How to Claim the Business Energy Credit

The business energy credit, also known as the Investment Tax Credit (ITC), is a federal tax incentive for commercial enterprises that invest in renewable energy projects. The Inflation Reduction Act of 2022 altered and extended these credits. For projects placed in service starting in 2025, the traditional ITC has been replaced by the new technology-neutral Clean Electricity Investment Tax Credit. The incentive directly lowers tax bills, which can improve the financial return of a clean energy project.

Determining Business and Project Eligibility

Any business entity subject to U.S. federal income tax can claim the business energy credit. This includes C corporations, S corporations, partnerships, and sole proprietorships. The entity must have a federal tax liability against which the credit can be applied. The rules also extend benefits to certain tax-exempt entities, though the mechanism for them to receive value from the credit differs.

For projects placed in service in 2025 and later, the credit uses a technology-neutral approach. This replaces the previous model, which was based on specific technology categories for projects that began construction before 2025. Instead, the credit is available for any facility that generates clean electricity with zero or net-negative greenhouse gas emissions. This framework also extends to energy storage technology, such as batteries with a capacity of five kilowatt-hours or more, microgrid controllers, and combined heat and power (CHP) systems that meet specific efficiency standards.

Calculating the Credit Amount

The value of the business energy credit is calculated as a percentage of the tax basis of the qualifying property. The basis is the cost of the asset, including expenses for installation and preparation. For projects that begin construction in 2023 or later, the credit structure starts with a base rate of 6% of the eligible costs.

A significant multiplier can increase the credit rate. If a project meets specific prevailing wage and apprenticeship requirements, the credit rate is multiplied by five, bringing it to 30%. This enhancement incentivizes fair labor practices in the construction of clean energy projects.

Beyond the 30% rate, bonus credits can further increase the total value. A 10% bonus is available for projects that meet domestic content requirements, meaning a certain percentage of the steel, iron, and manufactured products used are produced in the United States. Another 10% bonus applies to projects located in designated “energy communities.” These credit rates can be combined, so a project meeting all requirements could claim a credit equal to 50% of its cost basis.

Understanding Prevailing Wage and Apprenticeship Requirements

To qualify for the 30% credit rate, projects with a maximum net output of one megawatt or more must satisfy both prevailing wage and apprenticeship requirements. Prevailing wages are hourly wage rates determined by the Department of Labor for specific types of labor in a given geographic area. Businesses must ensure that all laborers and mechanics employed in the construction, alteration, or repair of the facility are paid at least these locally determined rates. Businesses must keep detailed payroll records documenting the wages paid and hours worked, as failure to do so can result in the credit being reduced to the 6% base rate.

The apprenticeship requirements mandate that a certain percentage of the total labor hours for a project must be performed by qualified apprentices. These apprentices must be enrolled in a registered apprenticeship program recognized by the Department of Labor or a state apprenticeship agency. The required percentage of apprentice labor hours is set by the Treasury Department and is subject to change. The requirements also include adherence to apprentice-to-journeyworker ratios established by the registered program. A “good faith effort” exception exists if a business requests qualified apprentices from a registered program but receives no response or is told that none are available, and documenting these requests is necessary to qualify.

Required Information and Forms for Claiming the Credit

To claim the business energy credit, taxpayers must file IRS Form 3468, Investment Credit. You will need to provide the exact cost basis of the property, which includes the purchase price and all associated costs to place it in service. The date the property was placed in service is also required, as this determines the tax year for which the credit can be claimed.

A significant accounting detail is the requirement to reduce the property’s tax basis for depreciation purposes. The basis of the energy property must be reduced by one-half of the amount of the energy credit claimed. For example, if a business claims a $30,000 energy credit on a property, its depreciable basis must be reduced by $15,000. This adjustment prevents a double benefit from both the credit and full depreciation, and the reduced basis is used to compute annual depreciation deductions.

The Filing and Post-Filing Process

Once Form 3468 is completed, it must be submitted as part of the business’s annual federal income tax return. A corporation would attach Form 3468 to its Form 1120, while a partnership would attach it to its Form 1065. The credit is then applied to reduce the taxpayer’s income tax liability for that year.

After the tax return has been filed, businesses have new options for monetizing the credit. One option is “transferability,” which allows an eligible taxpayer to sell all or a portion of the energy credit to an unrelated taxpayer for cash. This provides a way for businesses without sufficient tax liability to realize the value of the credit, and the transaction is tax-free for the seller.

Another post-filing option, primarily for tax-exempt entities like local governments or non-profits, is “direct pay.” This mechanism allows these entities to receive a direct cash payment from the IRS equal to the credit. This effectively turns the tax credit into a direct grant, making it possible for non-taxpaying organizations to benefit from clean energy investments.