The federal energy investment tax credit (ITC) has been one of the most powerful incentives in the U.S. tax code for decades, encouraging businesses and individuals to invest in clean energy. But the landscape shifted in 2025 when the One Big Beautiful Bill Act (OBBBA) accelerated the phase-out of several key credits created under the Inflation Reduction Act (IRA). Whether you are a business owner evaluating a commercial installation, a homeowner who missed the residential credit deadline, or an investor considering oil and gas, here is what you need to know.

What Is the Energy Investment Tax Credit?

The energy investment tax credit allows taxpayers to claim a percentage of the cost of qualifying energy property as a direct credit against their federal income tax. Unlike a deduction (which lowers taxable income), a credit reduces the actual amount of tax owed dollar for dollar.

Two frameworks are currently relevant:

  • Section 48 (Legacy ITC): The traditional business energy investment tax credit that covered solar, geothermal, fuel cells, microturbines, combined heat and power (CHP) systems, and small wind. This applied to projects where construction began before January 1, 2025. Projects that started under Section 48 may still qualify under legacy rules if placed in service within four years of the construction start date.
  • Section 48E (Clean Electricity Investment Credit): A technology-neutral version created by the IRA for facilities placed in service after December 31, 2024. Rather than listing eligible technologies, Section 48E covers any electricity-generating facility or energy storage technology that achieves net zero greenhouse gas emissions. This includes solar, wind, geothermal electric, nuclear, battery storage, and other qualifying systems.

ITC Rates: Base Amount vs. Full Credit

The amount of the credit depends on whether a project meets certain labor standards. Section 48E uses a two-tier structure:

Additional bonus credits can increase the total even further:

  • Domestic content bonus: Up to 10 additional percentage points for projects using U.S.-manufactured steel, iron, and manufactured products that meet Treasury Department thresholds
  • Energy community bonus: Up to 10 additional percentage points for facilities located in qualifying energy communities (areas with retired coal facilities, brownfield sites, or communities historically dependent on fossil fuel employment)
  • Low-income communities bonus: Up to 20 additional percentage points for qualifying projects in low-income communities or on tribal land

A project meeting PWA, domestic content, and energy community requirements could receive an ITC of up to 50 percent. Taxpayers claim the credit on Form 3468 (Investment Credit) filed with their annual return.

OBBBA Changes: Accelerated Phase-Out for Solar and Wind

The OBBBA preserved the core structure of Sections 48E and 45Y (the production tax credit counterpart) but introduced accelerated deadlines that every eligible investor must understand:

  • Solar and wind under Section 48E: The credit terminates for solar and wind facilities placed in service after December 31, 2027, unless construction began within 12 months of the OBBBA signing date (by July 4, 2026). Facilities that begin construction before that deadline generally have four years to be placed in service.
  • Other technologies under Section 48E: For non-solar, non-wind technologies (nuclear, geothermal, battery storage, hydropower), the credit phases out for facilities beginning construction in 2034 or later.
  • Section 25D (Residential Clean Energy Credit): The 30 percent residential credit for homeowner-installed solar panels, small wind, geothermal heat pumps, and battery storage expired for expenditures made after December 31, 2025. Homeowners who completed qualifying installations by the end of 2025 can still claim the credit on their 2025 return using Form 5695.
  • Section 179D (Energy Efficient Commercial Buildings Deduction): Expires for properties beginning construction after June 30, 2026.

The OBBBA also introduced foreign entity of concern (FEOC) restrictions that limit eligibility for facilities involving certain foreign-manufactured components. In some cases, a recapture provision may apply if a facility later fails to meet requirements after the credit has been claimed. Transferability rules remain available until the underlying incentives phase out.

Direct Pay and Transferability

Two features introduced by the IRA remain active through the credit phase-out periods:

  • Direct pay (elective payment): Tax-exempt entities such as nonprofits, state and local governments, tribal governments, and rural electric cooperatives can receive the credit as a direct payment from the IRS, even if they owe no federal income tax. Pre-filing registration is required.
  • Transferability: Taxable businesses can sell eligible credits to unrelated buyers for cash. This allows developers to monetize the value without complex tax equity structures.

Depreciation and the ITC: How They Work Together

When a taxpayer claims the energy ITC on qualifying property, the depreciable basis of that property must be reduced by 50 percent of the credit amount. For example, if a business installs a $1 million solar system and claims a 30 percent ITC ($300,000), the depreciable basis is reduced by $150,000 to $850,000.

Most qualifying energy property is classified as 5-year MACRS property. With 100 percent bonus depreciation permanently restored under the OBBBA for property acquired after January 19, 2025, businesses can deduct the full adjusted basis in the year the property is placed in service. The combination of the ITC plus accelerated depreciation makes these projects particularly effective for tax planning.

Oil and Gas Energy Tax Incentives

While the ITC applies to clean energy, the IRC also provides significant incentives for oil and gas investments. These provisions were not affected by the OBBBA changes to renewable energy credits:

  • Intangible Drilling Costs (IDCs): Under IRC Section 263(c), independent producers and working interest investors can deduct 100 percent of intangible drilling costs in the year incurred. IDCs (labor, drilling fluids, site preparation, fuel) typically represent 60 to 80 percent of total well costs. This has been part of the tax code since 1954 and has no phase-out.
  • Tangible Equipment Depreciation: Under OBBBA, 100 percent bonus depreciation is permanently restored. Tangible drilling equipment placed in service in 2025 or later can be fully deducted in the first year rather than over seven years under MACRS.
  • Percentage Depletion: Independent producers and royalty owners can deduct 15 percent of gross oil and gas income under IRC Sections 611 and 613. Unlike cost depletion, percentage depletion has no cost basis limit, so total deductions can exceed the original investment over the life of a producing well.
  • Working Interest Exception: Oil and gas working interests held directly (not through a limited partnership) are exempt from passive activity rules under IRC Section 469(c)(3). This allows high-earning W-2 employees to use oil and gas losses to offset ordinary income without the $25,000 rental activity limitation.

Arizona Considerations

Arizona does not currently offer a state-level energy investment tax credit for new installations. The state commercial/industrial solar credit under A.R.S. Sections 43-1085 and 43-1164 applied only to tax years 2006 through 2018 and is no longer available. The five-year carryforward window from 2018 credits closed with 2023 returns.

However, Arizona property owners benefit in other ways:

  • Property tax treatment: Arizona exempts the added value of residential solar energy devices from property tax assessment under A.R.S. Section 42-11054, meaning a rooftop solar installation will not increase your property taxes.
  • State income tax effect: Arizona uses a flat 2.5 percent income tax rate with federal adjusted gross income as the starting point. Federal energy credits reduce your federal tax without any Arizona clawback. Related deductions (like bonus depreciation) also flow through to lower Arizona taxable income.
  • TPT exemptions: Certain energy equipment sales and installations may qualify for transaction privilege tax exemptions. Check the ADOR rate table for current rates and exemption codes.

For more on Arizona-specific credits, see our guide to Arizona corporate credits and Arizona tax credits.

Key Deadlines for 2026

  • December 31, 2025 (passed): Section 25D residential clean energy credit and Section 25C home improvement credit expired. Taxpayers who completed qualifying installations by this date should claim the credit on their 2025 return.
  • June 30, 2026: Section 179D energy efficient commercial buildings deduction construction start deadline.
  • July 4, 2026: Construction start deadline for solar and wind projects to qualify for Section 48E ITC under the OBBBA 12-month window.
  • December 31, 2027: Placed-in-service deadline for solar and wind facilities under Section 48E (for projects that began construction by July 4, 2026).

Frequently Asked Questions

What is the difference between the ITC and the PTC?

The ITC is claimed on the cost of the energy system when it is placed in service. The production tax credit (PTC, under Sections 45 and 45Y) is claimed on the electricity generated over a 10-year term. Taxpayers cannot claim both for the same facility. The choice depends on the size and type of the project, expected output, and financing structure.

Can I still claim the energy investment tax credit for solar in 2026?

For commercial solar, yes, if the project begins construction before July 4, 2026, and is placed in service by December 31, 2027. For residential solar (Section 25D), no. The OBBBA eliminated the residential credit for expenditures made after December 31, 2025.

Are oil and gas tax deductions still available?

Yes. Intangible drilling cost deductions under IRC Section 263(c), percentage depletion under Sections 611 and 613, and the working interest exception under Section 469(c)(3) remain fully available with no OBBBA changes.

Does Arizona offer any energy tax credits?

Arizona's commercial solar credit expired after tax year 2018. However, federal energy credits and deductions (including the Section 48E ITC, IDC deductions, and bonus depreciation) still apply to Arizona taxpayers. Arizona also provides favorable property tax treatment for renewable energy equipment.

How K&R Taxes Can Help

Energy tax planning involves layering credits, deductions, and depreciation schedules across federal and state returns. Whether you are evaluating a commercial installation, considering an oil and gas working interest, or filing a 2025 return that includes a clean energy credit, timing and structure matter. Our team at K&R Taxes helps Arizona business owners and high-income individuals navigate these decisions with a focus on compliance and long-term efficiency. Contact us for a consultation, or learn more about our strategic tax advisory and preparation and accounting and business performance services.