Biden’s Inflation Reduction Act (IRA), signed in 2022, marked one of the largest federal commitments to clean energy. It allocated roughly $369 billion in tax incentives to encourage investment in renewable projects such as solar. A key feature of the law is its clean-energy credits, including the Investment Tax Credit (ITC) under IRC Section 48, which can create meaningful tax savings for businesses and individuals who materially participate in a qualifying solar trade or business.
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However, passive-activity rules may restrict how W-2 earners who do not materially participate use these credits. For those who are eligible, credits plus depreciation from a qualifying solar business can offset substantial business income. With material participation, the benefits may also apply against nonpassive income. Beyond tax benefits, solar projects often generate long-term cash flows through power-purchase agreements, which generally last 15 to 20 years.
If you are exploring ways to combine potential tax advantages with long-term renewable investments, solar projects could be worth a closer look. This article explains how these investments typically work and what to expect when you get involved.
📌 Also read: Tax Deductions vs Tax Credits: Key Differences & Similarities
A Hypothetical Solar Investment Example
Imagine you are a business owner with $2.2 million in annual income. Your combined federal and state tax liability is about $1.1 million, broken down as:
- Federal taxes: $850,000
- State and local taxes: $250,000
Under 2025 law, an illustrative first-year tax benefit from investing in a qualifying solar project could be around $725,000. This combines:
✅ $300,000 from the Investment Tax Credit (ITC) — assuming the project qualifies for a 30% credit under current rules.
✅ $425,000 from bonus depreciation — based on 100% bonus depreciation applied to an $850,000 depreciable basis at a 50% assumed combined tax rate.
Together, that creates meaningful upfront tax savings. In addition, a project may generate $50,000 of annual income for about 20 years through a power-purchase agreement (PPA). Over two decades, that would total roughly $1 million in cash flow. Of course, these numbers are hypothetical and depend on actual project performance.
Key Rules to Note in 2025
- Many commercial projects qualify for a 30% ITC only if they meet prevailing wage and apprenticeship requirements, along with timing rules set under the One Big Beautiful Bill Act (OBBBA). Construction must begin by July 4, 2026, and projects must be placed in service by December 31, 2027, subject to other restrictions.
- Additional credits for domestic content or energy community location could raise the ITC to 40%.
- The OBBBA also restored 100% bonus depreciation for qualifying property placed in service on or after January 19, 2025. For a project with a 30% ITC, the depreciable basis is reduced by half of the ITC, leaving 85% of cost eligible for first-year depreciation under IRC Section 168(k).
What This Means for Investors
An eligible solar project may provide a combination of:
- A tax credit
- A depreciation deduction
- Potential long-term cash flow from PPAs
However, outcomes vary based on eligibility rules, carryforward use, state conformity, financing structure, and project-specific risks. Solar investing is more than just writing a check — the details matter.
Benefits of Investing in Solar Projects
Commercial solar projects can offer three major benefits: federal tax credits, accelerated depreciation, and long-term income potential. The exact outcome depends on the project structure, but together these incentives can make solar an attractive investment for eligible participants.
Benefit #1: Federal Tax Credits
Most solar projects qualify for a 30% Investment Tax Credit (ITC), provided prevailing wage and apprenticeship rules are met. This base credit can increase to 40% with one “adder” (either the domestic-content requirement or the energy-community provision) and to 50% with both. Separate low-income project bonuses may boost it even higher in specific cases.
✏️ Hypothetical Example:
In a $1,000,000 solar project,
- Base ITC: $300,000
- With one adder: $400,000
- With both adders: $500,000
Tax credits directly reduce taxes owed, dollar for dollar. This makes them more powerful than deductions, which only reduce taxable income. For instance, a $400,000 tax credit lowers your tax bill by the full $400,000.
Additional points to note:
✅ Credits may be applied to prior-year taxes, in some cases up to the last three years.
✅ Under current rules, they may carry forward for many years (up to 22 years) if unused.
✅ In 2025, the transfer market reports suggest credits often sell for about 92–94 cents per ITC dollar.
Benefit #2: Depreciation
Depreciation lets you recover the cost of a physical asset over time by taking deductions that reduce taxable income. Commercial solar projects benefit from favorable rules.
- The depreciable basis is reduced by 50% of the ITC under §50(c).
- With a 30% ITC, this leaves 85% of the cost as the depreciable basis.
- The OBBBA restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
✏️ Using the same $1,000,000 hypothetical example:
After the ITC reduction, the depreciable basis is $850,000, and you could deduct this entire amount in the first year under 100% bonus depreciation.
State treatment of depreciation varies. Some states (e.g., New York) decouple from federal bonus depreciation rules and apply their own schedules. The actual state tax benefit depends on where the project is located and how the state conforms to federal tax law.
Benefit #3: Income Stream
Beyond tax benefits, solar projects typically provide an income stream through long-term power-purchase agreements (PPAs) or leases. These contracts often run 15 to 20 years, with payments tied to energy production.
✏️ Hypothetical Example:
If a contract specifies a 5% annual net cash yield, a $1,000,000 project might generate about $50,000 per year. Over 20 years, that could total $1,000,000 in gross cash flow. Actual returns depend on the contract terms and system performance.
Eligibility
Not everyone can take full advantage of the tax benefits that come with solar investments. Your ability to use credits and deductions depends on the type of income you earn, the structure of the entity you invest through, and whether you meet material participation standards under IRS rules.
Type of Income
Solar investments interact differently with each income category:
- Passive business income: This includes returns from limited partnerships, venture funds, real estate funds, or income from an S corporation or LLC in which you are not active. Passive losses or credits generally offset only passive income.
- Active business income: Income from an S corporation or LLC can be considered active if you materially participate in the business; otherwise it’s treated as passive.
- Earned income: W-2 wages, self-employment income (often reported on 1099-NEC), and vested RSUs fall into this category. By contrast, capital gains are not considered earned income.
- Partnership income: Depending on your level of participation, partnership income may be classified as passive or nonpassive.
Large corporations often participate in solar projects through power-purchase agreements (PPAs) or tax-equity deals. Companies such as Amazon, Meta, and Google have invested in clean-energy projects through these structures.
Depreciation and Income Limits
Tax law places limits on how much depreciation can offset income:
- For 2025, the excess business loss (EBL) threshold is $313,000 for single filers and $626,000 for joint filers.
- Any loss above these thresholds becomes a net operating loss (NOL) carryforward, which can generally offset up to 80% of future taxable income.
- Several rules can restrict deductions, including the at-risk rules, basis limitations, §461(l), and passive-activity rules.
C corporations can often use credits and deductions subject to applicable limits. Individuals, however, are bound by the passive-activity rules. If the solar investment is passive, you cannot use the credits or losses to offset wage income or other nonpassive income. To unlock that benefit, you must show material participation.
Material Participation Rules
The IRS uses seven tests under §469 to determine material participation. Common examples include:
- More than 500 hours spent in the activity during the year.
- More than 100 hours and more than any other individual.
- Significant Participation Activities (SPA): over 100 hours in each activity, totaling 500+ hours across all SPAs.
A few important clarifications:
✅ There is no blanket “100-hour rule.” 100 hours isn’t enough unless it exceeds anyone else’s participation or qualifies under the SPA rule.
✅ There is no “first 5 years” exception — you must establish material participation each year you want nonpassive treatment.
✅ Investor-type hours (e.g., reading reports, general research) don’t count unless tied to day-to-day management or operations.
✅ Remote management hours can qualify; you don’t need to be physically present at the project site.
Entity Choice
Entity structure (e.g., single-member LLC, multi-member LLC, S corporation) doesn’t change the passive-activity rules. The same material participation tests apply regardless of entity type.
- In a multi-member LLC, each member is evaluated separately under the tests. There is no automatic 500-hour requirement per member.
- In a single-member LLC, your hours are combined with your spouse’s hours for participation purposes.
Common Questions and Misconceptions
It’s natural to be skeptical when first hearing about the tax benefits of solar investments. Investors often ask:
- Why do these incentives exist?
- Do strong tax benefits mean weak project returns?
- What’s the catch?
Why These Incentives Exist
The Inflation Reduction Act (IRA) was designed to accelerate clean-energy deployment, expand domestic manufacturing, and attract private capital. The law does not guarantee that solar projects will outperform other sectors like oil and gas. Instead, it creates a policy framework that rewards investors for directing funds into renewable energy.
What About Returns?
From a cash-flow perspective, other investments may be more lucrative. However, solar offers a unique combination: large upfront tax savings through credits and depreciation, plus the possibility of long-term income from power-purchase agreements (PPAs) that can run 15 to 20 years. Few other investments provide the same mix of benefits.
Why Isn’t Everyone Doing This?
Participation comes with hurdles. Investors need sufficient taxable income to use credits, access to qualifying projects, and in many cases the ability to meet material participation requirements. These barriers naturally limit who can take part.
Since the IRA became law, the impact on clean-energy growth has been significant. More than 380 new clean-technology facilities have been announced, with over $230 billion in planned energy-manufacturing investment and more than 200,000 potential jobs projected by the Department of Energy. Initial government cost estimates placed the program at $369 billion over 12 years, but updated 2025 analyses now project between $936 billion and $1.97 trillion over 10 years. Goldman Sachs has estimated around $1.2 trillion.
Why Don’t Developers Just Use the Credits?
In many cases, they do. But developers often lack the tax capacity to absorb the full benefit. To address this, the IRA introduced mechanisms like credit transfers (selling credits for cash) and direct-pay options for certain entities. These tools allow developers to monetize credits even when they cannot use them directly.
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