The Investment Tax Credit (ITC) under IRC Section 38 is a federal dollar-for-dollar credit against income tax for qualifying capital investments — most commonly the 30% clean energy ITC under IRC §48 for solar, wind, battery storage, and other eligible energy property placed in service.
The Investment Tax Credit has roots in the Revenue Act of 1962 and is codified as a general business credit under IRC §38. The general framework (§38) aggregates multiple component credits, of which the energy credit under §48 is the most commercially significant for businesses today. The Inflation Reduction Act of 2022 (Pub. L. 117-169) dramatically expanded ITC availability and value. Under IRC §48 (irs.gov/inflation-reduction-act-of-2022/credits-deductions-for-businesses), the base energy ITC is 6% of the basis of qualifying energy property placed in service, scaling to 30% when prevailing wage and apprenticeship requirements are met (or for projects under 1 MW). Qualifying energy property includes: solar electric (photovoltaic), solar water heating, wind, geothermal, fuel cells, small wind turbines, battery energy storage (standalone, beginning 2023), microgrid controllers, biogas, and certain combined heat and power systems. Beginning 2025, qualified biogas property and electrochromic glass are also included per IRA amendments. Bonus credits: projects in energy communities (brownfields, coal/fossil fuel closure areas) receive an additional 10% credit. Projects using domestic content (U.S.-manufactured components meeting Treasury guidelines) receive an additional 10% credit. Low-income community bonus (§48(e)) provides an additional 10–20% for small qualifying solar/wind projects under 5 MW in low-income communities or on tribal land. Maximum combined ITC can reach 50%+ for qualifying projects in energy communities using domestic content. The ITC is non-refundable but transferable under IRA rules (IRC §6418 — irs.gov/credits-deductions/transferability-of-certain-credits) or eligible for direct pay for tax-exempt entities under §6417.
Yes, since 2023 under the Inflation Reduction Act. IRC §6418 (irs.gov/credits-deductions/transferability-of-certain-credits) allows eligible taxpayers (excluding tax-exempt entities) to transfer clean energy credits — including the §48 ITC — to unrelated purchasers in exchange for cash. Credit transfers are one-time and must be elected on the seller's tax return for the credit year. Tax-exempt entities (nonprofits, municipalities, tribal governments) may instead elect direct pay under IRC §6417, receiving a cash refund equal to the credit.
Yes, partially. Under IRC §50(c), the depreciable basis of ITC property must be reduced by 50% of the credit taken. For a $1 million solar project claiming 30% ITC ($300,000 credit), the depreciable basis is reduced by $150,000 to $850,000. Businesses depreciate the $850,000 over 5 years under MACRS (with bonus depreciation options). This basis reduction is reflected in IRS guidance on the energy credit (irs.gov/credits-deductions/businesses/rehabilitation-tax-credit).
The owner of the property (the lessor) generally claims the ITC, not the lessee. However, under IRC §50(d), lessors and lessees can elect to pass the credit through to the lessee by treating the lessee as having purchased the property. This makes ITC-driven lease structures (solar PPAs, equipment finance leases) attractive: the lessee captures the credit benefit through reduced lease payments. Safe harbor lease structures should be reviewed by a tax advisor familiar with IRS Form 3468 (irs.gov/forms-pubs/about-form-3468).