Log in Sign Up Now

Energy credit calculations and phase-out schedules

by | Sep 26, 2025 | Specialty Areas

Here’s what HIVE AI had to say about “Energy credit calculations and phase-out schedules”:

Energy Credit Calculations and Phase‑Out Schedules

Clean Electricity Production Credit (Section 45Y)

How the credit amount is calculated

  • The credit equals your base 45Y amount times the “phase‑out percentage” if construction begins in a phase‑out year. IRS final rules confirm the computation and that 45Y’s “applicable year” determination also governs 48E phase‑out. 1

Phase‑out schedule

  • Phase‑out is tied to the “applicable year” and begins the year after that threshold is met: 100% in year 1, 75% in year 2, 50% in year 3, and 0% thereafter. The statute sets this step‑down schedule. 2

Applicable year datasets and determination

  • The IRS adopted datasets (EIA Electric Power Annual and EPA GHGI) to determine the “applicable year” at which electricity‑sector emissions fall low enough to trigger the phase‑out window. 1

Domestic content elective‑pay phase‑out exception (for applicable entities)

  • If you claim elective payment and fail domestic content on ≥1 MW projects begun in 2024, a statutory exception can avoid the 10% elective‑pay reduction by filing Form 7211 with an exception statement per Notice 2024‑9. 3

Clean Electricity Investment Credit (Section 48E)

How the credit amount is calculated

  • The 48E credit equals your calculated 48E amount times the phase‑out percentage if construction begins in a phase‑out year, mirroring 45Y’s step‑down. 4

Phase‑out schedule and bonus adders

  • Phase‑out schedule uses the same 100%/75%/50%/0% progression tied to the 45Y “applicable year.” Bonus adders (energy community and domestic content) increase the applicable percentage by 10 points (or 2 points at base rate) each if met. 4

New statutory restrictions and terminations under OBBBA

  • Wind/solar termination: 48E does not apply to wind or solar property placed in service after 12/31/2027 at “applicable facilities” (exception for storage at those facilities). 5
  • Prohibited foreign entity rules: No 48E credit where construction begins after 12/31/2025 and includes “material assistance” from a prohibited foreign entity; 100% recapture if “applicable payments” are made within 10 years. 5
  • Domestic content thresholds updated: Adjusted percentage steps of 40%/45%/50%/55% by start‑of‑construction date windows (lower for offshore) apply for the bonus. 5

Private activity bond/subsidized financing reduction

  • If tax‑exempt bonds finance the facility or storage, reduce the credit by up to 15% or a financing ratio fraction; instructions detail the calculation on Form 3468. 6

Legacy Production Credit (Section 45)

Inflation indexing and price‑based phase‑out

  • The 45 credit per‑kWh rate and 8‑cent threshold are inflation‑indexed. The credit phases down proportionately when the “reference price” exceeds the adjusted 8‑cent threshold; no credit remains when the reference price is ≥3 cents over the threshold. 7
  • Annual IRS guidance confirms whether the phase‑out applies; for example, prior notices have stated when the reference price did not trigger a phase‑out for a calendar year. 8

Current year filing mechanics

  • Form 8835 and its instructions list current per‑kWh rates and apply the price‑based phase‑out on the form; 2024/2025 instructions detail the calculation and adjustments. 9

Residential Clean Energy Credit (Section 25D)

Early termination under OBBBA

  • The residential clean energy credit is terminated for expenditures made after December 31, 2025 (previously slated to run longer), accelerating the sunset for rooftop solar, geothermal, etc. 10

Elective Pay, Basis Reduction, and Recapture

Basis reduction and recapture framework

  • Elective pay projects follow section 50‑like recapture rules; basis reduction is generally 50% of the credit amount. If property ceases to qualify during the recapture period, recompute using the applicable recapture percentage and report (Form 4255 referenced by regs). 11

What credits are eligible for elective pay

  • The elective‑pay eligible “applicable credits” list includes 45, 45Q, 45U, 45V, 30C, etc., for entities qualifying under 6417. 12

Clean Electricity Investment/Production Credit Filing Tips

Forms and phase‑out implementation

  • 48E and 45Y compute phase‑outs by multiplying the pre‑phase‑out credit by the percentage tied to the applicable year; proposed and final guidance align on this approach. 4
  • Pre‑filing registration tool crosswalk shows forms for each energy credit (e.g., 45Y Form 7211; 48 via Form 3468; 48E will be reflected in form updates). 13

Domestic content elective‑pay phase‑out and exception

  • If you are an applicable entity using elective pay for 45/45Y/48/48E and fail domestic content on ≥1 MW projects, a 10% reduction may apply unless you qualify for a statutory exception (and substantiate it per Notice 2024‑9 procedures) in the year construction began. 14

Practical Examples

Example A: 48E credit with phase‑out

  • A storage project meeting PWA/Apprenticeship and sited in an energy community begins construction in the second calendar year after the applicable year. Compute the full 48E credit rate with adders, then multiply by 75% for the phase‑out year. 4

Example B: 45Y credit in first phase‑out year

  • A qualifying 45Y facility whose construction begins the first year after the applicable year uses 100% phase‑out percentage (i.e., no reduction) and claims the full 45Y amount. 2

Example C: 45 price‑based phase‑out

  • If the annual reference price exceeds the inflation‑adjusted 8‑cent threshold but by less than 3 cents, the 45 credit is proportionately reduced on Form 8835; at ≥3 cents over, it phases out to zero for that year. 15

Key OBBBA Changes To Monitor

48E wind/solar termination and foreign‑entity restrictions

  • Wind/solar placed in service after 12/31/2027 are excluded from 48E; projects beginning construction after 12/31/2025 cannot include material assistance from prohibited foreign entities; certain payments within 10 years trigger 100% recapture. 5

25D residential credit termination

  • Residential clean energy credit ends for expenditures after 12/31/2025; project cost timing matters more than placed‑in‑service date. 10

What I need from you to model your credit and phase‑out precisely

  • Technology, capacity, and whether you will claim 45Y or 48E
  • Construction begin date and placed‑in‑service date
  • PWA/apprenticeship, domestic content, and energy community status
  • Any tax‑exempt bond financing or elective‑pay/transfer plans

With those details, I can produce a worksheet showing the gross credit, applicable adders, any financing or elective‑pay reductions, and the statutory phase‑out percentage that applies in your construction year under 45Y/48E.

Sources

1 – T.D. 10024 📄 Summarize
2 – IRC § 45Y(d) 📄 Summarize
3 – IRS – Instruction 7211 Instructions for Form 7211, Clean Electricity Production Credit 📄 Summarize
4 – REG-119283-23 📄 Summarize
5 – One Big Beautiful Bill Act Sec. 70513. Termination and restrictions on clean electricity investment credit 📄 Summarize
6 – IRS – Instruction 3468 Instructions for Form 3468, Investment Credit 📄 Summarize
7 – IRC § 45(b) 📄 Summarize
8 – Notice 2005-37 📄 Summarize
9 – IRS – Instruction 8835 Instructions for Form 8835, Renewable Electricity Production Credit 📄 Summarize
10 – One Big Beautiful Bill Act Sec. 70506. Termination of residential clean energy credit 📄 Summarize
11 – Treasury Regulation 1.6417-6 📄 Summarize
12 – Treasury Regulation 1.6417-1 📄 Summarize
13 – IRS – Publication 5884 Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool User Guide 📄 Summarize
14 – IRS Newsroom – IR-2023-252 📄 Summarize
15 – IRS.gov – Instructions for Form 8835 (2024) 📄 Summarize

Try Your AI Tax Assistant for Free!

Ready to transform your practice with agentic AI in tax? See firsthand how our cutting-edge AI tax tools can revolutionize your approach to tax research and planning.

Create Your Free Account