Maximizing tax benefits is a game that a variety of people try to win at. However, the complex
rules in the tax code and regulations combined with frequent scams can make it difficult to find
legitimate opportunities for investment and tax benefit opportunities.
One opportunity that is compelling is direct ownership of solar installations (commercial or
residential). Though riddled with pitfalls and scams (we have a full list of red flags below), this
is a legitimate area that can be especially beneficial for high-net-worth individuals seeking to
maximize tax benefits. High-net-worth individuals who act quickly can still capture significant
tax benefits through the Section 48E Investment Tax Credit (ITC), particularly if they establish
their solar investment as an active trade or business.
In this blog, we walk through what the ITC is, how the One Big Beautiful Bill signed into law
July 4, 2025, affects the solar tax credits, how to have a solar investment as an active trade or
business and what that means, as well as what pitfalls to watch out for.
Investment Tax Credits:
The Inflation Reduction Act (passed in August 2022) enhanced solar energy investment
opportunities under Internal Revenue Code (IRC) Sections 38, 46, and 48E. Section 38
establishes the general business credit framework, while Section 46 determines the amount of
investment tax credit that flows into the general business credit calculation. These sections work
together with Section 48E to provide the specific energy property credit. Section 48E allows for
a dollar-for-dollar reduction of federal income tax liability equal to 30% of a qualified solar
property’s cost basis. This means for a $500,000 commercial solar installation, the taxpayer
would have a direct tax credit of $150,000. There is even an energy community bonus allowing
for the tax credit to be equal to 40% of the cost basis of the qualified solar property if it is built in
designated energy communities.
In addition, claiming the credits on your tax return has incredibly favorable timing under IRC
Section 39(a)(4). A taxpayer who can claim the credits can carry back the credits up to 3 years
and any unused credit can be carried forward for up to 22 years. Typically, a credit can only have
a 1-year carryback and a 20-year carryforward. What this means in practice is that if you have
insufficient tax liability in year 1 when your solar system is placed in service, you can amend
prior tax return years (up to 3 years back) to claim refunds. But you must own the solar assets in
order to take the credits and you must be a trade or business. (We cover the trade or business
piece below.)
Implications of the One Big Beautiful Bill:
The One Big Beautiful Bill was signed into law on July 4, 2025, and made some drastic changes
to energy credits. We won’t go into all the details here, but we will cover how this affects the
investment tax credits and what it means for you.
Section 48E ITC is still available through 2027 BUT there are some critical deadlines to be
aware of:
- Solar projects have new construction deadlines where the solar project must either be
placed in service by December 31, 2027, OR construction on the solar project must begin
within 12 months of the bill’s enactment (so by July 4, 2026). - There are also new restrictions on sourcing equipment and ownership structuring with
new “Foreign Entity of Concern” rules.
Active Trade or Business:
Though you can take the credits if you own the solar assets (the property), there are even more
tax benefits for a taxpayer whose solar investment is an active trade or business. If the solar
investment is an active trade or business, the taxpayer can (in addition to the tax credits) claim
depreciation. The amount of depreciation that is allowed is generally the amount paid for the
qualifying assets. However, for solar assets where an ITC credit is being claimed, the amount of
depreciation allowed is reduced by half of the credit amount claimed. What this means is if a
30% ITC credit is claimed, the depreciation amount is reduced by 15% to only 85% instead of
100%
As mentioned above, the taxpayer can claim depreciation if the solar investment is an active
trade or business. In addition, the taxpayer must own the property (same requirement the
taxpayer needs to claim the ITC credits). Let’s walk through the trade or business piece and then
the active piece of the requirement.
Trade or Business:
In order to be a trade or business, the taxpayer would need to have a profit motive for entering
into the business arrangement. You can still have a profit motive even if based on an after-tax
basis (after receiving credits or other tax benefits) (based on different court findings). The
Treasury Regulations lay out 9 factors that the IRS looks at in determining whether an activity
was engaged in for profit. We won’t dive into them in detail here but we will list them below for
your reference. Under Treasury Regulation 1.183-2 these 9 factors are used to determine whether
an activity was engaged in for profit:
- Manner in which the taxpayer carries on the activity.
- The expertise of the taxpayer or his/her advisors.
- The time and effort expended by the taxpayer in carrying on the activity.
- Expectation that assets used in activity may appreciate in value.
- The success of the taxpayer in carrying on other similar or dissimilar activities.
- The taxpayer’s history of income or losses with respect to the activity.
- The amount of occasional profits, if any, which are earned.
- The financial status of the taxpayer.
- Elements of personal pleasure or recreation.
Material Participation:
Once the profit motive is met, then we also need to determine if the activity is active or passive.
The IRC defines a “passive activity” as any activity (1) which involves the conduct of any trade
or business, and (2) in which the taxpayer does not materially participate.
There is not a definition of “materially participate” but the IRC does say that a taxpayer can only
materially participate in an activity if the taxpayer’s involvement in the activity’s operations
happens in a manner that is (1) regular, (2) continuous, and (3) substantial. In addition, the
Treasury Regulations outline a 7-part test to help determine whether a taxpayer has “materially
participated” in the business. Each of the tests is a separate way to reach the “materially
participate” requirement for an activity to be considered active. The 7 material participation tests
are as follows:
- 500-hour Test: Participate for more than 500 hours during the year
- Substantially All Test: Your participation constitutes substantially all participation by any
individual (particularly relevant for solo investors managing their own solar installations) - 100-Hour Test: Participate for more than 100 hours AND no other individual participates
more - Significant Participation Activity: Combined participation in all significant participation
activities exceeds 500 hours - Five of Ten Years Test: Materially participated for any 5 of the prior 10 tax years
- Personal Service Activity: Materially participated for any 3 prior years (applies to
personal service activities) - Facts and Circumstances Test: Regular, continuous, and substantial participation
We also won’t dive into these here but will provide warning below on things to avoid and
common pitfalls, including in the material participation tests.
Pitfalls to Avoid:
There are lots of solar tax credit scams out there. It’s common enough that the IRS has issued
multiple warnings about solar tax credit scams. There are several things to be aware of and to
watch out for.
- Too-Good-To-Be-True Promises
o Claims of “zero-cost” solar systems
o Guarantees of immediate tax rebates or government checks
o Promises that exceed the statutory 30-40% credit limits
o Claims you can claim credits without actual ownership or investment - Aggressive Sales Tactics
o Unsolicited door-to-door sales or cold calls
o High-pressure tactics demanding immediate decisions
o Requests for personal financial information upfront
o Claims of special “government programs” with limited availability - Improper Credit Structuring
o Schemes involving inflated system costs to increase credits
o Arrangements where you don’t actually own the solar equipment
o Complex partnerships designed solely to pass through credits
o Claims that passive investors can easily qualify for active treatment - Improper Credit Structuring
o Schemes involving inflated system costs to increase credits
o Arrangements where you don’t actually own the solar equipment
o Complex partnerships designed solely to pass through credits
o Claims that passive investors can easily qualify for active treatment
Make sure you are doing your due diligence: verifying contractor licenses and certifications,
making sure there is clear title and ownership documentation, maintaining records from day one,
and reviewing all contracts with qualified legal counsel.
Best practice is to get professional guidance, document everything, and use reputable
contractors. In addition, make sure that everything is structured properly from the start and that
you have regular compliance reviews. You can have legitimate solar investments that offer
substantial tax benefits but they require careful planning, proper execution, and ongoing
compliance.
Conclusion:
If you are interested in learning more about solar investments and how it could apply to you and
your specific situation, please reach out.
