What an Investment Tax Credit Is
An investment tax credit is a dollar-for-dollar reduction in the federal income tax you owe when you buy certain types of property or equipment for a business or rental property. Instead of deducting the cost from your income (which lowers your taxable income), a tax credit directly reduces the tax bill itself. A $1,000 credit means you pay $1,000 less in taxes—not that your income is $1,000 lower.
The federal government offers investment tax credits to encourage people and businesses to spend money on things the government wants to promote: renewable energy systems, certain manufacturing equipment, rehabilitation of older buildings, and other assets. The most common one is the Investment Tax Credit (ITC) for solar panels, wind turbines, and geothermal systems installed on residential or commercial property.
You claim the credit on your federal tax return when you file. The amount depends on what you bought, when you bought it, and how much it cost. Some credits have limits—you cannot claim more than your total tax liability for the year, though unused credits may carry forward to future years.
Key Takeaways
- An investment tax credit reduces your federal tax bill dollar-for-dollar, not your taxable income, so a $5,000 credit saves you $5,000 in taxes owed.
- The most widely used investment credit is for renewable energy systems like solar panels, and the percentage of the cost you can claim changes by year and type of equipment.
- You must own the property where the equipment is installed and use it for business or rental purposes, though residential solar has different rules.
- Unused credits may carry forward to future tax years if your tax liability is too low to claim the full amount in the current year.
- You report investment tax credits on IRS Form 3468 and attach it to your federal tax return.
The Renewable Energy Investment Tax Credit (ITC)
The Renewable Energy Investment Tax Credit, often called the ITC, is the investment credit most homeowners and small business owners encounter. It covers solar photovoltaic systems, solar water heaters, wind turbines, geothermal heat pumps, and certain battery storage systems installed on residential or commercial property.
The percentage of the cost you can claim as a credit changes by year. As of 2024, the credit covers 30 percent of the cost of a residential solar system, including installation labor and equipment. For commercial systems, the percentage may differ. The law that set these percentages is scheduled to step down in future years, so the credit available in 2025 or 2026 may be lower than what is available today.
You do not have to own the building outright—renters cannot claim the credit, but homeowners with mortgages can. For commercial property, you must own the building or have a long-term lease. The equipment must be new (not used) and installed in the United States.
How to Claim an Investment Tax Credit on Your Return
To claim an investment tax credit, you file IRS Form 3468 (Investment Credit) with your federal tax return. The form asks you to list each piece of equipment, when it was placed in service (the date installation was complete and it began operating), the cost, and the percentage of cost you are claiming as a credit.
You will also need documentation from the installer: an invoice showing the total cost, a description of the equipment, the date it was installed, and proof that it meets the IRS requirements for the credit. Keep these records for at least three years after you file.
If the credit is larger than your total tax liability for the year, you cannot claim the full amount. Instead, you claim what you owe in taxes, and the unused portion carries forward. You can use the carryforward in future years when your tax liability is higher, or in some cases carry it backward to the prior year. The rules for carryforward depend on the type of credit and your situation.
Other Types of Investment Tax Credits
Beyond renewable energy, the federal government offers investment credits for other purposes. The Rehabilitation Credit applies when you restore a historic building or a building at least 40 years old. The credit is 20 percent of may have access to rehabilitation expenses for historic structures and 10 percent for non-historic buildings at least 40 years old.
The Work Opportunity Tax Credit is available to employers who hire people from certain groups—veterans, long-term unemployed workers, ex-felons, and others. The credit ranges from $1,200 to $9,600 per employee, depending on the group and how long the person works for you.
There are also credits for research and development activities, certain film and television production, and investment in low-income housing. Each has its own rules, forms, and documentation requirements. If you think you may may have access to for a credit beyond renewable energy, a tax professional can review your situation.
What Costs may have access to and What Do Not
For renewable energy credits, the cost of the equipment itself and the labor to install it both count toward the credit. This includes the solar panels, inverters, wiring, mounting hardware, and the installer's labor. Sales tax on the equipment also counts in most cases.
Costs that do not count include repairs to existing systems, maintenance, financing charges, and the cost of replacing a system that is already in place. If you upgrade an old solar system to a new one, only the new equipment and installation may have access to. Costs for permits, inspections, and engineering studies may or may not count depending on how they are classified—your installer or tax professional can clarify.
For business property, the equipment must be used in your trade or business. A solar system on a rental property counts, but a system on a vacation home you do not rent out does not. For residential property, the rules are more lenient: the system must be on your primary residence or a second home, but it does not have to generate income.
When You Cannot Claim the Full Credit
Your tax liability sets a ceiling on how much credit you can claim in a single year. If you owe $3,000 in federal income tax and you have a $5,000 investment credit, you can claim only $3,000 of the credit in that year. The remaining $2,000 does not disappear—it carries forward to the next tax year.
In future years, if your tax liability is higher, you can claim the carryforward. For renewable energy credits, you can carry them forward indefinitely until you use them all. For other credits, the carryforward period may be limited—typically one year back or 20 years forward, depending on the credit type.
If you have no tax liability in a year—because your income is too low or you have enough deductions—you cannot claim the credit that year, but it still carries forward. This is one reason to keep detailed records: you may not use the credit until years later.
Frequently Asked Questions
Can I claim an investment tax credit if I rent my home?
No. Renters cannot claim the renewable energy credit because they do not own the property. The property owner—your landlord—would be the one to claim it. Some landlords pass the savings to tenants through lower rent, but that is a private arrangement.
What if I install solar panels and then sell my house?
You claim the credit on the tax return for the year the system was installed and placed in service, regardless of when you sell. The credit does not transfer to the new owner. The new owner cannot claim it again.
Do I have to report the credit every year?
No. You claim the credit once, on the return for the year the equipment was installed. If you have a carryforward, you report that on your next return, but only the amount you are actually using that year.
What happens if I claim a credit I am not may have access to to?
The IRS may disallow the credit and assess penalties and interest on the unpaid tax. Keep all documentation—invoices, installation dates, equipment descriptions, and proof of cost—for at least three years. If you are unsure whether you may have access to, a tax professional can review your situation before you file.
Can I claim both a tax credit and a deduction for the same equipment?
No. You must choose one or the other. For most people, the credit is worth more because it reduces your tax bill directly. Your tax professional can calculate which option saves you more money.