Overview and Questions about the Investment Tax Credit and Production Tax Credit

What is the Investment Tax Credit (ITC)?

The ITC is a one-time federal tax credit equal to a percentage of a project’s “qualified investment” when it’s placed in service. Today it’s a 6% base or 30% if you meet prevailing-wage & apprenticeship (PWA) rules (or qualify for the small-project exception), with potential +10 pts bonuses for domestic content and energy-community siting. Standalone storage also qualifies.

Simple example: If you build a $1 million solar project, you get $300,000 off your federal taxes.

What is the Production Tax Credit (PTC)?

A per-kWh credit for electricity produced and sold from a qualified facility during its first 10 years of operation. It’s 0.3¢/kWh base, multiplied by 5× (to ~1.5¢/kWh) if prevailing-wage & apprenticeship rules apply, inflation-adjusted, with additional 10% boosts for domestic content and energy-community status. You generally elect either ITC or PTC for a given facility.

Simple example: If your wind facility generates 100,000 MWh per year, you get about $275,000 in tax credits annually for 10 years. (With MW onshore wind turbines and a 35% capacity factor, 100,000 MWh per year is generated by about 11 turbines.)

A Short History of the ITC and PTC

ITC:

• 1978–1985: First modern “energy investment credit” enacted in the Energy Tax Act of 1978 at 10% (initially refundable), later increased and broadened before expiring mid-1980s.
• 2005: The Energy Policy Act of 2005 creates the 30% ITC for commercial (§48) and introduces a parallel 30% residential credit (§25D, initially capped at $2,000).
• 2008: The Emergency Economic Stabilization Act extends the ITC eight years and removes the $2,000 residential cap (effective 2009).
• 2009–2011: During the financial crisis, American Recovery and Reinvestment Act (ARRA) §1603 cash grants allowed many projects to take a grant in lieu of the ITC/PTC.
• 2015-2021: Extensions and phasedowns (PATH Act, later year-end bills) keep the ITC available with step-downs; short-term extensions continue through 2021.
• 2022 (Inflation Reduction Act (IRA)): Restores 30% through at least 2032, adds standalone storage, and creates the base/bonus structure plus domestic-content and energy-community adders; sets a transition to tech-neutral §48E for facilities placed in service after 12/31/2024.
• 2025: Treasury/IRS finalize rules for the new §48E Clean Electricity ITC.
• 2025 (One Big Beautiful Bill Act (OBBBA)): Law narrows windows for wind and solar under §48E, requiring placement in service by Dec. 31, 2027, with a begin-construction safe harbor by July 4, 2026. (Other techs treated differently.)

PTC:

• 1992: §45 PTC created in the Energy Policy Act of 1992 at 1.5¢/kWh (1993 dollars), for 10 years of output (initially wind & closed-loop biomass) and authorized through 7/1/1999.
• 1999–2004: Credit lapses and revives multiple times (1999, 2001, 2003), then is repeatedly extended and expanded to more resources.
• 2013: IRS issues “begin construction” guidance (e.g., Notices 2013-29/-60), creating safe harbors widely used by developers.
• 2015–2021: Extensions plus a phasedown for wind; Congress continues short-term renewals into 2021.
• 2022 (IRA): Restores a full-value PTC and re-opens it to solar; establishes transition to tech-neutral §45Y for facilities placed in service after 12/31/2024. 
• 2025: Treasury/IRS finalize rules for §45Y Clean Electricity PTC.
• 2025 (OBBBA): Law compresses eligibility for wind and solar under §45Y (e.g., placed in service by 12/31/2027 with begin-construction by 7/4/2026).

How did the Inflation Reduction Act of 2022 expand or redesign these credits?

The IRA fundamentally redesigned the ITC and the PTC, making it the most significant energy tax legislation in U.S. history.

1. Restored and Extended Full Credit Values: The IRA reversed a planned phase-down of the credits. It restored the ITC to a headline rate of 30% and the PTC to its full inflation-adjusted value for at least a decade, providing long-term market certainty.
2. Created a Two-Tiered Credit Structure: The Act established a “base” credit amount and a “bonus” or full credit amount. To receive the full 30% ITC or the full PTC rate, projects larger than one megawatt (MW) must now meet specific prevailing wage and apprenticeship labor requirements. Projects that don’t meet these standards receive a much smaller base credit (a 6% ITC or 0.55 cents/kWh PTC).
3. Introduced New “Bonus” Adders: On top of the full credit rate, projects can earn additional bonus credits, potentially stacking the ITC to 50% or even higher in some cases. These 10% bonus adders are for projects that:
   • Use a required percentage of U.S.-made steel, iron, and manufactured products (Domestic Content).
   • Are located in an “Energy Community” (e.g., a brownfield site or a community with a historical dependence on fossil fuel jobs).
   • For the ITC, additional bonuses are available for projects serving low-income communities.
4. Expanded Technology Eligibility: Most notably, the IRA made solar projects eligible to choose the PTC for the first time. This gave the solar industry a critical choice between an upfront credit (ITC) or a long-term, performance-based credit (PTC). The ITC was also expanded to explicitly include standalone energy storage, microgrid controllers, and other clean energy technologies.
5. Created New Monetization Mechanisms: The IRA introduced two new ways for entities to get cash from the credits, even if they don’t have enough tax liability to use them directly:
   • Transferability: Allows project developers to sell their tax credits to an unrelated third party for cash.
   • Direct Pay (or Elective Pay): Allows tax-exempt entities — like municipalities, public schools, rural electric cooperatives, and non-profits — to receive the credit’s value as a direct cash refund from the IRS.

How did the One Big Beautiful Bill Act further change these credits?

The OBBBA, signed into law in July 2025, significantly rolled back and redesigned the clean energy tax credits that were established by the IRA. The changes were particularly targeted at wind and solar projects.

Here are the key ways the OBBBA changed the ITC and PTC:

1. Accelerated Phase-Out for Wind and Solar: This is the most significant change. The Act terminates the tech-neutral ITC (Sec. 48E) and PTC (Sec. 45Y) for wind and solar projects on a much faster timeline. To qualify, wind and solar projects must now:

• Begin construction by July 4, 2026,
• Be placed in service by December 31, 2027.

This replaced the IRA’s original, more gradual phase-out that was tied to national emissions reduction targets and was expected to last into the 2030s.

Also, some have interpreted the two requirements (begin construction and placed in service) to be disjunctive — only one would have to be met. This is an incorrect reading of the law. There is no “or” in the law. The OBBBA has two requirements: begin construction by July 4, 2026, AND be placed in service by December 31, 2027.

2. Introduced Strict Foreign Entity Restrictions: The OBBBA added complex rules to limit the involvement of “Prohibited Foreign Entities” (PFEs), which include entities with ties to China, Russia, Iran, and North Korea. These restrictions apply to:

• Ownership and control of a project.
• “Material assistance,” which limits the sourcing of components and equipment from these entities.

3. Maintained Credits for Other Technologies: In contrast to wind and solar, other clean energy technologies like battery storage, geothermal, hydropower, and nuclear were largely spared from the accelerated phase-out. They retain the original, longer runway established by the IRA, with credits available until at least 2032.

What does “begin construction” mean? 

The term “begin construction” is not defined in the statute (i.e., the Internal Revenue Code) for the ITC and PTC. Instead, the statute uses the phrase as a deadline (e.g., “for any facility the construction of which begins before January 1, 2025…”).

The detailed, operational definition that has been used for the past 10+ years — the two tests of “Physical Work of a Significant Nature” and the “Five Percent Safe Harbor” — was created by the Internal Revenue Service during the Obama administration in a series of official guidance documents beginning with IRS Notice 2013-29. This means the term “begin construction” can be re-interpreted by the Trump administration.

What does “placed in service” mean? 

Like the term “begin construction,” the phrase “placed in service” is not defined in the statute itself (the Internal Revenue Code). The statute mandates that the credit is claimed in the year a project is “placed in service,” but it doesn’t define what that means.

The IRS and courts have mostly used a Five-Factor test to define “placed in service.” (See Ampersand Chowchilla Biomass, LLC. V. United States, 26 F.4th 1306 (Fed. Cir. 2022).) Because there isn’t a single, rigid definition, the IRS has historically used a “facts and circumstances” analysis based on five key factors to determine the placed-in-service date for a power plant:

1. Required Licenses and Permits: Have all necessary legal and regulatory approvals to operate been obtained?
2. Control of the Facility: Has control of the facility passed to the taxpayer who will operate it (i.e., it’s no longer under the sole control of the construction contractor)?
3. Completion of Critical Tests: Have the essential tests to ensure the facility can operate safely and reliably been completed?
4. Commencement of Regular Operations: Has the facility begun its regular, daily operations?
5. Synchronization to the Grid: Has the power plant been synchronized with the electrical grid to generate income?

No single factor is decisive, but the synchronization to the grid is often considered the most critical milestone for a power generation facility. However, not all courts have followed the test strictly and have been more lenient in this definition of “placed in service.” (See Sealy Power Ltd. V Commissioner, 46 F.3d 382 (5th Cir. 1995).)  

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