How to Claim the Energy Storage Tax Credit

The federal government provides a tax incentive, expanded by the Inflation Reduction Act, to encourage the adoption of energy storage technology. This incentive functions as a dollar-for-dollar reduction of taxes owed for a portion of the cost of an eligible energy storage system. This credit is available for both individual residential installations and larger business projects.

The purpose of this incentive is to lower the financial barrier for installing battery storage systems. By reducing the net cost, it aims to accelerate their deployment, which contributes to a more resilient power grid by enabling the storage of energy for later use.

Qualifying for the Credit

To be eligible, both the taxpayer and the equipment must meet specific criteria. For residential filers, the credit is available for systems installed in a home located in the United States, which can be a new or existing structure. The taxpayer must live in the home for at least part of the year, making it their residence; landlords generally cannot claim the credit for a property they rent out but do not personally use.

A recent change allows standalone energy storage to qualify for the credit. Previously, a battery system had to be charged by an on-site renewable energy source, like solar panels. Now, a battery can qualify on its own, providing greater flexibility for homeowners.

The energy storage property itself has technical requirements. For residential installations, the battery system must have a minimum capacity of 3 kilowatt-hours (kWh). For both residential and business applications, the equipment must be new, as used or refurbished systems are not eligible. The system must be “placed in service,” meaning it is fully installed and operational, during the tax year for which the credit is claimed.

The qualifications for businesses fall under the broader Investment Tax Credit framework and can be more complex, covering projects from small batteries to large, utility-scale facilities.

Calculating the Credit Amount

For residential projects placed in service between 2022 and 2032, the credit is 30% of qualified expenditures. For business projects, the credit structure is more layered, starting with a base credit of 6%. This business credit can increase to 30% if the project meets specific prevailing wage and apprenticeship requirements during construction.

Qualified expenditures include more than just the cost of the battery itself. Taxpayers can include:

• The cost of the battery system
• Professional installation labor
• Permitting fees required by local authorities
• Costs for necessary site preparation and electrical wiring upgrades

Businesses can further increase their credit amount through several bonus adders. A 10% bonus can be added if the project is located in a designated “energy community.” These communities are typically areas with a historical connection to the fossil fuel industry, such as those with retired coal mines or power plants.

Another 10% bonus is available for projects that meet domestic content requirements, which mandate that a certain percentage of materials are produced in the United States. These bonus credits can be stacked, potentially increasing the total credit value for qualifying business projects.

Required Information and Documentation

To substantiate the claim, you must gather all necessary records to have on hand in the event of an IRS inquiry. The primary document is the itemized invoice or contract from the installer. This should clearly separate the costs of the battery storage equipment from any other work performed and list labor costs, permit fees, and other related expenses.

Proof of payment is also necessary to show that the expenses were actually incurred. This can take the form of canceled checks, credit card statements, or bank statements that correspond to the invoices.

You will also need documentation confirming the technical specifications of the installed system, such as manufacturer’s certification statements that verify the battery’s capacity is at least 3 kWh for residential use. A record of the “placed in service” date is required, as this day the system became fully operational determines the tax year for which the credit can be claimed.

How to Claim the Credit

Claiming the credit involves completing specific forms as part of your annual federal tax return. Individuals claim the credit by filing IRS Form 5695, Residential Energy Credits, with their Form 1040. The total qualified expenditures are entered on this form to calculate the 30% credit, which then flows to Schedule 3 of the Form 1040 to reduce the final tax liability.

Businesses use Form 3468, Investment Credit, to claim the credit for their energy storage projects. This form accommodates the various bonus credit adders and is attached to the corporate or partnership tax return.

For certain entities that do not have a tax liability, such as local governments or tax-exempt organizations, new monetization options are available. These entities can use a process called “elective pay” or “direct pay” to receive the credit amount as a direct cash payment from the IRS. Additionally, for-profit businesses can, under certain conditions, use “transferability” to sell their earned tax credits to another unrelated taxpayer for cash.

Post-Filing Considerations

After claiming the credit, taxpayers must be aware of the recapture rules. The credit is subject to a five-year holding period, meaning the energy storage property must remain in service for its intended purpose for five full years after installation. If the property is sold or its use changes in a way that would have made it ineligible, a portion of the credit may need to be repaid to the IRS.

The recapture amount is calculated on a pro-rata basis, as the credit vests at a rate of 20% for each full year the property is in service. For example, if a homeowner sells their home and the battery system with it after three full years, they have vested in 60% of the credit. The remaining 40% would be subject to recapture and must be added back to their tax liability in the year of the sale.

Taxpayers should maintain records of their system’s operational status for at least five years after the credit is claimed to ensure compliance.