Internal Revenue Code as the Clean Electricity Investment Credit; the older, technology-specific Section 48 Energy Credit still governs projects that began construction before 2025. The base rate is 6 percent of qualifying investment, rising to 30 percent when a project meets prevailing wage and apprenticeship standards, with additional bonuses that can push the effective rate to 50 percent or higher.¹

Which Code Section Applies to Your Project

The dividing line is when construction began. Projects that started construction before January 1, 2025, remain under Section 48, which lists specific qualifying technologies: solar, fuel cells with at least 0.5 kilowatts of capacity, geothermal, combined heat and power, small wind, and energy storage with at least 5 kilowatt-hours of capacity.² Newly placed-in-service property is credited under Section 48E instead.³

Section 48E is technology-neutral. It asks a single question: is the facility’s anticipated greenhouse gas emissions rate zero or below? If yes, it qualifies, whether the technology is solar, wind, geothermal, nuclear, hydropower, or something not yet on the market.⁴ Energy storage with at least 5 kilowatt-hours of nameplate capacity qualifies as its own category even though it doesn’t generate electricity.

In either case, the property must be new (you must be the original user) and must be placed in service during the tax year you claim the credit, meaning installed, operational, and ready for its intended function.

One boundary worth flagging: this article covers the business investment tax credit for clean energy. The residential clean energy credit for homeowners is a separate program with different rules, and the Section 48D advanced manufacturing credit for semiconductor facilities is a distinct credit that happens to share the investment-credit framework.

The Credit Rate and Its Bonuses

The base credit is 6 percent of the qualifying investment. Meeting prevailing wage and registered apprenticeship requirements multiplies that rate by five, to 30 percent.¹ For any project of meaningful size, wage and apprenticeship compliance is the single most consequential decision on the return.

To satisfy prevailing wage rules, every laborer and mechanic on the project must earn at least the locally prevailing rate set by the Department of Labor. The apprenticeship requirement calls for a specified share of total labor hours to be performed by apprentices in registered programs. Both standards apply during construction and during the first five years of operation for any alteration or repair work.⁵

Two bonus adders can stack on top of the 30 percent rate:

A Domestic Content Bonus of 10 percentage points, available when the project uses a qualifying percentage of steel, iron, and manufactured products made in the United States.
An Energy Community Bonus of 10 percentage points, available for projects on brownfield sites, in census tracts affected by coal mine or coal plant closures, or in statistical areas with significant fossil fuel employment and above-average unemployment.

The energy community designation relies on Treasury Department data that identifies qualifying locations, and the list updates periodically.⁶ Combined with the wage-and-apprenticeship rate, both bonuses bring the effective credit to 50 percent.

Low-Income Community Allocations

Facilities in low-income communities or on Indian land can receive an additional 10 percentage points. Qualified low-income residential building projects and qualified low-income economic benefit projects get 20 percentage points instead.⁷ Annual capacity is capped, and you must apply for and receive a formal allocation before claiming the bonus. Competition is intense, and missing a year’s capacity means waiting for the next round.

The Under-One-Megawatt Exception

Projects with a maximum output under one megawatt of alternating current can skip prevailing wage and apprenticeship requirements and still receive the full 30 percent rate. If multiple facilities of the same technology share integrated operations, their combined nameplate capacity determines whether the exception applies.⁸ Splitting a larger project into small pieces to game the threshold will not work if the IRS treats the facilities as a single unit.

Deadlines for Wind and Solar

The One Big Beautiful Bill Act tightened the timeline for the two most common technologies. Section 48E credits terminate for wind and solar facilities placed in service after December 31, 2027, unless construction begins before July 5, 2026.⁹ In practice, if a wind or solar project has not broken ground by early July 2026, it must be generating electricity before 2028 to qualify at all. For most utility-scale developments, that window is very narrow.

Other zero-emissions technologies have more room. Non-wind, non-solar facilities must begin construction before 2033 to receive the full credit, with a phase-out starting no earlier than 2032. The phase-down runs four years and begins the later of 2032 or the year U.S. greenhouse gas emissions from electricity generation fall to 25 percent or less of 2022 levels.¹ Foreign entity restrictions now apply to all Section 48E projects, so supply-chain vetting is more important than before.¹⁰

Note also that the One Big Beautiful Bill Act restricted the applicable credit percentage for certain geothermal and solar property under Section 48. If you’re finishing a legacy project, check the current Form 3468 instructions for any reduced rates.⁹

Correcting Wage and Apprenticeship Failures

A prevailing wage violation does not automatically forfeit the increased credit, but the cost of curing one is steep. Two payments are required:

A correction payment to each underpaid worker equal to the wage shortfall, plus interest at the standard underpayment rate with an extra six percentage points added.
A penalty of $5,000 to the IRS for each worker who was underpaid during any period in the tax year.

If the IRS finds the failure was intentional, the correction payment triples and the per-worker penalty doubles to $10,000. Payment is due within 180 days of the IRS’s final determination.¹¹

For apprenticeship shortfalls, you can pay $50 for each hour of non-compliance to be treated as meeting the standard. Intentional disregard raises that figure to $500 per hour, which on a large project adds up quickly.¹¹

Turning the Credit Into Cash

Many project owners cannot use the full credit against their own tax bill. Two mechanisms address that.

Under Section 6418, you can sell all or part of the credit to an unrelated buyer for cash. The buyer applies the credit against their own tax liability, and the cash you receive is not treated as taxable income. Credits typically sell at a discount to face value. A credit can only be transferred once; the buyer cannot resell it.¹²

Direct pay under Section 6417 is primarily available to tax-exempt entities such as local governments, tribal organizations, and nonprofits. Instead of transferring the credit, the entity files a return and receives a refund from the IRS equal to the credit’s value.¹³ That is how a school district or municipal utility benefits from an energy credit despite owing no federal income tax. Both mechanisms require pre-filing registration through the IRS Energy Credits Online portal.¹⁴

Basis Reduction and Carryforward

There is a trade-off that catches some taxpayers off guard. Under Section 50(c), you must reduce the depreciable basis of the property by 50 percent of the credit amount. Claim a $300,000 credit on a $1 million solar array, and the depreciable basis drops by $150,000.¹⁵ The 50 percent rule is specific to energy and clean electricity credits; other investment credits require a full basis reduction equal to the credit.

If the credit exceeds your tax liability, the unused portion is not lost. As part of the general business credit under Section 38, it allows a one-year carryback and a 20-year carryforward.¹⁶ Taxpayers with consistently low liability usually do better selling the credit than sitting on a carryforward that slowly ages.

Recapture

Selling the property early or changing its use within five years of the placed-in-service date triggers recapture of a portion of the credit:

Within year one: 100 percent recaptured.
Within year two: 80 percent.
Within year three: 60 percent.
Within year four: 40 percent.
Within year five: 20 percent.

After five full years, recapture no longer applies.¹⁷

Recapture is triggered by selling the property, converting it to personal use, or any other event that causes it to stop functioning as investment credit property. Failing to maintain prevailing wage compliance during the five years after placement in service can also trigger recapture of the increased credit amount.⁵ Some events are exempt: transfers at death, transfers between spouses in a divorce, and corporate reorganizations where the property stays in the same trade or business.¹⁷

Storage systems mixing qualifying and non-qualifying energy sources face a related risk. If the qualifying share drops below 50 percent of total energy input during the recapture period, part of the credit must be repaid.⁵ A separate 100 percent recapture applies to Section 48E credits if the taxpayer makes prohibited payments to foreign entities within ten years of placing the property in service.

Limits for Individual Investors

Individuals and closely held corporations face two limits that large publicly traded companies typically do not.

The passive activity rules restrict credits from activities in which you do not materially participate. Invest in a solar project as a limited partner or silent investor, and the resulting credits are passive activity credits. They can only offset tax on passive income, not wages or portfolio earnings. Unlike passive activity losses, unused passive credits do not release when you dispose of the activity. You can, however, elect to increase the basis of the property by the unused credit amount at disposition, reducing gain or increasing loss on the sale.¹⁸

The at-risk rules add another layer. You can only claim credits to the extent of money and property actually put at risk in the activity. Nonrecourse debt with no personal exposure to loss does not count as at-risk and will not support a credit claim.¹⁹ These rules are why most individual energy investors work with advisors who specialize in credit structuring.

How to Claim the Credit

Filing centers on IRS Form 3468. You complete a separate form for each facility, selecting Part V for the Section 48E Clean Electricity Investment Credit or Part VI for the legacy Section 48 Energy Credit.⁹ The form asks for property type, cost basis, and any bonus categories claimed. If you are claiming the increased credit for meeting wage and apprenticeship standards, file Form 7220 for each applicable facility.

Form 3468 attaches to your income tax return (Form 1040 for individuals, Form 1120 for corporations), and the credit flows through Form 3800, which aggregates all general business credits.²⁰

If you plan to transfer the credit or elect direct pay, register each credit property through the IRS Energy Credits Online tool before filing. The tool generates a unique registration number that must appear on the return.¹⁴ Receiving a registration number is not an IRS approval of the credit amount; the credit still has to be computed and reported correctly on the return.²¹

1
Internal Revenue Service. Clean Electricity Investment Credit
2
Office of the Law Revision Counsel. 26 USC 48 – Energy Credit
3
Congressional Research Service. IRA Tax Credit Repeal in the FY2025 Reconciliation Law Part 1
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Office of the Law Revision Counsel. 26 USC 48E – Clean Electricity Investment Credit
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Federal Register. Definition of Energy Property and Rules Applicable to the Energy Credit
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U.S. Department of the Treasury. Energy Communities
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U.S. Department of Energy. Clean Electricity Low-Income Communities Bonus Credit Amount Program
8
eCFR. 26 CFR 1.48E-3 – Rules Relating to the Increased Credit for Prevailing Wage and Apprenticeship
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Internal Revenue Service. Instructions for Form 3468 (2025)
10
Congressional Research Service. IRA Tax Credit Repeal in the FY2025 Reconciliation Law
11
Federal Register. Increased Amounts of Credit or Deduction for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements
12
Office of the Law Revision Counsel. 26 US Code 6418 – Transfer of Certain Credits
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Office of the Law Revision Counsel. 26 USC 6417 – Elective Payment of Applicable Credits
14
Internal Revenue Service. Register for Elective Payment or Transfer of Credits
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Office of the Law Revision Counsel. 26 USC 50 – Other Special Rules
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Office of the Law Revision Counsel. 26 USC 39 – Carryback and Carryforward of Unused Credits
17
Office of the Law Revision Counsel. 26 US Code 50 – Other Special Rules
18
Internal Revenue Service. Topic No. 425 Passive Activities Losses and Credits
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Office of the Law Revision Counsel. 26 US Code 465 – Deductions Limited to Amount at Risk
20
Internal Revenue Service. About Form 3468 Investment Credit
21
Internal Revenue Service. IRA and CHIPS Act Pre-filing Registration Tool Overview