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Updated April 23, 2021
The Energy Credit or Energy Investment Tax Credit (ITC)
Internal Revenue Code (IRC) Section 48 provides an
was under construction by the end of 2019 may qualify for
investment tax credit (ITC) for certain energy-related
the 30% tax credit, even if the property is not placed in
property. This In Focus summarizes the current renewable
service (or ready for use) until a later date.
energy ITC and reviews its legislative history.
Like the 10% ITC for solar, the 10% ITC for geothermal
energy property is permanent. Geothermal energy property
Certain investments in renewable energy property qualify
may also qualify for the renewable energy production tax
for an ITC. The amount of the credit is determined as a
credit (PTC) under IRC Section 45.
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
The Early Years
credit is being claimed, as summarized in Table 1.
The energy tax credit was first enacted in the Energy Tax
Act of 1978 (P.L. 95-618), which created a temporary 10%
Table 1. Energy Credit: Summary of Current Law
tax credit for business energy property and equipment using
energy resources other than oil or natural gas. Tax credits
(End of Year)
for solar and wind energy property were refundable (credits
Solar, Fiber Optic Solar, Fuel
could be received as a payment if the taxpayer did not have
Cel s, Smal Wind, and Waste
tax liability to offset), with nonrefundable credits available
Energy Recovery Propertya
for a wide range of other qualifying technologies and
property. The rationale behind the credits was to reduce
Heat and Power, Geothermal
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
Solar, Geothermal Energy
were scheduled to expire December 31, 1982.
Credit expiration dates are start-of-construction deadlines.
For nonpermanent credits, property general y must be placed in
The Windfall Profit Tax Act of 1980 (P.L. 96-223)
service four years after the start of construction to qualify (five years
expanded the energy credit to further the objective of
if construction started in 2016 or 2017).
developing an abundant range of energy resources and
promoting investment in energy conservation. Tax credits
Waste energy recovery property is eligible starting in 2021.
for solar and wind energy property investments were
b. Offshore wind facilities that began construction after 2016 are
extended for three years, through 1985. Additionally, the
eligible. Facilities that began construction before 2017 may claim
credit rate for solar and wind was increased to 15%, and the
the ITC in lieu of the production tax credit (PTC).
credit was made nonrefundable. The tax credit for
geothermal was also increased from 10% to 15% and ocean
Solar energy has a permanent 10% ITC. Temporarily, the
thermal equipment was added as qualifying property. The
credit rate for solar was increased to 30% through 2019,
10% credit for biomass was also extended for three years,
before being reduced to 26% through 2022 and 22% in
through 1985. The definition of biomass included materials
2023. Investments in small wind property (a wind turbine
such as municipal solid waste. The act also provided an
with 100 kilowatts of capacity or less) qualified for the 30%
11% credit for small-scale hydroelectric generating
ITC through 2019, with the credit rate reduced to 26%
property, through 1985. A 10% credit was provided for co-
through 2022 and 22% in 2023. Investments in fuel cell
generation property (e.g., property that produces heat or
power plants and fiber optic solar may qualify for the ITC
other useful energy in addition to electricity) through 1982.
at these same rates. The credit for fuel cells is limited to
The act made a number of other changes to the business
$1,500 per 0.5 kilowatts in capacity. Waste energy recovery
energy ITC (the changes noted here are those most closely
property that is not part of a combined heat and power
related to the current energy ITC).
(CHP) system and has a maximum capacity of 50
megawatts or less can qualify for the 26% credit if
When considering the Tax Reform Act of 1986 (TRA86;
construction begins in 2021 or 2022, and a 22% credit if
P.L. 99-514), Congress believed it desirable to maintain tax
construction begins in 2023. Investments in microturbines,
credits for renewable energy to continue stimulating
CHP systems, and geothermal heat pumps qualify for a
technological development and the use of renewable energy
10% ITC. There is a 30% ITC for offshore wind property
sources. While there was not support for a broad extension
beginning construction by the end of 2025.
of the energy credit (investment credits generally were
repealed or allowed to expire in TRA86), investment tax
The expiration dates for the ITC are commence
credits for solar and geothermal energy property were
construction deadlines. For example, solar property that
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The Energy Credit or Energy Investment Tax Credit (ITC)
extended, but phased down to 10% before being set to
phase out, with a 26% credit for property beginning
expire December 31, 1988. The credit for biomass was also
construction in 2020, and 22% for property beginning
extended, but reduced to 10% in 1987, when it was set to
construction in 2021.
expire. The credit for ocean thermal property was extended
at 15% through 1988. The credit for wind was not extended.
The Bipartisan Budget Act of 2018 (P.L. 115-123) extended
The energy credit for many other types of property had
the ITC for five years for fiber-optic solar, fuels cell, small
expired at the end of 1982, as scheduled.
wind, microturbine, CHP, and geothermal heat pump
property. For property eligible for a 30% credit through
There were a number of short-term extensions to the energy
2019, the credit rate is reduced following the reduction
credit in the late 1980s and early 1990s. The Miscellaneous
schedule for solar enacted in P.L. 114-113. All termination
Revenue Act of 1988 (P.L. 100-647) extended the solar,
dates were changed to construction start deadlines.
geothermal, and ocean thermal investment credits at their
1988 rates. The Omnibus Budget Reconciliation Act of
The energy credit deadlines were generally extended by two
1989 (P.L. 101-239) again extended the credits for solar,
years in the Taxpayer Certainty and Disaster Tax Relief Act
geothermal, and ocean thermal equipment. The Omnibus
of 2020 (Division EE of P.L. 116-260). This legislation
Budget Reconciliation Act of 1990 (P.L. 101-508) extended
expanded the credit to include waste energy recovery
the tax credits for solar and geothermal, as did the Tax
property and to allow an ITC for offshore wind. For
Extension Act of 1991 (P.L. 102-227).
offshore wind, the credit is allowed for property that begins
construction by the end of 2025. The tax credit rate for
The Energy Policy Act of 1992 (P.L. 102-486) made the
offshore wind is 30% and does not phase out.
credits for solar and geothermal permanent. After P.L. 102-
486, the only tax credits remaining from the Energy Tax
Cost of the Credit
Act of 1978 (P.L. 95-618) were the newly permanent 10%
For much of its history, there was little cost associated with
solar and geothermal credits.
the energy credit. From the credit’s inception in 1978
through 2007, the Joint Committee on Taxation (JCT)
Evolution of the Current Credit
estimated that tax expenditures—or forgone revenue—
The Energy Policy Act of 2005 (EPACT05; P.L. 109-58)
associated with the energy credit were generally de minimis
increased the solar ITC from 10% to 30% for 2006 and
(less than $50 million per year; fiscal years 1997, 1998, and
2007. The legislation also provided that fiber-optic
2007 were exceptions, when the tax expenditure estimate
distributed sunlight property was eligible for the tax credit,
for the credit was $0.1 billion).
while solar property used to heat a swimming pool was not.
EPACT05 also provided a 30% ITC for fuel cell power
JCT provided energy credit tax expenditure estimates by
plants and a 10% ITC for stationary microturbine power
type of qualifying technology starting in 2008 (Figure 1)
plants that were placed in service during 2006 or 2007. The
Energy credit tax expenditure estimates have increased in
temporary components of the ITC and EPACT05 credit
recent years. The majority of the cost is for solar credits.
rates were extended through 2008 in the Tax Relief and
Health Care Act of 2006 (P.L. 109-432).
Figure 1. Tax Expenditures for the Energy Credit
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 objective was to promote the continued
development of alternative energy resources. In P.L. 110-
343, 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
small wind energy property, and a 10% credit for CHP
property, each with a placed-in-service deadline of
December 31, 2016. The purpose of the tax credit for CHP
was to encourage more efficient use of fossil fuel power
generation. The energy ITC was modified as part of the
Joint Committee on Taxation.
American Recovery and Reinvestment Act (ARRA; P.L.
111-5) in 2009, with certain limitations and restrictions
For 2020, the JCT estimated energy credit tax expenditures
relaxed. Changes in credit rates and expiration dates were
to be $6.8 billion, with the majority of tax expenditures
not part of the ARRA modifications.
($6.7 billion) attributable to solar. Between 2020 and 2024,
the JCT has estimated energy credit tax expenditures to be
In 2015, the Consolidated Appropriations Act, 2016 (P.L.
$35.5 billion, with $34.8 billion for solar.
114-113) further extended the credit. The 30% credit rate
for solar electric or heating property (but not fiber-optic
Molly F. Sherlock
, Specialist in Public Finance
solar) was extended through 2019. The termination date
was changed from a placed-in-service deadline to a
construction start date. The higher rate was scheduled to
The Energy Credit or Energy Investment Tax Credit (ITC)
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