Residential Clean Energy Credit: IRC 25D and the 2025 Cutoff

The residential clean energy credit is a 30% federal income tax credit under IRC Section 25D for the cost of solar panels, solar water heaters, small wind turbines, geothermal heat pumps, fuel cells, and battery storage installed at a home you live in. The One Big Beautiful Bill Act, signed July 4, 2025, ended the credit for any expenditures made after December 31, 2025.¹ If your qualifying installation was completed by that date, you can still claim it on your 2025 return, and any credit that exceeds your tax bill carries forward into future years.

The December 31, 2025 Cutoff

Before the new law, Section 25D was set to pay 30% through 2032, then step down to 26% in 2033 and 22% in 2034. The One Big Beautiful Bill Act scrapped that phase-down and simply terminated the credit for expenditures made after December 31, 2025.²

The timing rule is stricter than most people expect. Under Section 25D, an expenditure is treated as made when the original installation is completed, not when you signed the contract or paid the deposit.² A homeowner who paid for solar panels in 2025 but whose crew did not finish the job until 2026 loses the credit. For a home you built, the expenditure is treated as made when you begin using the home.

What Qualified for the Credit

Six categories of equipment were eligible. There is no overall dollar cap for most of them, so the 30% applies to the full amount you spent.³ Fuel cells are the exception, capped at $500 per half-kilowatt of capacity.²

Solar electric (photovoltaic) panels. Solar roofing tiles and shingles qualify because they generate energy; ordinary shingles or trusses supporting a panel do not.⁴
Solar water heaters, where at least half the energy used to heat the water comes from the sun. The system must be certified by the Solar Rating and Certification Corporation or a comparable state-endorsed body.²
Small wind turbines that generate electricity for a residential dwelling.
Geothermal heat pumps that meet the Energy Star requirements in effect when purchased.
Fuel cells, limited to your principal residence and subject to the per-kilowatt cap above.
Battery storage with at least 3 kilowatt-hours of capacity, whether or not paired with a new solar system.²

The equipment must be new. Used or previously owned property does not qualify.⁴

Beyond the hardware, qualifying costs include labor for on-site preparation, assembly, and original installation, plus the piping or wiring needed to connect the system to your home.⁴ Structural work that serves a non-energy purpose, such as ordinary roofing materials or roof reinforcement to hold panels, does not count.

Which Homes Qualified

The equipment had to be installed on a U.S. dwelling you actually use as a residence. Both existing homes and new construction count. Most types of equipment qualify at either a primary or a second home you use personally; fuel cells are the exception and must be at your principal residence.²

If you claim the credit on a second home, you cannot rent it out. The credit is never available for a home you do not live in yourself, which rules out pure rental property.⁵ Landlords may have options under the separate Section 48 commercial investment credit, but Section 25D is strictly for personal residences.

If your home is also used for business, the treatment splits at 20%. When nonresidential use is 20% or less, you can claim the full credit.⁴ Above 20%, you prorate: if 30% of the home is used for business, the 30% credit rate applies to only 70% of your cost.

Condo and co-op owners are treated as paying their proportionate share of any qualifying expenditure the association makes, so a rooftop solar array on the building generates credits for the individual owners.²

You Have to Own the Equipment

Ownership is where a lot of homeowners get caught out. To claim the credit, you have to own the clean energy equipment. If you lease your solar panels or sign a power purchase agreement, the third-party company that installs, owns, and maintains the system takes the tax benefits; you are buying the electricity, not the system.⁶ The same logic rules out community solar subscriptions, where you pay for a share of a remote array’s output without owning equipment at your home. Financing the purchase with a loan is fine, because you still own the system.

Rebates and Subsidies That Reduce the Credit

Some incentives shrink the cost figure you apply the 30% to, and some do not.⁴

Public utility subsidies for buying or installing clean energy equipment must be subtracted from qualified expenses, whether the utility paid you or your contractor.
Manufacturer, distributor, or installer rebates based on the cost of the equipment are treated as purchase-price adjustments and must be subtracted.
Net metering payments for electricity you sell back to the grid do not reduce your qualified expenses.
State energy incentives generally do not reduce qualified costs unless they meet the federal definition of a rebate or purchase-price adjustment. Incentives that do not reduce your basis may instead be includable in gross income.

Getting this wrong in either direction causes trouble. Skip a required utility subtraction and you overstate the credit. Subtract a state grant that did not have to be subtracted and you shortchange yourself.

How to Claim It

The credit is claimed on IRS Form 5695, Residential Energy Credits.⁷ You enter costs by technology on the form’s numbered lines (solar electric, solar water heating, and so on), and the resulting credit moves to Schedule 3 of Form 1040, where it reduces your tax.⁸

Records to keep with your return:

The manufacturer’s certification statement, a signed statement that the product qualifies. Keep it in your files; you do not attach it.⁹
Itemized invoices that separate hardware from labor.
Documentation of the installation completion date, which controls which tax year the credit belongs to.
For fuel cells, proof of your principal residence address, which the form requires.

Hold onto the records for at least three years after filing, longer if any audit window is extended. With the credit now terminated, close attention to final-year claims is a reasonable expectation.

Carrying Forward Unused Credit

The credit is nonrefundable. It can reduce your federal income tax to zero, but it will not produce a refund on its own. If the credit is larger than your tax bill, the unused portion carries into the following year.² Earn a $12,000 credit on a 2025 installation but owe only $7,000 in 2025 tax, and $5,000 rolls into your 2026 return. The credit can also offset alternative minimum tax, which can matter for higher-income filers.

The termination raises a fair question about carryforwards past the cutoff. Section 25D(c) adds any excess credit to the credit “allowable” in the following year, and the termination in Section 25D(h) blocks new expenditures after 2025 rather than erasing credits already earned. Carryforwards from 2025 and earlier should remain usable in 2026 and beyond, but a tax professional is worth consulting if you are relying on that reading. Carryforwards follow the taxpayer, not the property; if you sell the home, the remaining credit stays with you and does not pass to the buyer.

1
Congress.gov. Public Law 119-21 – One Big Beautiful Bill Act
2
Office of the Law Revision Counsel. 26 USC 25D – Residential Clean Energy Credit
3
Internal Revenue Service. Residential Clean Energy Property Credit – Qualifying Expenditures and Credit Amount
4
Internal Revenue Service. Residential Clean Energy Credit
5
Internal Revenue Service. Residential Clean Energy Property Credit – Qualifying Residence
6
U.S. Environmental Protection Agency. Solar Power Purchase Agreements
7
Internal Revenue Service. About Form 5695, Residential Energy Credits
8
Internal Revenue Service. Form 5695 – Residential Energy Credits
9
ENERGY STAR. Tax Credit Definitions