What Is the Sec. 48 Energy Investment Tax Credit?

The Section 48 tax credit, officially known as the energy Investment Tax Credit (ITC), is a federal incentive designed to encourage investment in clean energy projects. It reduces the federal income tax liability for businesses and other entities that place new, qualifying energy properties into service by allowing a percentage of the project’s cost basis to be claimed as a direct credit.

The Inflation Reduction Act of 2022 (IRA) brought significant changes, providing long-term stability and expanding the incentive’s scope. Previously, the credit often relied on short-term legislative extensions that created uncertainty for developers.

Eligible Energy Property

For projects that began construction before January 1, 2025, eligibility for the Section 48 credit is based on investment in specific types of new “energy property.” The original use of the property must begin with the taxpayer, and the “placed in service” date determines the tax year for which the credit can be claimed.

Qualifying technologies include:

• Solar energy property that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat.
• Geothermal equipment that uses heat from within the earth for electricity generation or thermal energy applications.
• Fuel cell property that generates electricity through an electrochemical process and meets certain efficiency standards.
• Microturbine properties and combined heat and power (CHP) systems that meet specific efficiency requirements.
• Small wind energy property, defined as a wind turbine with a nameplate capacity of not more than 100 kilowatts.
• Energy storage technology, such as large-scale batteries that receive, store, and deliver energy for conversion to electricity.
• Qualified biogas property and microgrid controllers.

For projects beginning construction in 2025 or later, the technology-specific Section 48 credit is replaced by the Section 48E Clean Electricity Investment Tax Credit. This new credit applies to any facility used to generate clean electricity with a greenhouse gas emissions rate of zero or less, and also supports connected energy storage technologies.

Calculating the Credit Amount

The value of the energy investment tax credit is determined by a two-tiered structure established by the IRA. The credit is calculated as a percentage of the eligible cost basis of the qualifying property. The default, or base, credit rate is 6%, but projects can qualify for a 30% credit rate by satisfying specific labor requirements.

To secure the full 30% credit, a project must meet both Prevailing Wage and Apprenticeship (PWA) requirements. The prevailing wage rules mandate that all laborers and mechanics involved in the project be paid wages at rates not less than the prevailing local rates for similar work, as determined by the Secretary of Labor.

The apprenticeship requirement stipulates that a certain percentage of the total labor hours for a project’s construction, alteration, or repair must be performed by qualified apprentices from a registered apprenticeship program.

Bonus Credit Adders

Beyond the 30% credit, projects can increase their total credit value by meeting criteria for two bonus adders. These bonuses, each providing an additional 10 percentage points, can be stacked on top of the 30% rate, potentially bringing the total credit to 50% of the project’s eligible cost basis.

The first bonus is for Domestic Content. To qualify, a project must certify that any steel, iron, or manufactured product that is a component of the facility was produced in the United States. The rules require that 100% of all steel and iron be of domestic origin. For manufactured products, an increasing percentage of the total cost of the components must be from products mined, produced, or manufactured domestically.

The second bonus is for projects located in an Energy Community. This 10-percentage-point bonus is available if a project is sited in a qualifying location. An energy community is defined as a “brownfield site,” a statistical area with a history of fossil fuel employment and above-average unemployment, or a census tract affected by a recent coal mine closure or coal-fired power plant retirement.

Monetizing the Credit

The IRA introduced two mechanisms that allow entities to receive a cash-equivalent benefit from the credits, even if they have little or no tax liability. These provisions are known as transferability and elective pay.

Transferability allows an eligible taxpayer, primarily for-profit businesses, to sell all or a portion of their earned credit to an unrelated third party in exchange for cash. This creates a direct market for tax credits, enabling project developers to secure upfront funding. The cash received by the seller is not included in their gross income, and the buyer can use the purchased credit to offset their own federal tax liability.

Elective pay, also known as direct pay, is available for tax-exempt entities, including governments, non-profits, and rural electric cooperatives. Under this provision, these entities can treat the credit amount as a payment of tax. Since these organizations do not owe federal income tax, the IRS issues them a direct cash refund for the full value of the credit, effectively turning it into a direct grant.

Claiming the Credit and Recapture Rules

To claim the investment tax credit, a taxpayer must file IRS Form 3468, Investment Credit, with their annual federal tax return. Filers must have the property’s cost basis, its placed-in-service date, and documentation to support eligibility for the 30% rate and any bonus adders.

The credit is subject to recapture rules if the property is disposed of or ceases to be qualifying property within five years of being placed in service. The credit vests at 20% for each full year it is held and operated. If a property is sold during this five-year period, the unvested portion of the credit must be repaid to the IRS. For example, if a property is disposed of after three full years, the remaining 40% would be subject to recapture.