IRC Section 45: Renewable Electricity Production Tax Credit

The IRC Section 45 renewable electricity production tax credit is a per-kilowatt-hour federal income tax credit for electricity generated at a qualifying facility from listed renewable resources and sold to an unrelated buyer. For calendar year 2026, the inflation-adjusted base rate is roughly 0.6 cents per kilowatt-hour, and facilities that meet federal prevailing wage and apprenticeship standards earn five times that amount, or about 3.0 cents per kilowatt-hour.¹ The credit runs for 10 years from the date the facility is placed in service.²

Before going further, a boundary worth stating up front: if your project begins construction after 2025, you generally will not be claiming legacy Section 45 at all. You’ll be looking at Section 45Y, the technology-neutral successor. More on that below.

What Generation Qualifies

Section 45(c) limits the credit to electricity from specific resources: wind, closed-loop biomass (crops grown specifically for energy), open-loop biomass (agricultural byproducts, mill residues, forest-thinning waste), geothermal, municipal solid waste (including direct combustion and landfill methane capture), qualified hydropower (incremental production at existing dams and certain small irrigation systems), and certain marine and hydrokinetic facilities.³

Two conditions apply regardless of resource. The electricity must be produced at the qualifying facility and sold to an unrelated person during the tax year, meaning no shared ownership or control between generator and buyer. A facility that produces power only for its own use doesn’t qualify.²

Is Your Project Under Section 45 or Section 45Y?

The Inflation Reduction Act of 2022 created Section 45Y, a technology-neutral production credit that replaces legacy Section 45 for newer projects. Any facility producing electricity with a net-zero greenhouse gas emissions rate can qualify under 45Y, rather than being confined to the Section 45(c) resource list.

The dividing line is when construction begins. Facilities that began construction before January 1, 2025, and secured a safe harbor position may still claim the legacy Section 45 credit. Facilities beginning construction after 2025 are generally eligible only for Section 45Y. Some projects that began construction before 2025 can choose between the legacy and tech-neutral credits if they meet the eligibility rules for both.

Legislation signed on July 4, 2025 (the One Big Beautiful Bill Act) added restrictions on Section 45Y. Solar projects are ineligible for the 45Y credit if construction begins on or after July 4, 2026, and the project is placed in service after December 31, 2027. Projects starting construction before that date or placed in service by the end of 2027 remain eligible. The same law bars credits for facilities receiving material assistance from prohibited foreign entities above certain thresholds, starting at 40 percent for projects beginning construction in 2026.

How the Credit Amount Is Calculated

The statutory base written into Section 45(a) is 0.3 cents per kilowatt-hour. Each year the IRS publishes an inflation adjustment factor that scales the credit upward. For 2026, that factor is 2.057, which brings the base credit to roughly 0.6 cents per kilowatt-hour for facilities that don’t meet federal labor requirements, and roughly 3.0 cents with the 5x multiplier for those that do.¹

Not every resource earns the full rate. Open-loop biomass, landfill gas, trash combustion, qualified hydropower, and certain marine and hydrokinetic facilities receive half the credit that wind and closed-loop biomass earn.² For those resources, the 2026 credit works out to about 0.3 cents without labor compliance or about 1.5 cents with it.

Phase-Out Based on Reference Prices

The statute reduces the credit when market prices for a resource climb past a threshold equal to 8 cents multiplied by the inflation adjustment factor. For 2026, the wind reference price is 3.17 cents per kilowatt-hour, well below the threshold, so the phase-out does not apply to wind projects this year.¹

Reductions for Subsidized Financing

Facilities financed with tax-exempt bonds, government grants, subsidized energy financing, or other federal or state credits face a proportional reduction. The reduction equals the lesser of one-half or the ratio of those subsidized amounts to total project capital.⁴ The rule prevents stacking multiple public incentives on the same dollar of project cost.

Earning the 5x Multiplier: Prevailing Wage and Apprenticeship

The gap between the base credit and the full credit is enormous. To close it, a facility must satisfy both prevailing wage and apprenticeship requirements during construction.⁵

The prevailing wage rule requires every laborer and mechanic working on the facility, whether employed by the taxpayer, a contractor, or a subcontractor, to be paid at least the prevailing wage rate determined by the Department of Labor for that work and location. These rates follow the Davis-Bacon Act framework used for federal construction projects.⁵

The apprenticeship requirement has three parts. For construction beginning in 2024 or later, at least 15 percent of total construction labor hours must be performed by qualified apprentices from a registered apprenticeship program. The daily ratio of apprentices to journeyworkers on the job site must meet the standards set by that registered program. And any contractor or subcontractor employing four or more workers on the project must hire at least one qualified apprentice.

Facilities with a maximum net output under one megawatt (measured in alternating current) are exempt from both requirements and automatically receive the full credit.⁵

Penalties for Falling Short

Missing prevailing wages forfeits more than the 5x bonus. The taxpayer must pay each underpaid worker the wage difference plus interest, and owes the IRS a $5,000 penalty per affected worker per year. If the IRS finds the failure was intentional, the penalty doubles to $10,000 per worker. Apprenticeship violations carry a penalty of $50 for each labor hour where the requirement wasn’t met, rising to $500 per hour for intentional disregard. These penalties are reported on Form 4255.

PTC or ITC: You Have to Pick One

For many qualifying projects, you can elect either a production-based credit (Section 45 or 45Y) or an investment-based credit (Section 48 or 48E) on the same facility, but not both. The production credit pays out over 10 years based on actual electricity sold. The investment credit is a one-time percentage of capital cost in the year the facility is placed in service.

Which one wins depends on the project. A wind farm in a consistently high-output location may generate more total value from a decade of per-kilowatt-hour production credits. A project with high upfront costs and less predictable output may prefer the immediate investment credit. The election is irrevocable, so model carefully. Facilities that began construction before 2025 and meet safe harbor rules may have four options to compare, since they can choose between the legacy credits and the tech-neutral replacements.

Direct Pay and Credit Transfers

Tax-exempt organizations, state and local governments, tribal entities, and similar bodies historically couldn’t use Section 45 because they owe no federal income tax. The Inflation Reduction Act changed that through the elective payment mechanism in Section 6417, commonly called direct pay. These entities can now receive the credit amount as a cash payment from the IRS.⁶

Taxable entities have a separate option under Section 6418: selling all or part of earned credits to an unrelated buyer for cash. The buyer then claims the credit on their own return. The payment the seller receives isn’t treated as taxable income, and the buyer can’t deduct what they paid. That framework created an active marketplace for renewable energy tax credits that runs alongside older tax equity partnership structures.

Both options require pre-filing registration through the IRS Energy Credits Online (ECO) portal. You create a clean energy account, register each qualifying property, and obtain a registration number before filing. Registration can’t happen earlier than the start of the tax year in which the credit is earned, and it must be completed at least 120 days before the return’s due date, including extensions.⁷ Miss the window and you lose direct pay or transfer for that tax year. It’s a deadline that catches people off guard.

How to Claim the Credit

Claiming the credit requires IRS Form 8835, Renewable Electricity Production Credit. The form calls for total kilowatt-hours produced and sold during the year, the applicable inflation-adjusted rate, and information about the facility’s placed-in-service date and resource type.⁸ File a separate Form 8835 for each qualifying facility.⁹ The credit amount then flows into Form 3800, General Business Credit, which aggregates business credits against total liability.

Corporate filers attach these forms to Form 1120. Partners and S corporation shareholders who receive a share of the credit from a pass-through entity may be able to report it directly on Form 3800 without a separate Form 8835.⁹

Behind the forms sits a real documentation burden. You need metered production records showing total kilowatt-hours generated and sold, signed power purchase agreements proving the buyer is unrelated, and records establishing the exact placed-in-service date. If the facility claimed the 5x labor multiplier, add payroll records, certified apprenticeship program documentation, and Davis-Bacon wage determinations for the project location. The IRS generally requires records to be kept for at least three years from the filing date, with the period extending to six or seven years in certain circumstances.¹⁰ Given the 10-year credit window, that realistically means keeping facility records for 13 years or more from the placed-in-service date.

If the Credit Exceeds Your Tax

When the Section 45 credit exceeds your federal income tax liability for the year, the unused portion doesn’t disappear. Under the general business credit rules, unused credits can be carried back 3 years and carried forward 22 years. Carryback credits apply to the current year first, then to the earliest available prior year, working forward sequentially. Each carryback year is capped at 75 percent of the taxpayer’s federal tax liability for that year.

Buyers of transferred credits under Section 6418 get the same carryback and carryforward rules, which is one reason the transfer market functions: a buyer whose tax liability fluctuates still has a long runway to use the credits. Credits do eventually expire after the 22-year carryforward window, so a buyer with persistently low tax liability could still lose value.

1
Federal Register. Credit for Renewable Electricity Production and Publication of Inflation Adjustment Factor
2
Office of the Law Revision Counsel. 26 USC 45 – Electricity Produced From Certain Renewable Resources, Etc.
3
Office of the Law Revision Counsel. 26 USC 45 – Electricity Produced From Certain Renewable Resources, Etc.
4
U.S. Government Publishing Office. 26 USC 45 – Electricity Produced From Certain Renewable Resources, Etc.
5
Internal Revenue Service. Frequently Asked Questions About the Prevailing Wage and Apprenticeship Under the Inflation Reduction Act
6
Internal Revenue Service. Elective Pay and Transferability
7
Internal Revenue Service. Register for Elective Payment or Transfer of Credits
8
Internal Revenue Service. About Form 8835, Renewable Electricity Production Credit
9
Internal Revenue Service. Instructions for Form 8835 (2025)
10
Internal Revenue Service. How Long Should I Keep Records