The federal solar tax credit is no longer a single number you can put on a slide. In 2026 it depends on when construction began, how large the system is in AC terms, where the equipment came from, and whether the labor standards were met. Here is the current state of Section 48E, including the guidance that a federal court threw out in June.
Under Section 48E the base credit is 6 percent. The 30 percent rate applies if the facility's net output is under 1 MW AC, or if prevailing wage and apprenticeship requirements are met. Domestic content and energy community bonuses add 10 percentage points each, with the domestic content threshold at 50 percent for construction beginning in 2026. The decisive date is July 4, 2026: projects beginning construction on or before it escape the December 31, 2027 placed-in-service deadline and effectively have until the end of 2030 under the four-year continuity safe harbor. IRS Notice 2025-42, which had eliminated the 5 percent safe harbor for most solar, was vacated by a federal court on June 6, 2026, restoring that safe harbor, though an appeal could unsettle it. Solar under Section 48E remains 5-year MACRS property with permanent 100 percent bonus depreciation. Confirm your position with tax counsel.
What changed, and why 2026 is different
For most of the last decade, the federal solar incentive was simple enough to put on a slide: 30 percent of the system cost, as a tax credit, with a phase-down scheduled years away. That slide is now wrong in three separate ways.
The Inflation Reduction Act replaced the old Section 48 investment credit with the technology-neutral Section 48E credit for projects placed in service after 2024. The One Big Beautiful Bill Act, enacted July 4, 2025, then added termination rules that apply specifically to wind and solar, introduced foreign entity restrictions, and set a beginning-of-construction date that has become the single most consequential number in commercial solar development this year.
The result is that two identical arrays on two identical roofs can now receive very different federal treatment depending on when construction began, how large the system is in AC terms, who supplied the equipment, and whether the labor standards were met. This guide covers each of those variables.
The rate structure: 6 percent, 30 percent, and the bonuses
Section 48E does not have a single rate. It has a base rate and an alternative rate, plus bonuses that can be layered on top.
| Component | Value | Condition |
|---|---|---|
| Base rate | 6 percent | Default |
| Alternative rate | 30 percent | Net output under 1 MW AC, or prevailing wage and apprenticeship requirements satisfied |
| Domestic content bonus | Plus 10 points at the 30 percent rate, plus 2 points at the base rate | Meets the adjusted percentage for the year construction began |
| Energy community bonus | Plus 10 points at the 30 percent rate, plus 2 points at the base rate | Located in a qualifying energy community |
| Low-income bonus | Plus 10 or 20 points | Facilities under 5 MW AC only, and only through a competitive capacity allocation from Treasury |
| Interconnection property | Capitalized interconnection costs included in qualified investment | Facilities of 5 MW AC or less only |
The 1 MW line is the most important number for a commercial host. Below 1 MW AC, you reach 30 percent automatically. At or above 1 MW AC, you reach 30 percent only by satisfying prevailing wage and apprenticeship requirements, and failing them drops you to 6 percent. That is not a rounding difference on a $2 million project. It is roughly a $480,000 difference.
Prevailing wage and apprenticeship, concretely
For projects at or above 1 MW AC, prevailing wage means paying laborers and mechanics on construction, alteration, and repair at rates determined by the Department of Labor for the locality, and apprenticeship has three separate components: a labor hours percentage, a daily ratio requirement, and a participation requirement. The labor hours threshold is 15 percent for construction beginning after 2023.
These are documentation obligations as much as payroll obligations, and they begin on the first day of construction. They cannot be reconstructed at tax filing time. Any EPC bidding a project at or above 1 MW AC should be able to describe its compliance and recordkeeping process before you sign.
Domestic content: the threshold rises each year
| Beginning of construction | Required percentage |
|---|---|
| Before June 16, 2025 | 40 percent |
| June 16, 2025 through December 31, 2025 | 45 percent |
| During 2026 | 50 percent |
| After December 31, 2026 | 55 percent |
This matters at procurement, not at filing. A project that intends to claim the domestic content bonus in 2026 has to hit 50 percent, and the equipment decisions that determine that are made months before anyone files a return.
The "up to 70 percent" claim
You will see vendor material adding 30 plus 10 plus 10 plus 20 and presenting 70 percent as an available credit. Be careful. The 20-point low-income bonus applies only to facilities under 5 MW AC and only through a competitive allocation of environmental justice capacity limitation from Treasury. It is not something a project simply qualifies for by being in a particular place. Treat 40 or 50 percent as the realistic ceiling for a well-positioned commercial project, and treat anything above that as contingent on an allocation you do not yet have.
The two deadlines that now govern every project
This is the part of the law that changed most, and it is the part most commonly explained incorrectly.
OBBBA added termination provisions to Sections 45Y and 48E that end the credit for applicable wind and solar facilities placed in service after December 31, 2027. But that termination applies only to facilities whose construction began after July 4, 2026. IRS Notice 2025-42 expressed the same rule from the other direction: a taxpayer may establish that construction began on or before July 4, 2026.
| Construction began | Placed-in-service requirement | Practical effect |
|---|---|---|
| On or before July 4, 2026 | No 2027 deadline. Subject to the continuity requirement, with a four-calendar-year continuity safe harbor | A project that began construction in 2026 satisfies continuity automatically if placed in service by December 31, 2030 |
| After July 4, 2026 | Must be placed in service by December 31, 2027 | A hard deadline. Interconnection delay alone can cost the entire credit |
Read that table again if you are planning a project now. The July 4, 2026 date is not the date the credit ends. It is the date that determines whether you have until the end of 2027 or effectively until the end of 2030. For any project of size in Massachusetts, where interconnection studies and utility system modifications can consume years rather than months, that distinction is frequently the difference between a financeable project and an unfinanceable one.
Proving beginning of construction, and the guidance that got vacated
Historically, taxpayers established beginning of construction two ways: the Physical Work Test, which looks at whether work of a significant nature started, and the 5 percent safe harbor, which looked at whether 5 percent or more of total project cost had been incurred. Both have more than a decade of IRS guidance behind them.
IRS Notice 2025-42, published August 15, 2025, narrowed this substantially for wind and solar. It made the Physical Work Test the only method for most facilities, preserving the 5 percent safe harbor only for what it called a low output solar facility of 1.5 MW AC or less, measured collectively where facilities have integrated operations. It also listed activities that expressly do not count toward physical work, including planning and design, obtaining permits, financing, surveys, environmental and engineering studies, site clearing, and soil testing.
Then, on June 6, 2026, the United States District Court for the District of Columbia vacated Notice 2025-42 in its entirety and remanded the matter to the IRS, holding that the agency had acted arbitrarily and capriciously under the Administrative Procedure Act. The court found that the IRS had not adequately explained eliminating a safe harbor with more than a decade of reliance interests behind it, had not responded to alternatives raised in comments, and had not justified treating wind and solar differently from other technologies under a technology-neutral credit. The vacatur applies to all taxpayers, not only the plaintiffs.
The practical effect is that the 5 percent safe harbor is available again for wind and solar of any size, alongside the Physical Work Test.
Do not treat this as settled. As of August 2026 we have not identified a filed government appeal, a stay, or replacement guidance from the IRS. Several major tax practices expected an appeal and cautioned that a reversal could operate retroactively. If your project's federal position depends on a 2026 beginning-of-construction date established under the 5 percent safe harbor, that position should be taken on the written advice of your own tax counsel, and it should be documented as though it may be examined. We build projects to satisfy the Physical Work Test wherever the schedule allows, because it does not depend on the outcome of an appeal.
Foreign entity rules: the constraint nobody saw coming
OBBBA added restrictions that operate at two levels, and they bite in 2026.
At the taxpayer level, no credit is allowed if the taxpayer is a specified foreign entity or a foreign-influenced entity as defined in Section 7701(a)(51).
At the project level, the material assistance rules matter to every commercial host, because they are about your equipment supply chain rather than your ownership. A qualified facility does not include a facility whose construction begins after December 31, 2025 if it received material assistance from a prohibited foreign entity. Compliance is measured by a material assistance cost ratio that must meet or exceed a threshold.
| Beginning of construction | Solar facility | Energy storage |
|---|---|---|
| 2026 | 40 percent | 55 percent |
| 2027 | 45 percent | 60 percent |
| 2028 | 50 percent | 65 percent |
| 2029 | 55 percent | 70 percent |
| After 2029 | 60 percent | 75 percent |
Treasury and the IRS issued Notice 2026-15 on February 12, 2026, providing interim rules for calculating the ratio, an identification safe harbor, and permitted use of the domestic content cost tables from Notice 2025-08. Supplier certifications are signed under penalty of perjury and must be retained for six years. Final safe harbor tables are required by statute no later than December 31, 2026.
One technical point worth knowing, because it cuts in your favor: for FEOC purposes, beginning of construction is determined under rules similar to Notices 2013-29 and 2018-59 as in effect on January 1, 2025. That means the 5 percent safe harbor always applied to the FEOC test, independent of Notice 2025-42 and independent of the litigation over it. The two beginning-of-construction tests are separate.
For a building owner, the operational takeaway is short: your equipment procurement decisions now carry tax consequences, and your EPC needs to be collecting supplier documentation as a matter of course.
Depreciation: 5-year MACRS and permanent 100 percent bonus
There is genuine confusion circulating on this point, so here is what the statute says.
Section 168(e)(3)(B)(viii) classifies as 5-year property any qualified facility under Section 45Y(b)(1)(A), any qualified property under Section 48E(b)(2) that is a qualified investment, and any energy storage technology. That clause is intact. Commercial solar under Section 48E remains 5-year MACRS property.
Separately, Section 168(k)(1)(A) sets bonus depreciation at 100 percent, and OBBBA repealed subsections 168(k)(6) and (k)(8), which contained the 80, 60, 40, and 20 percent phase-down schedule. Bonus depreciation at 100 percent is now permanent rather than stepping down.
Where does the confusion come from? OBBBA did remove 5-year eligibility for energy property under the old Section 48 for projects beginning construction after December 31, 2024. Commercial projects entering service now fall under Section 48E, where the 5-year clause survives. Articles asserting that solar lost its 5-year classification are describing the wrong code section.
For a taxable owner, the combination of the investment credit and first-year depreciation is often the largest single line in the financial model, which is exactly why ownership structure deserves as much attention as system design. See loan versus lease versus PPA.
Stacking with Massachusetts SMART 3.0
The federal credit and the Massachusetts SMART tariff are independent mechanisms and are designed to work together. The credit reduces your net capital cost in year one. SMART pays a per-kilowatt-hour tariff for a 20-year term on top of the electricity the system offsets.
| Capacity (kW AC) | Base rate per kWh |
|---|---|
| Above 25 to 250 | $0.2807 |
| Above 250 to 500 | $0.2430 |
| Above 500 to 1,000 | $0.2317 |
| Above 1,000 to 5,000 | $0.1790 |
There is a direct link between the two programs worth understanding, because it tells you how the Commonwealth reads federal risk. DOER's cost model for PY2026 indicated that rates should fall. DOER instead set final rates approximately 20 percent above the modeled values, citing federal tax credit revocation and post-OBBBA risk. In June 2026 it also filed emergency regulations creating a narrow eligibility carve-out for advanced-stage projects likely to qualify for the federal credit. Massachusetts is actively pricing federal uncertainty into its own tariff.
Full program mechanics, adders, and stacking rules are in the SMART 3.0 guide.
What to do now, in order
- Establish your beginning-of-construction position in writing. Date, method, and supporting evidence. This is the highest-value document in the project file.
- Confirm your AC size against the 1 MW line. If you are near it, model both sides, including the prevailing wage and apprenticeship cost of crossing it and the SMART rate consequence.
- Decide on domestic content early. The 2026 threshold is 50 percent, and it is a procurement decision, not a filing decision.
- Collect supplier documentation from the start. FEOC material assistance certifications are signed under penalty of perjury and retained for six years.
- Get the interconnection position in writing before you commit capital. If your project is subject to the December 31, 2027 placed-in-service deadline, utility timing is your largest single risk to the credit.
- Model the after-tax case with your own tax position, not a generic 30 percent assumption. A condominium trust, a municipality, and a profitable operating company are three different investments in the same array.
- Retain tax counsel. Given the vacatur of Notice 2025-42 and the possibility of appeal, this is not a year to rely on a contractor's spreadsheet for a tax position.
Key takeaway. The federal credit for commercial solar in 2026 is 6 percent by default and 30 percent for systems under 1 MW AC or larger systems meeting prevailing wage and apprenticeship requirements, with 10-point bonuses available for domestic content and energy communities. The date that matters most is July 4, 2026: projects that began construction on or before it avoid the December 31, 2027 placed-in-service deadline and effectively have until the end of 2030. Notice 2025-42 was vacated in June 2026, restoring the 5 percent safe harbor, but an appeal could unsettle that, so document your construction-start position carefully and take it on advice of counsel. Depreciation remains 5-year MACRS with permanent 100 percent bonus.
Sources
- 26 U.S.C. Section 48E, Clean Electricity Investment Credit. uscode.house.gov
- 26 U.S.C. Section 7701, definitions including specified foreign entity and material assistance. uscode.house.gov
- 26 U.S.C. Section 168, Accelerated Cost Recovery System. uscode.house.gov
- IRS Notice 2025-42, Beginning of Construction for Wind and Solar Facilities. irs.gov
- IRS Notice 2026-15 and IR-2026-23, material assistance guidance. irs.gov
- IRS, Prevailing Wage and Apprenticeship Requirements. irs.gov
- Holland & Knight, Court Vacates IRS Notice 2025-42, June 2026. hklaw.com
- Massachusetts DOER, SMART 3.0 Program Details and PY2026 Annual Report. mass.gov
This article is general information, not tax or legal advice. Federal tax rules in this area changed in 2025 and 2026 and remain subject to litigation and further guidance. Confirm your position with your own tax counsel before relying on it.