Understanding the ITC and PTC Tax Credits for 2025

Businesses, nonprofits, and other organizations investing in renewable energy may qualify for two key federal tax incentives that significantly reduce project costs. The Investment Tax Credit (ITC) provides a percentage-based credit for the upfront costs of installing renewable energy systems, while the Production Tax Credit (PTC) offers a per-kilowatt-hour credit for electricity generated by qualifying systems over time.

Both credits offer substantial benefits; however, they generally cannot be applied to the same property. Selecting the most advantageous option often depends on project specifics, such as size, location, and expected performance. These programs remain available for projects that began construction before January 1, 2025. For projects starting construction in 2025 or later, updated clean energy incentives with new eligibility criteria and expanded coverage may apply.

Because of these complexities, organizations are encouraged to consult with a tax professional to ensure they maximize their incentives and remain compliant with program requirements. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

The Investment Tax Credit (ITC)

The ITC offers businesses a tax credit of up to 30% of the cost of installing renewable energy systems, such as solar panels, wind turbines, fuel cells, and geothermal systems. Available through 2032, the ITC is an upfront credit calculated based on eligible project expenses, including new equipment costs, installation, and certain indirect costs.

This credit is particularly beneficial for smaller-scale projects or installations in areas with lower sunlight, where system performance might not be optimal. It also applies to energy storage devices with a capacity of five kilowatt-hours or more, even if the system isn’t directly connected to solar power.

However, businesses should be aware of recapture rules. The credit vests over five years at a rate of 20% per year, meaning businesses must repay a portion of the credit if ownership of the system changes before the vesting period is complete.

To claim the ITC, businesses need to file IRS Form 3468 with their federal tax return for the year the system is placed in service. Maintaining thorough records of project expenses, labor compliance, and other requirements is crucial to successfully securing the credit.

The Production Tax Credit (PTC)

Unlike the ITC, the PTC rewards businesses for the electricity generated by their renewable energy systems. Eligible businesses can receive up to 2.75 cents per kilowatt-hour for electricity produced from wind, biomass, geothermal, and hydropower. This credit is available for the first 10 years of a system’s operation and is adjusted annually for inflation.

The PTC is most advantageous for large-scale projects in sunny or wind-rich areas, where energy production is consistently high. It allows project owners to benefit over time based on the system’s performance rather than upfront costs.

To claim the PTC, businesses must complete IRS Form 8835 and include it with their federal tax return for the year the system begins generating electricity. Proper documentation of production levels is essential to ensure accurate credit calculation.

Bonus Credits

Businesses may qualify for additional credits on top of the ITC or PTC through the following bonus programs:

• Domestic Content Bonus: Projects using components manufactured in the U.S., such as steel and iron, may receive an extra credit, increasing the ITC from 30% to 40% or adding 0.3 cents per kilowatt-hour to the PTC.
• Energy Community Bonus: Renewable energy systems located in areas affected by coal plant closures or declines in the fossil fuel industry may qualify for additional credits.
• Low-Income Communities Bonus: Projects in low-income communities or those benefiting low-income households can earn extra credits. 

These bonuses are stackable under certain conditions. However, eligibility requirements can vary, and businesses are encouraged to consult with tax professionals to ensure all criteria are met and to maximize the incentive amount.

Tax-Exempt Organizations 

Tax-exempt entities, such as nonprofits, local governments, and tribal organizations, can also benefit from renewable energy incentives under the Inflation Reduction Act. Instead of traditional tax credits, these organizations can receive the value of the credit as a direct payment from the federal government, effectively reducing project costs without requiring a tax liability. 

Alternatively, tax-exempt organizations can transfer their credits to other eligible businesses or project partners in exchange for compensation. This approach is often used in public-private partnerships, where a local government might transfer its credit to a contractor responsible for the renewable energy project. 

Eligibility and Key Requirements

To qualify for either the ITC or PTC, systems must be located in the United States or its territories, use primarily new equipment, and not be leased to tax-exempt entities like schools. Additionally, projects must pay prevailing wages and meet apprenticeship requirements during construction and initial operation. Non-compliance can result in reduced credits or financial penalties.

The ITC and PTC are available only for projects that began construction before January 1, 2025. For these projects, the credits will remain at their full value as long as the systems are placed in service by the end of 2032. Starting in 2033, the credits will phase out as follows:

• 2033: Credits are reduced to 75% of their full value.
• 2034: Credits are reduced to 50% of their full value.
• 2035 and beyond: Credits are no longer available, unless Congress decides to act. 

For projects beginning construction in 2025 or later, eligibility transitions to the Section 48E Clean Electricity Investment Credit and Section 45Y Clean Electricity Production Tax Credit, which introduce updated eligibility criteria and expanded coverage for clean energy technologies. 

Contact Us

The ITC and PTC remain critical tools for businesses and organizations considering renewable energy projects that began construction before 2025. Understanding the eligibility criteria and project requirements can help ensure these credits are applied effectively, providing financial support for energy system installations and operations. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.