Federal Solar Tax Credit

For 20 years, homeowners could directly claim a federal tax credit for buying and installing solar panels on their property. That era ended when the “One Big Beautiful Bill” terminated the Section 25D Residential Clean Energy Credit for systems installed after December 31, 2025.

Fortunately, homeowners can still benefit from the lesser-known Section 48E federal tax credit through the end of 2027. This tax credit is claimed by businesses that operate Third-Party Ownership (TPO) solar arrangements, such as leases, Power Purchase Agreements, and prepaid solar products.

In this article, we’ll explore the differences between the two types of federal solar tax credits, and how to benefit from the 48E credit when you go solar in 2026.

What is the Federal Solar Tax Credit?

The federal solar tax credit can refer to incentives available to homeowners: The consumer-claimed 25D credit (now expired) and the business-claimed 48E credit (available through the end of 2027).

25D Residential Clean Energy Credit

The Residential Clean Energy Credit was a tax credit worth 30% of the gross cost of a solar project (parts, labor — the whole chalupa) with no maximum incentive amount.

So if your all-in solar cost was $25,000, your federal solar tax credit would be worth $7,500. If you spend $75,000 on solar and battery, your tax credit would be worth $22,500.

The only requirements to use this incentive are:

1. You own the system by going solar via cash or a solar loan
2. You have income tax liability, which is what this incentive reduces

48E Clean Electricity Investment Credit

The Clean Electricity Investment Credit is the same credit that applies to utility and commercial-scale solar installations. It also applies to residential solar installations owned and operated by a business — also known as Third-Party Ownership.

These arrangements fall into three buckets:

• Leases
• Power Purchase Agreements (PPAs)
• Prepaid solar products

In a TPO, the operator claims a tax credit worth 30-50% (depending on available adders) of eligible project costs, and passes some or all of the value to the homeowner via lower payments, lower PPA rate, or a lower prepaid cost.

In a lease or PPA, it can be difficult to tell exactly how much of the tax credit value is passed through. In prepaid solar products, the should be immediately apparent how much the tax credit lowers your upfront payment.

It’s worth noting that the 48E federal solar tax credit is subject to Foreign Entities of Concern (FEOC) rules, which can limit which equipment is used for the project.

*

*

How is the 48E Federal Solar Tax Credit Calculated?

The value of the 48E federal solar tax credit is based on a 30% baseline value for projects under 1 megawatt (residential projects are far smaller than this!)

There are also bonus credits for the following:

• 10% Domestic Content Adder: Available to projects that meet thresholds for equipment manufactured in the U.S.
• 10% Energy Community Adder: Available to projects installed in designated communities impacted by previous energy projects.

So, the 48E federal tax credit can be worth up to 50% of a residential solar project—although that doesn’t necessarily mean your costs will be reduced accordingly. TPO companies typically retain some value to cover their monitoring, maintenance, and insurance obligations.

How the 25D Federal Tax Credit was calculated

Calculating the 25D Residential Clean Energy Credit value was fairly straightforward: It was simply 30% of eligible project costs (typically the contract value).

Gross cost of project x 0.30 = tax credit value

So if your project cost was $30,000, your tax credit was worth $9,000 ($30,000 x 0.30 = $9.000).

The gross system cost may include improvements needed to facilitate the solar installation, such as electrical box upgrades. However, it’s best to speak to your tax advisor about your unique circumstances.

If your system was installed before January 1, 2026, check out our guide for navigating the tax forms to claim this credit.

How To Claim the 25D Solar Tax Credit

To claim the federal solar tax credit, you will need to file an IRS Form 5695 for the tax year which your project “expenditure” was made.

With regards to the tax code, your expenditure is considered complete when your system is installed—not necessarily when you sign a contract to purchase solar. This threshold was confirmed by IRS guidance released on August 21, 2025.

We’ll walk you through the basic process of filing for the federal solar tax credit, but we recommend talking to a tax professional to make sure you’re not missing anything.

What Do I Need to File?

You will need four IRS tax forms (plus their instructions) to file for your solar panel tax credit.

• Form 1040 (standard federal income tax form)
• Schedule 3 (Form 1040)
• Form 5695 (Residential Energy Credit form)
• Form 5695 Instructions (Residential Energy Efficient Property Credit Limit Worksheet)

Federal Solar Tax Credit Filing Step-by-Step

The following is a fictional scenario to be used for example purposes only. Consult a licensed tax professional with questions.

Let’s go through the basics of claiming a federal solar tax credit using a fictional $30,000 expenditure on a solar system.

Step 1: File your taxes as normal

Begin by filing your taxes as you normally would. Tally your income, claim dependents, deduct your charitable donations — all that fun stuff.

Your solar tax credit comes into play on Line 5 of Schedule 3 (Form 1040). This form is for claiming additional credits and payments, including residential energy credits.

When you hit this point, it’s time to switch to Form 5695 to calculate your residential energy credit amount.

Step 2: Fill out Form 5695

We’ve modified Form 5695 below to show an example scenario for a $30,000 solar purchase and the 30% tax credit available from 2022-2032.

We’ll assume you only installed solar equipment, so we can skip lines 2-5 and keep it simple.

Input the gross cost of your solar installation in Line 1, then multiply it by 0.30 in Line 6b to find your credit amount. In this scenario, it’s $9,000.

Carry this figure down to Line 13. Then use the Residential Energy Efficient Property Credit Limit Worksheet (Page 4 of the form 5695 Instructions) to calculate your tax liability for Line 14.

If Line 14 is greater than Line 13, you can use your entire tax credit in one year. Hooray!

If Line 14 is less than Line 13, you won’t be able to use your entire tax credit in one year. Don’t worry, it can be carried over to next year (as you can see in Line 16).

Fill in Line 15 with the smaller of Line 13 or Line 14.

Here’s how that looks on the 2022 form:

In this scenario, we’ll assume the tax credit in Line 13 is smaller than the liability in Line 14, and the full credit can be claimed in one year. So $9,000 is the federal solar tax credit amount that will be entered into Schedule 3 (Form 1040), Line 5.

Step 3: Complete Schedule 3 and Form 1040

Using Form 5695, we calculated a $9,000 federal solar tax credit for purchasing a $30,000 solar system.

Now, we’ll enter that amount into Line 5 of the Schedule 3 (Form 1040) pictured below, which is where nonrefundable credits are claimed.

Complete the entire Schedule 3 form to get a final total in Line 8, and then enter that amount into Line 20 on page 2 of Form 1040.

Quick Tip: The Schedule 3 (Form 1040) and Form 1040 are separate forms.

Here’s what the 2022 Form 1040 looks like with the Residential Energy Credit entered from Schedule 3 (Form 1040):

Once your federal solar tax credit is on your Form 1040, the rest is business as usual!

The federal solar tax credit reduces the total tax Uncle Sam wants to collect for the year, shown in Line 24, and can increase your refund or decrease the total amount you owe after payments and refundable credits.

What If My Tax Liability Is Lower Than My Solar Tax Credit?

As a nonrefundable credit, the solar tax credit can only be used to reduce tax liability. It is not a check with the subject line “Thanks for Going Solar” that automatically comes in the mail after you install solar.

So what if your tax credit is greater than your tax liability?

Let’s go back to our scenario above and pretend you have a $9,000 solar tax credit and only $5,000 in tax liability. You would be able to claim $5,000 of the tax credit the first year, and then the remaining $4,000 can be carried over to the next year.

The latest guidance from the IRS is that homeowners can carry forward unused credit to future tax years. Notably, the IRS hasn’t announced an expiration date for carrying forward this credit.

However, tax forms will likely change in the future, including dedicated lines for carrying forward tax credit value. As such, we recommend consulting a licensed tax professional regarding your unique situation.

How Do Solar Loans Affect the Solar Tax Credit?

There are two types of solar loans in relation to the tax credit.

Type 1 has one monthly payment amount. These loans assume that you will submit your tax credit to the lender to buy down your principal and secure that monthly payment.

If you do not put your tax credit back into your loan, this will initiate another loan, in the amount of your tax credit, at the same APR.

Type 2 has a different payment amount for year one than for the subsequent years. In this type of loan, your payments are based on the entire loan amount.

When you receive your federal tax credit, you’ll have the option to use it to re-amortize your loan to secure lower monthly payments. You can also keep the federal solar tax credit, and your payments will remain the same.

Solar.com can help figure out which solar financing option is best for you.

The Bottom Line

With the homeowner-claimed federal solar tax credit terminated, many homeowners will see better savings from accessing the business-claimed tax credit through leases, PPAs, and prepaid solar products.

We’re here to help. Start a project on Solar.com to see which way to go solar best suits your savings goals!