With the rise of the “Climate Economy,” recent legislation provides unprecedented efforts to incentivize energy efficiency and reduce carbon emissions. As part of the Inflation Reduction Act several new forms of clean energy activities and existing clean energy credits are now available for organizations.
This includes Section 48, a tax credit that supports renewable and energy efficient property.
What is the Section 48 Credit?
Section 48 is an Investment Tax Credit (ITC) for renewable and energy efficient property, including solar and geothermal energy.
The credit reduces an organization’s federal tax liability by a percentage of qualifying energy property costs. Section 48 provides up to 6% or bonus rates of 30%, plus 10% domestic bonus, plus another 10% if in an energy community. Exempt Organizations are also invited to participate with the ability to receive direct pay.
What types of items qualify for Section 48?
Qualifying energy property for Section 48 includes:
- Solar
- Geothermal
- Fuel cells
- Small wind
- Energy storage
- Biogas
- Microgrid controllers
- Combined heat and power
Additional environmental justice bonus credits are available for eligible solar energy projects with the following guidelines.
- Projects under 5 MW: additional 10% for facilities in low-income communities or facilities on Tribal lands
- Projects with 1.8 gigawatts (GW) per year: additional 20% for facilities as part of a low- income residential building project or economic benefit project
How do you qualify for Section 48?
To qualify for a bonus rate of Section 48, properties must meet certain qualifications, as well as domestic content and prevailing wage and apprenticeship requirements. It’s important to be aware of what qualifying project costs entails as well as effective dates.
Solar Energy Property Qualifications
Only active solar systems are eligible for the credit. Qualification is based on the use of mechanically forced energy transfer, such as the use of fans or pumps to circulate solar-generated energy to:
- Generate electricity, not transmit or use electricity or heat
- Heat or cool a structure
- Provide hot water for use in a structure
- Provide solar process heat
- Illuminate the inside of a structure using fiber-optic distributed sunlight
Be aware that passive solar systems and solar property used for heating swimming pools are ineligible property.
The taxpayer must construct or be the original user of the solar energy equipment to qualify for this ITC. Qualifying property includes the costs of:
- Energy property
- Direct installation
- Overhead
- Applicable sales and use taxes on equipment and materials
- Solar photovoltaic panels (PV)
- Concentrating solar-thermal power (CSP)
- Solar collectors
- Storage tanks
- Rock beds
- Thermostats
- Heat exchangers
- Power conduit inverters
- Racking
- Balance-of-system equipment
- Step-up transformers
- Circuit breakers
- Surge arrestors
- Parts related to the functioning of these items
Geothermal Energy Property Qualifications
Qualifying geothermal property costs include equipment used to produce, distribute, or use energy from a geothermal deposit. A geothermal deposit is a geothermal reservoir consisting of natural heat that is stored in rocks or in an aqueous liquid or vapor below the earth’s surface.
This equipment can include:
- Production equipment that brings geothermal energy from the subterranean deposit to the surface (screen or slotting liners, tubing, downhole pumps, other equipment, and reinjection wells).
- Distribution equipment that transports or circulates geothermal steam or hot water from a geothermal deposit to the site of ultimate use (components of a heating system, including pumps, pipes and ductwork).
- Dual-use geothermal equipment that uses energy derived both from a geothermal deposit and from sources other than a geothermal deposit, limitations apply.
- Geothermal heat pump property that uses ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.
Be aware that equipment used in electrical transmission or geothermal fluid distribution as well as geothermal deposits located outside the United States, or a possession of the United States is ineligible property.
Section 48 Clean Energy Property Qualifying Dates
For clean energy projects with construction beginning after December 31, 2019, and a placed into service date before January 1, 2022, the credit percentage was 26%.
For projects with construction beginning after December 31, 2021 (January 1, 2025, for property using fiber-optic distributed sunlight), and prior to January 1, 2033, they will use the Inflation Reduction Act Provisions. The credit begins to phase out through December 31, 2034.
Inflation Reduction Act Provisions for Section 48
Qualified projects over 1 megawatt (MW) must meet prevailing wage and apprenticeship participation requirements.
Stackable credit amounts
(% of total project costs) | Meets wage and apprenticeship requirements | Does not meet wage and apprenticeship requirements |
| Base credit | 30% | 6% |
| Meets domestic content requirements | 10% | 2% |
| Meets energy community requirements | 10% | 2% |
| Possible credit amount | 50% | 10% |