⏱️ Reading time: 14 minutes | Updated August 2026
📋 Key Takeaways
- The 30% Residential Clean Energy Credit (Section 25D) ended for expenditures made after December 31, 2025. Homeowners who buy solar in 2026 receive $0 federal credit.
- The Commercial Clean Electricity ITC (Section 48E) remains active at 30% (with prevailing wage and apprenticeship) but with strict deadlines: placed in service by December 31, 2027 for projects beginning construction after July 4, 2026.
- On June 6, 2026, a federal court vacated IRS Notice 2025-42, restoring the 5% Safe Harbor for all project sizes pending appeal.
- Third-party-owned residential systems (leases/PPAs) may still capture Section 48E commercial credits, with savings passed to homeowners.
- State incentives, utility rebates, SRECs, and HEEHRA rebates (up to $14,000) remain available and now carry more weight in project economics.
1. The Headline: The Residential Solar Tax Credit Is Gone for 2026
If you are a homeowner considering solar in 2026, the single most important fact is this: the 30% federal Residential Clean Energy Credit under Internal Revenue Code Section 25D ended on December 31, 2025. There is no phase-out, no transition rule, and no safe harbor for residential buyers who missed the deadline.
The change came from the One Big Beautiful Bill Act (Pub. L. 119-21), signed into law on July 4, 2025. The law states that Section 25D "shall not apply with respect to any expenditures made after December 31, 2025" [Pub. L. 119-21]. Under 26 U.S.C. § 25D(e)(8)(A), an expenditure is treated as made "when the original installation of the item is completed." That means:
- Signing a contract in 2025 does not lock in the credit.
- Paying a deposit — or even paying in full — in 2025 does not lock in the credit.
- Only systems whose installation was completed on or before December 31, 2025 qualify.
The IRS confirmed this interpretation in its OBBBA FAQ: "The credit will not be allowed for any expenditures made after December 31, 2025." Homeowners with qualifying 2025 installations should file IRS Form 5695 with their 2025 federal return. Unused credits can carry forward to future tax years under standard carryforward rules.
2. What Survives: The Commercial Credit (Section 48E)
While the residential credit is dead, the commercial side of the tax code remains active — but with new constraints. The Clean Electricity Investment Tax Credit under IRC Section 48E provides a base credit of 6%, increased to 30% for projects that meet prevailing wage and apprenticeship (PWA) requirements. Two bonus adders are still available:
- Domestic Content Bonus: +10% if 50% of manufactured products and 40% of steel/iron are produced in the United States (for projects beginning construction in 2026).
- Energy Community Bonus: +10% for projects located in designated low-income or fossil fuel-dependent communities.
The maximum effective rate with all bonuses stacks to 40% or higher — but only for projects that hit the deadlines. This is where safe harbor and commence-construction rules become critical.
3. The Two-Path Deadline Structure
Under OBBBA, solar and wind projects must navigate one of two paths to claim the Section 48E credit:
| Path | Begin Construction By | Placed in Service By | Credit Rate |
|---|---|---|---|
| Long Runway | July 4, 2026 | December 31, 2030 | 30% base + bonuses |
| Short Runway | After July 4, 2026 | December 31, 2027 | 30% base + bonuses |
Projects on the Long Runway path benefit from the Continuity Safe Harbor: if placed in service within four calendar years of the year construction began, the IRS automatically treats continuity requirements as satisfied [IRS Notice 2013-29, Section 5]. Projects on the Short Runway have roughly 18 months from now to complete installation — a tight but feasible timeline for typical commercial rooftop systems.
Critical warning: A project that begins construction after July 4, 2026, and is not placed in service by December 31, 2027, receives $0 in ITC. No base credit, no adders, no recourse.
4. How to Establish Beginning of Construction: The Two Tests
The IRS recognizes two methods for establishing that construction has begun. Both were reaffirmed in IRS Notice 2022-61 and remain valid for Section 48E projects:
The Physical Work Test
Construction begins when "physical work of a significant nature" starts. The focus is on the nature of the work, not the cost or amount. Qualifying work includes:
- On-site: Excavation for foundations, pouring concrete pads, installing racks or structures to affix panels, electrical trenching.
- Off-site: Manufacturing of custom components (modules, inverters, transformers, racking) under a written binding contract — provided the components are not held in inventory [IRS Notice 2025-42, §3.04].
Preliminary activities such as planning, permitting, securing financing, site surveying, and interconnection applications do not count toward the Physical Work Test.
The 5% Safe Harbor
Construction is considered to have begun when the taxpayer pays or incurs at least 5% of the total project cost. The cost must be tied to physical project components — not permits, PTO fees, or financing costs alone. Taxpayers should aim for 7% to create a buffer against budget fluctuations.
Major development (June 6, 2026): In Oregon Environmental Council v. IRS (D.D.C. No. CV-25-4400), a federal district court vacated IRS Notice 2025-42 in full, finding it "arbitrary and capricious" under the Administrative Procedure Act. Notice 2025-42 had eliminated the 5% Safe Harbor for solar projects greater than 1.5 MW (AC) and all wind projects. The court's ruling restores the 5% Safe Harbor for all project sizes — at least while the ruling stands. An IRS appeal is expected, so developers should consult counsel on reliance risk.
The Continuity Requirement
Beginning construction is only step one. Taxpayers must also demonstrate a "continuous program of construction" through either ongoing physical work or the Continuity Safe Harbor (placed in service within four calendar years of construction beginning). For projects on the Long Runway, this means completion by December 31, 2030.
5. MACR and Prohibited Foreign Entity (PFE) Compliance
Projects beginning construction after January 1, 2026, must also satisfy the Material Assistance Cost Ratio (MACR) to avoid disqualification for receiving material assistance from a Prohibited Foreign Entity (PFE). Under IRS Notice 2026-15 (February 2026):
| BOC Date | Domestic Content Threshold | MACR Threshold |
|---|---|---|
| Jan 1 – July 4, 2026 | 50% | 40% |
| 2027 | 55% | 45% |
Taxpayers may rely on supplier certificates to calculate MACR. For developers, this means sourcing documentation from every tier of the supply chain. PES Supply stocks Qcells and Mission Solar panels — both US-manufactured and BABA-compliant — as well as Enphase and SolarEdge inverters with domestic content certifications available.
6. Buyer-Impact Block: What Homeowners Must Know Now
🏠 For Homeowners
- No federal credit for 2026 installs. The 30% Section 25D credit is gone. Do not let any installer tell you otherwise.
- State incentives still matter. New York (25% up to $5,000), South Carolina (25%), Arizona (25% up to $1,000), and Massachusetts (15% up to $1,000) still offer income tax credits. Utility rebates, SRECs, net metering, and property/sales tax exemptions also apply.
- HEEHRA rebates are the new federal path. The High-Efficiency Electric Home Rebate Act provides point-of-sale discounts up to $14,000 per household for electrification upgrades — including electrical panel upgrades ($4,000) that support solar + battery systems. Income limits apply (under 150% of Area Median Income).
- Third-party ownership (lease/PPA) may still capture federal value. The system owner claims Section 48E and may pass savings through as lower monthly payments. Read the contract carefully: compare buyout terms, escalators, and transfer rules.
- Run the numbers without the 30% credit. Use our Solar ROI Calculator to see real payback periods under 2026 rules.
7. Buyer-Impact Block: What Installers and Contractors Must Do Now
🔧 For Installers & Contractors
- Documentation is everything. For commercial projects, maintain purchase orders, invoices, contracts, and photographic evidence of physical work. In an audit, the burden of proof is on the taxpayer.
- Push TPO structures for residential. Leases and PPAs are now the only route to federal credit value for residential customers. Structure deals so the system owner (not the homeowner) can claim Section 48E.
- Watch the December 31, 2027 placed-in-service deadline. For commercial projects starting now, 18 months is a realistic runway — but permitting, interconnection, and equipment lead times are tightening. Source equipment early.
- Source domestic content now. The 50% domestic content threshold for 2026 projects requires US-made modules, inverters, and racking. PES Supply carries Qcells Dalton-made modules, Mission Solar Texas-made panels, and Enphase IQ8 microinverters with domestic content certifications.
- Track the Notice 2025-42 appeal. The June 6 court ruling restored the 5% Safe Harbor for all sizes, but an IRS appeal could reinstate the >1.5 MW restriction. For large projects, hedge by satisfying the Physical Work Test regardless.
8. State and Local Incentives That Still Stack in 2026
Federal policy may have tightened, but state and utility programs remain robust. Here is a snapshot of the strongest remaining incentives:
| Incentive Type | Examples | Typical Value |
|---|---|---|
| State tax credits | NY (25% / $5K max), SC (25%), AZ (25% / $1K max), MA (15% / $1K max) | $1,000–$5,000 |
| Utility rebates | Austin Energy ($2,500), Oncor Take A Load Off ($2,000–$8,500 with storage) | $2,000–$8,500 |
| SRECs / performance | NJ SuSI, IL Shines, MD SREC market | $500–$900/year |
| Battery rebates | CA SGIP, NV Energy ($3,000), OR Solar + Storage | $150–$3,000+ |
| Property tax exemption | Available in 36+ states | Varies by assessed value |
| Sales tax exemption | AZ, FL, NJ, WA, and others | 5–10% of equipment cost |
| HEEHRA rebates | Federal point-of-sale electrification rebates | Up to $14,000/household |
For a complete database of state incentives, visit DSIRE (Database of State Incentives for Renewables & Efficiency).
9. The Court Ruling That Changed the Game (June 6, 2026)
On June 6, 2026, the U.S. District Court for the District of Columbia issued a decision that temporarily reshuffled the deck for commercial developers. In Oregon Environmental Council v. Internal Revenue Service (No. CV-25-4400), the court vacated IRS Notice 2025-42 in its entirety.
Notice 2025-42, issued in August 2025, had eliminated the 5% Safe Harbor for solar projects greater than 1.5 MW (AC) and all wind projects beginning construction on or after September 2, 2025. The court found the notice "arbitrary and capricious" under the Administrative Procedure Act, noting that the IRS failed to adequately explain why the 5% Safe Harbor permitted "circumvention" of statutory deadlines and failed to account for more than a decade of taxpayer reliance interests [Snell & Wilmer alert, June 9, 2026; CLA Connect, June 15, 2026].
What this means today: The 5% Safe Harbor is available for projects of all sizes — at least until the IRS appeals and a higher court rules. Developers with projects in the 1.5 MW+ range who were forced into the Physical Work Test now have restored flexibility. Best practice: satisfy both tests where possible to eliminate appeal risk.
10. Product Sourcing for Compliance
Meeting the 50% domestic content threshold and 40% MACR threshold for 2026 projects requires intentional sourcing. Here is how common component combinations stack up using IRS Notice 2025-08 safe harbor values:
| Component | Domestic Content Contribution | MACR Contribution |
|---|---|---|
| US-made inverter (e.g., Enphase IQ8, SolarEdge US production) | ~24.8% | ~24.8% |
| US-made racking system | ~19.6% | ~19.6% |
| US-made modules (Qcells, Mission Solar) | ~5.6% | — |
| Total (inverter + racking + minimal modules) | ~50.0% ✓ | ~44.4% ✓ |
With US-made inverters and racking alone, most C&I projects can hit both thresholds without complex module sourcing. PES Supply provides domestic content compliance certificates for Enphase and SolarEdge inverters upon request.
11. What About Battery Storage?
Standalone battery storage follows a different timeline under Section 48E. Unlike solar, which faces the July 4, 2026 BOC deadline and December 31, 2027 placed-in-service cutoff, energy storage projects have a longer runway. Storage co-located with solar that began construction by July 4, 2026, can qualify under the same long runway. Standalone storage and storage with other generation technologies must commence construction before the end of 2033 for full credit value [Tax Law Center analysis].
For homeowners, the news is mixed: owned batteries installed in 2026 do not qualify for Section 25D. But third-party-owned batteries within a lease/PPA structure may still access Section 48E credits. PES Supply stocks Tesla Powerwall 3, Enphase IQ Battery 5P, and FranklinWH aPower 2 systems for both residential and commercial applications.
12. Timeline: Critical Dates at a Glance
| Date | Event |
|---|---|
| July 4, 2025 | OBBBA signed (Pub. L. 119-21) |
| December 31, 2025 | Section 25D residential credit ENDS |
| August 2025 | IRS Notice 2025-42 issued (later vacated) |
| January 1, 2026 | FEOC / MACR rules take effect |
| February 2026 | IRS Notice 2026-15 issued (MACR guidance) |
| July 4, 2026 | BOC deadline for Long Runway 48E eligibility |
| June 6, 2026 | D.D.C. vacates Notice 2025-42 — 5% Safe Harbor restored |
| December 31, 2027 | Placed-in-service deadline for Short Runway projects |
| December 31, 2030 | Placed-in-service deadline for Long Runway projects |
13. Get a Project Quote
Whether you are a homeowner evaluating post-credit economics or a contractor racing the December 31, 2027 deadline, PES Supply can help. We stock 50,000+ SKUs from 169 authorized brands — including domestic-content-compliant modules, inverters, racking, and battery storage — with next-day dispatch from our Louisville, Kentucky supply house.
Need help sizing a system? Use our Solar System Calculator or Solar ROI Calculator to run the numbers with current incentive stacks.
14. Frequently Asked Questions
Is there any federal solar tax credit for homeowners in 2026?
No. The Section 25D Residential Clean Energy Credit ended for expenditures made after December 31, 2025. Under 26 U.S.C. § 25D(e)(8)(A), an expenditure is treated as made when the original installation is completed — so a system finished in 2026 does not qualify, even if you signed the contract in 2025.
Can I claim the credit if I paid in 2025 but installation finished in 2026?
No. The IRS OBBBA FAQ confirms that eligibility depends on when the system was placed in service (completed), not when you paid or signed. Only systems completed by December 31, 2025 qualify.
What form do I use to claim a 2025 credit?
File IRS Form 5695 with your 2025 federal tax return. The credit is nonrefundable — it can reduce your tax liability to zero but will not generate a cash refund beyond what you owed. Unused amounts carry forward to future years.
Is the commercial solar tax credit still available?
Yes. Section 48E remains active at 30% (with prevailing wage and apprenticeship) plus bonus adders. Commercial projects must be placed in service by December 31, 2027, if construction began after July 4, 2026.
What is the 5% Safe Harbor?
The 5% Safe Harbor allows a taxpayer to establish that construction has begun by paying or incurring at least 5% of total project cost. In June 2026, a federal court restored this method for all project sizes by vacating IRS Notice 2025-42.
What is the Physical Work Test?
The Physical Work Test requires the start of "physical work of a significant nature" — such as excavation, foundation pouring, racking installation, or manufacturing of custom components under a binding contract. Preliminary activities like permitting and financing do not count.
What happens if I miss the December 31, 2027 deadline?
For commercial projects that began construction after July 4, 2026, missing the December 31, 2027 placed-in-service deadline means $0 in ITC. No base credit, no adders.
Do solar batteries qualify for a tax credit in 2026?
Homeowner-owned batteries installed in 2026 do not qualify for Section 25D. Batteries owned by a third party within a lease/PPA may qualify under Section 48E. Standalone storage has a longer eligibility runway through 2033.
Can a solar lease or PPA still receive a federal tax credit?
Yes — the system owner (not the homeowner) may claim the Section 48E Clean Electricity ITC. Some providers pass part of that value through as lower monthly payments, but this is not guaranteed dollar-for-dollar.
What state incentives are still available?
State tax credits (NY, SC, AZ, MA), utility rebates (Austin Energy, Oncor), SRECs (NJ, IL, MD), battery rebates (CA SGIP, NV Energy), property tax exemptions, sales tax exemptions, and HEEHRA rebates (up to $14,000) all remain active. See DSIRE for your state's full stack.
Will the federal solar tax credit come back?
There is no legislation currently scheduled to reinstate the residential credit. Plan around current law — no Section 25D for 2026 installs — rather than betting on reinstatement.
What is MACR and why does it matter?
The Material Assistance Cost Ratio (MACR) determines whether a project received impermissible assistance from a Prohibited Foreign Entity (PFE). For 2026 projects, the MACR threshold is 40%. Failing it disqualifies the project from the ITC entirely.
Disclaimer: PES Supply is an electrical equipment distributor, not a tax advisor or law firm. This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional before making credit-dependent decisions. Statutory citations verified against primary sources as of August 2026.
