Clean Energy Tax Credits | The Clock is Ticking

Under the One Big Beautiful Bill Act (OBBBA), the technology-neutral tax credits under §45Y (Clean Electricity Production Credit) and §48E (Clean Electricity Investment Credit) are subject to accelerated termination for wind and solar facilities placed in service after December 31, 2027. To maintain eligibility for these credits, projects must officially begin construction by July 4, 2026, primarily by satisfying the “Physical Work Test,” as recent guidance has significantly restricted the use of the 5% Safe Harbor for these technologies. The Physical Work Test determines that construction has officially begun when “physical work of a significant nature” starts on project components, whether on-site or off-site, provided the taxpayer maintains continuous progress toward completion. Projects failing to meet this mid-2026 construction milestone must be fully placed in service by December 31, 2027, to remain eligible.

While §45Y offers an ongoing credit based on the kilowatt-hours of clean electricity produced and sold, §48E provides a one-time investment credit based on a percentage of the project’s cost. Under the OBBBA’s updated framework, the base credit rate for §48E is generally 30%, provided that prevailing wage and apprenticeship requirements are strictly met. Facilities with a maximum net output of less than one megawatt are exempt from the prevailing wage and apprenticeship requirements. Businesses may qualify for additional credits including a 10% domestic content bonus if you meet U.S. manufacturing thresholds for steel, iron, and manufactured products, as well as a 10% energy community bonus if the project is in an energy community. It is important to note that businesses must navigate stricter prohibitions against components from Foreign Entities of Concern (FEOC) while also evaluating opportunities to increase their credit by locating projects within designated Energy Communities. Given these compressed timelines and the rigorous new “material assistance” (a prohibition that cancels the credit if you exceed the allowance for components from specific “countries of concern”) rules for foreign sourcing, it is critical to review your business’s specific project timelines and supply chains to ensure full credit eligibility.

While federal tax credits provide significant upfront capital relief, California’s property tax laws offer long-term operational savings. Specifically, under the state’s ‘new construction exclusion,’ businesses can prevent their property tax bills from rising even as the value of their facility increases due to solar improvements. Under current California law, the property tax exclusion for active solar energy systems is set to sunset on January 1, 2027. Legislative action in 2025 (SB 710) eliminated the automatic repeal, meaning systems installed before this date will remain excluded from property tax assessment until ownership changes. For installations completed after January 1, 2027, the exclusion is not automatically guaranteed and could be subject to normal property tax reassessment unless further legislative action is taken. You can find more information about this at your local county assessor’s office.

Have questions? Contact PP&Co’s qualified tax professionals. Email info@ppandco.com or call (408) 287-7911 to determine what’s right for your specific situation.