Updated November 2, 2018
The Energy Credit: An Investment Tax Credit
for Renewable Energy
Internal Revenue Code (IRC) Section 48 provides an
investment tax credit (ITC) for certain energy-related
investments. The incentive was enacted in 1978 and has
been substantially modified over time. Under current law,
the ITC for most nonsolar technologies will expire at the
end of 2021. There is a permanent 10% ITC for solar and
geothermal technologies. Increased credit rates for solar are
available through 2021.
placed in service after December 31, 2023, no credit is
allowed, except for solar, where the credit is reduced to
Certain investments in renewable energy property qualify
for an ITC. The amount of the credit is determined as a
percentage of the taxpayer’s basis in eligible property
(generally, the cost of acquiring or constructing eligible
property). The tax credit rate and other credit parameters
depend on the type of property or technology for which the
credit is being claimed. Current law for the energy credit is
summarized in Table 1.
Special tax credits for energy have been part of the tax code
since the late 1970s.
Table 1. Energy Credit: Summary of Current Law
Solar, Fiber Optic Solar, Fuel
Cells, Small Wind
Heat and Power, Geothermal
Solar, Geothermal Energy
(End of Year)
Notes: Credit expiration dates are start-of-construction deadlines.
For nonpermanent credits, property generally must be placed in
service by December 31, 2023. Wind property may be eligible for the
Section 45 production tax credit (PTC), and elect to receive the ITC
in lieu of PTC through 2019.
Solar energy has a permanent 10% ITC. Temporarily, the
credit rate for solar is 30% through 2019, before being
reduced to 26% in 2020 and 22% in 2021. Investments in
small wind property (a wind turbine with 100 kilowatts of
capacity or less) may qualify for a 30% ITC through 2019,
with the credit rate reduced to 26% in 2020 and 22% in
2021. Investments in fuel cell power plants and fiber optic
solar may qualify for the ITC at these same rates. The credit
for fuel cells is limited to $1,500 per 0.5 kilowatts in
capacity. Investments in microturbines, combined heat and
power (CHP) systems, and geothermal heat pumps qualify
for a 10% ITC.
The expiration dates for the ITC are commence
construction deadlines. For example, solar property that is
under construction by the end of 2019 may qualify for the
30% tax credit, even if the property is not placed in service
(or ready for use) until a later date. However, if property is
The ITC for geothermal energy property is permanent. The
credit rate for geothermal is 10%. Geothermal energy
property may also qualify for the renewable energy
production tax credit (PTC) under IRC Section 45.
The Early Years
The energy tax credit was first enacted in the Energy Tax
Act of 1978 (P.L. 95-618), which created a temporary 10%
tax credit for business energy property and equipment using
energy resources other than oil or natural gas. Tax credits
for solar and wind energy property were refundable (credits
could be received as a payment if the taxpayer did not have
tax liability to offset), with nonrefundable credits available
for a wide range of other qualifying technologies and
property. The rationale behind the credits was to reduce
U.S. consumption of oil and natural gas by encouraging the
commercialization of a broader range of energy
technologies and resources. Generally, the energy credits
were scheduled to expire December 31, 1982.
The Windfall Profit Tax Act of 1980 (P.L. 96-223)
substantially expanded the energy credit to further the
objective of developing an abundant range of energy
resources and promoting investment in energy
conservation. Tax credits for solar and wind energy
property investments were extended for three years, through
1985. Additionally, the credit rate for solar and wind was
increased to 15%, and the credit was made nonrefundable.
The tax credit for geothermal was also increased from 10%
to 15% and ocean thermal equipment was added as
qualifying property. The 10% credit for biomass was also
extended for three years, through 1985. The definition of
biomass included materials such as municipal solid waste.
The act also provided an 11% credit for small-scale
hydroelectric generating property, through 1985. A 10%
credit was provided for co-generation property (e.g.,
property that produces heat or other useful energy in
addition to electricity) through 1982. The act also made a
number of other changes to the business energy investment
credit. The changes noted here are those most closely
related to the current energy credit.
When enacting the Tax Reform Act of 1986 (TRA86; P.L.
99-514), Congress believed it desirable to maintain tax
credits for renewable energy to continue stimulating
The Energy Credit: An Investment Tax Credit for Renewable Energy
technological development and the use of renewable energy
sources. While there was not support for a broad extension
of the energy credit (investment credits generally were
repealed or allowed to expire in TRA86), investment tax
credits for solar and geothermal energy property were
extended, but phased down to 10% before being set to
expire December 31, 1988. The credit for biomass was also
extended, but reduced to 10% in 1987, when it was set to
expire. The credit for ocean thermal property was extended
at 15% through 1988. The credit for wind was not extended.
The energy credit for many other types of property had
expired at the end of 1982, as scheduled.
There were a number of short-term extensions to the energy
credit in the late 1980s and early 1990s. The Miscellaneous
Revenue Act of 1988 (P.L. 100-647) extended the solar,
geothermal, and ocean thermal investment credits at their
1988 rates. The Omnibus Budget Reconciliation Act of
1989 (P.L. 101-239) again extended the credits for solar,
geothermal, and ocean thermal equipment. The Omnibus
Budget Reconciliation Act of 1990 (P.L. 101-508) extended
the tax credits for solar and geothermal, as did the Tax
Extension Act of 1991 (P.L. 102-227).
The Energy Policy Act of 1992 (P.L. 102-486) made the
credits for solar and geothermal permanent. After P.L. 102486, the only tax credits remaining from the Energy Tax
Act of 1978 (P.L. 95-618) were the newly permanent 10%
solar and geothermal credits.
Evolution of the Current Credit
The Energy Policy Act of 2005 (EPACT05; P.L. 109-58)
increased the solar ITC from 10% to 30% for 2006 and
2007. The legislation also provided that fiber-optic
distributed sunlight property was eligible for the tax credit,
while solar property used to heat a swimming pool was not.
EPACT05 also provided a 30% ITC for fuel cell power
plants and a 10% ITC for stationary microturbine power
plants that were placed in service during 2006 or 2007. The
temporary components of the ITC and EPACT05 credit
rates were extended through 2008 in the Tax Relief and
Health Care Act of 2006 (P.L. 109-432).
The Emergency Economic Stabilization Act of 2008 (P.L.
110-343) substantially expanded and provided a long-term
extension of the temporary components of the energy
credit. The credits were extended to promote the continued
development of alternative energy resources. Specifically,
the EPACT05 credits for solar, fuel cells, and microturbines
were extended for eight years, through December 31, 2016.
The legislation also provided a 10% credit for geothermal
heat pump property, a 30% credit for qualified small wind
energy property, and a 10% credit for combined heat and
power (CHP) property. A placed-in-service deadline of
December 31, 2016, was included for geothermal heat
pump, small wind, and CHP property. The purpose of the
tax credit for CHP was to encourage more efficient use of
fossil fuel power generation. The credit was modified as
part of the American Recovery and Reinvestment Act
(ARRA; P.L. 111-5) in 2009, with certain limitations and
restrictions relaxed. Changes in credit rates and expiration
dates were not part of the ARRA modifications.
In 2015, the Consolidated Appropriations Act, 2016 (P.L.
114-113) further extended the credit. The 30% credit rate
for solar electric or heating property (but not fiber-optic
solar) was extended through 2019. Further, the termination
date was changed from a placed-in-service deadline to a
construction start date. The credit was set at 26% for
property beginning construction in 2020, and 22% for
property beginning construction in 2021. To qualify for a
rate in excess of 10%, property must be placed in service by
December 31, 2023.
Legislation in 2018, the Bipartisan Budget Act of 2018
(P.L. 115-123) extended the ITC for five years for fiberoptic solar, fuels cell, small wind, microturbine, CHP, and
geothermal heat pump property. For property eligible for a
30% credit through 2019, the credit rate is reduced
following the reduction schedule for solar enacted in P.L.
114-113. All termination dates were changed to
construction start deadlines.
Cost of the Credit
For much of its history, there was little cost associated with
the energy credit. From the credit’s inception in 1978,
through 2007, the Joint Committee on Taxation (JCT)
estimated that tax expenditures—or forgone revenue—
associated with the energy credit was generally de minimis
(less than $50 million per year). There were three
exceptions, fiscal years (FYs) 1997, 1998, and 2007, when
the tax expenditure estimate for the credit was $0.1 billion.
Starting in FY2008, JCT provided energy credit tax
expenditure estimates by type of qualifying technology (see
Figure 1). Energy credit tax expenditure estimates have
increased in recent years. The majority of the cost is for
Figure 1. Tax Expenditures for the Energy Credit
Source: Joint Committee on Taxation.
For 2018, the JCT estimated energy credit tax expenditures
to be $2.8 billion, with the majority of tax expenditures
($2.5 billion) attributable to solar. Between 2018 and 2022,
the JCT has estimated energy credit tax expenditures to be
$13.5 billion, with $12.5 billion for solar.
Molly F. Sherlock, Specialist in Public Finance
The Energy Credit: An Investment Tax Credit for Renewable Energy
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