IRC Section 48: Energy Credit Rules, Basis, and Recapture

The IRC Section 48 energy tax credit gives a dollar-for-dollar reduction in federal income tax equal to 6% or 30% of what you spend on qualifying clean energy property, with the higher rate available when the project meets prevailing wage and apprenticeship standards. One threshold matters before anything else: Section 48 now applies primarily to projects that began construction before 2025. A newer, technology-neutral credit under Section 48E has replaced it for facilities placed in service after December 31, 2024.¹

Does Section 48 Still Apply to Your Project

If construction began before 2025 and the property has not yet been placed in service, Section 48 is still your credit. If both construction and placed-in-service dates fall after 2024, the project falls under Section 48E instead. The two credits share the same 6%/30% rate structure and many of the same bonus adders, but 48E swaps the statutory list of qualifying technologies for an eligibility test based on the facility’s anticipated greenhouse gas emissions rate, which must be zero or less.² What follows describes Section 48.

Property That Qualifies

Section 48 covers specific categories of equipment: solar energy equipment used to generate electricity or provide heating and cooling, geothermal energy equipment (up to but not including the electrical transmission stage), fuel cell property, microturbine property, small wind energy property, energy storage technology, biogas property, waste energy recovery property, and microgrid controllers.³ Solar equipment used to heat swimming pools is specifically excluded.

The property must be depreciable, meaning it has a useful life exceeding one year and is used in a trade or business. Original use must begin with you, or you must have constructed or reconstructed the property. It must also meet any performance and quality standards the IRS has prescribed after consulting with the Department of Energy.³

How the Credit Is Calculated

The base rate is 6% of the property’s cost basis.³ That rate jumps to 30% if the project meets prevailing wage and apprenticeship requirements during construction. On a $2 million solar installation, the difference is $120,000 versus $600,000. Most of the credit’s value lives in that labor compliance.

Three bonus adders can stack on top of the base or full rate. Each provides a 10-percentage-point increase for projects meeting the labor standards, or 2 points for projects that do not:

Energy community bonus, for projects placed in service in areas with significant historical fossil fuel employment or affected by coal facility closures.³
Domestic content bonus, when a specified share of the project’s steel, iron, and manufactured components was produced in the United States, under rules referenced in Section 45(b)(9)(B).³
Low-income community bonus, which works differently: 10 points for projects in a low-income community or on Indian Land, and 20 points for qualified low-income residential building projects or qualified low-income economic benefit projects.⁴

The low-income community bonus is subject to an annual capacity allocation, so not every eligible project receives it. In theory, a labor-compliant project in an energy community using domestic content and serving a low-income residential building could reach 70% (30% + 10% + 10% + 20%). In practice, qualifying for everything at once is rare.

Projects financed with tax-exempt bonds face a reduction under rules similar to Section 45(b)(3), cutting the credit by the lesser of 15% or the proportion of tax-exempt bond proceeds to total project capital.³

Prevailing Wage and Apprenticeship

The labor requirements apply to any project with a maximum net output of one megawatt or greater that begins construction on or after January 29, 2023. That date reflects a 60-day window after the Department of Labor published its initial guidance on November 30, 2022.⁵ Projects under one megawatt qualify for the full 30% rate without meeting these standards.⁶

The Wage Rule

Every laborer and mechanic working on construction must be paid at least the DOL-determined prevailing wage for that type of work in that geographic area. The requirement extends to contractors and subcontractors, not only to workers you employ directly. Records must be sufficient to show all workers were paid at or above the applicable rates, including fringe benefits.⁵

The Apprenticeship Rule

A minimum percentage of total labor hours must be performed by qualified apprentices from a registered apprenticeship program: 10% for construction that began before 2023, 12.5% for construction beginning in 2023, and 15% for construction beginning in 2024 or later.⁶ You must also maintain the apprentice-to-journeyworker ratio required by the applicable program.

Fixing a Shortfall

Falling short of the wage rule does not automatically kill the full credit. Within 180 days of a final IRS determination of noncompliance, you can cure by making two payments: a correction payment to each underpaid worker for the difference between what was paid and the prevailing wage (plus interest), and a $5,000 IRS penalty per underpaid worker. If the failure was intentional, the correction payment triples and the per-worker penalty doubles to $10,000.⁷

Apprenticeship failures can be cured by paying $50 multiplied by the labor hours where the requirement was not met, rising to $500 per hour for intentional disregard.⁷ On a large project, the intentional-disregard penalty can easily exceed the value of the credit. Building compliance in from day one is much cheaper than cure.

Basis Reduction

Claiming the credit reduces the depreciable basis of the property. Under IRC Section 50(c), basis is normally reduced by the full amount of the credit, but a special rule for the energy credit reduces basis by only 50% of the credit claimed.⁸ On a $1 million solar installation with a 30% credit of $300,000, depreciable basis drops by $150,000 to $850,000. The reduced depreciation deductions over the life of the property offset part of the credit’s benefit, which matters for cash flow projections and tax equity financing structures.

Five-Year Recapture

Selling, exchanging, or ceasing to use the property as qualifying energy property within five years of placing it in service triggers recapture of a portion of the credit:⁸

Within year 1: 100% recaptured
Within year 2: 80% recaptured
Within year 3: 60% recaptured
Within year 4: 40% recaptured
Within year 5: 20% recaptured

After five full years, no recapture applies. Recapture is not limited to outright sales. A change in use so the property no longer qualifies, or ceasing to use it in a trade or business, also triggers it. Any buyer or financing partner should be aware of the five-year holding requirement before structuring a deal.

Getting Cash for the Credit

Two Inflation Reduction Act provisions let entities that cannot use the credit against tax convert it to cash.

Elective Pay

Section 6417 lets certain tax-exempt and governmental entities receive the credit as a direct payment from Treasury rather than as an offset against tax they do not owe. Eligible entities include tax-exempt organizations, state and local governments, tribal governments, the Tennessee Valley Authority, Alaska Native Corporations, and rural electric cooperatives.⁹

Credit Transfers

Section 6418 lets any eligible taxpayer sell all or part of the energy credit to an unrelated buyer for cash.¹⁰ The rules:

Payment must be in cash.
The seller does not include the payment in gross income, and the buyer cannot deduct it.
Buyer and seller cannot be related parties under IRC Sections 267(b) or 707(b)(1).
A buyer who purchases credits cannot resell them.
The transfer election is irrevocable.

The election must be made no later than the due date (including extensions) of the return for the year the credit was determined.¹⁰ Credits typically sell at a discount to face value, with pricing shaped by the buyer’s confidence in the credit and the complexity of the underlying project.

How to Claim It

The credit is claimed on Form 3468 (Investment Credit), which feeds into Form 3800 (General Business Credit) on the federal return.¹¹ Form 3468 asks for detailed information about each property, including type, location with latitude and longitude coordinates, and the owner’s taxpayer identification number if different from the filer.¹²

Projects claiming the increased credit for meeting labor requirements must also file Form 7220, which documents prevailing wage and apprenticeship compliance for each facility or energy project.¹²

Using elective pay or transferability requires pre-filing registration through the IRS Energy Credits Online (ECO) portal to obtain a registration number for each applicable credit property. Each entity needs its own account and employer identification number. Registration should happen after the property is placed in service but at least 120 days before the extended return due date.¹³ Missing the registration deadline means missing the election, with no way to fix it after the return is filed. Any later recapture event is reported on Form 4255.¹¹

1
Internal Revenue Service. Clean Electricity Investment Credit
2
Office of the Law Revision Counsel. 26 USC 48E – Clean Electricity Investment Credit
3
Office of the Law Revision Counsel. 26 US Code 48 – Energy Credit
4
U.S. Department of Energy. Clean Electricity Low-Income Communities Bonus Credit Amount Program
5
U.S. Department of Labor. Prevailing Wage and the Inflation Reduction Act
6
Internal Revenue Service. Frequently Asked Questions About the Prevailing Wage and Apprenticeship Under the Inflation Reduction Act
7
Federal Register. Increased Amounts of Credit or Deduction for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements
8
Office of the Law Revision Counsel. 26 US Code 50 – Other Special Rules
9
Office of the Law Revision Counsel. 26 US Code 6417 – Elective Payment of Applicable Credits
10
Office of the Law Revision Counsel. 26 US Code 6418 – Transfer of Certain Credits
11
Internal Revenue Service. About Form 3468 – Investment Credit
12
Internal Revenue Service. Instructions for Form 3468 (2025)
13
Internal Revenue Service. Register for Elective Payment or Transfer of Credits