§48 vs §48E: How Much of Your Solar Credit Will Year One Absorb?

The Inflation Reduction Act of 2022 turned the federal solar tax credit into one of the most powerful tools available to high-income earners looking to reduce their federal tax bill. But the rules changed in 2025, creating a split between between the legacy Section 48 credit and the new Section 48E. This isn’t just a technical relabel. It can change how much of the credit you’re actually able to use against your income in Year 1.

This guide walks through the difference in Section 48 and 48E, when each one applies, how safe harboring locks a project into one or the other, and most importantly: how to calculate exactly how much of the credit your tax bill can absorb in a given year.

The IRA Foundation: Why the Government Pays You to Build (or Buy Into) Solar

Federal solar tax incentives have been around in some form since the late 1970s, but the Inflation Reduction Act of 2022 (“IRA”) supercharged them. The IRA expanded the size of the credit, layered on bonus adders for domestic content and energy communities, and extended the runway for new projects.

The mechanism is simple: when a qualifying solar project is placed in service, the federal government issues a tax credit equal to a percentage of the project’s eligible cost. The credit reduces federal income tax dollar-for-dollar. Whoever owns the project and places it in service is the one who claims the credit.

For high-income earners, this opens up a tax-mitigation path that was historically reserved for institutional players: by becoming a partner in a solar project, typically through a “flip partnership” or asset-purchase structure with a developer, you can claim a share of the credit and the accelerated depreciation alongside it.

The key caveat is material participation. To use solar credits against tax generated by active or ordinary income in the current year, and to use depreciation deductions against active or ordinary income, you generally need to materially participate or otherwise have the solar activity treated as non-passive. Unused credits may still carry back or forward under the general business credit rules, but passive activity limits can affect when those credits are actually usable.

Why Two Sections? §48 and §48E Side by Side

Section 48 has been the main statutory home for energy credits since the late 1970s. It uses a fixed list of approved technologies, including solar, wind, geothermal, fuel cells, and a few others, and sets the credit rate for each. Section 48E was created by the IRA to replace Section 48 going forward.

The dividing line between §48 and §48E is when construction on the project began:

Safe Harboring: How a Project Locks In Its Section

“Construction began” isn’t a vague concept in solar. For the §48 to §48E transition, the IRS recognizes two ways a project can be treated as having begun construction:

• Physical work test: physical work of a significant nature has started (site preparation, foundations, racking installation, etc.).
• 5% safe harbor: at least 5% of the total project cost has been paid or incurred (typically by the developer purchasing equipment and taking delivery).

Once a project crosses one of those thresholds, its eligibility under §48 or §48E is locked in, provided the project then makes “continuous progress” toward completion and is placed in service within the relevant window.

The practical effect: a developer who secured equipment in late 2024 may still be placing projects in service today under §48 (legacy). Most new projects coming online in 2026 are §48E.

Important OBBBA note: The July 4, 2026 solar and wind deadline uses tighter rules. Under IRS Notice 2025-42, most solar and wind projects must use the physical work test for that deadline; the 5% safe harbor generally is not available except for low-output solar facilities of 1.5 MW AC or less.

OBBBA Changes the Sunset

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, accelerated the phase-out of §48E for solar and wind. The headline timeline:

• Solar and wind projects must begin construction by July 4, 2026 to retain the most favorable §48E terms.
• Projects that begin construction after that date must be placed in service by December 31, 2027, or they lose the credit entirely.
• OBBBA also tightened the domestic content thresholds for the 10% bonus adder: 45% for projects starting on or after June 16, 2025, 50% for 2026 starts, and 55% for projects starting after 2026. It also added foreign-entity restrictions for projects starting after December 31, 2025.

For high-income individuals looking to participate, the practical takeaway is that the window of best-terms §48E projects is closing. Projects breaking ground inside the safe-harbor window are still highly attractive; projects starting later face a tighter runway.

How Much of the Credit Can You Actually Use?

This is the question most articles skip. A 30% to 50% credit on a $200,000 project sounds great on paper, but how much of it can your federal tax bill actually absorb in a single year?

The answer comes down to a calculation set by IRC Section 38(c), the “general business credit limitation.” There’s a ceiling on how much credit you can apply in a single year. Anything above the ceiling isn’t lost; it carries to other years (a 3-year carryback plus a 22-year carryforward under §39(a)(4), available for energy credits arising in tax years beginning after Dec 31, 2022). This carryback/carryforward discussion assumes the credit is otherwise allowable and not blocked by the passive activity credit rules.

To find your ceiling, you need three numbers:

1. Your regular federal income tax
2. Your tentative minimum tax (TMT), the AMT calculation result
3. The cap formula that applies to your credit (different for §48 vs §48E)

The Two Cap Formulas

Both §48 and §48E use the same general structure, but §48 is treated as a “specified credit” under §38(c)(4)(B). For specified credits, your TMT is treated as zero in the cap formula. §48E was never added to the specified-credit list, so its TMT remains a binding floor.

That single difference, whether TMT is zeroed out, is what creates the gap in Year-1 usable credit between the two sections. Now let’s run real numbers.

Worked Example: $100,000 of Credits Against $1,000,000 of Income

Imagine an married filing jointly household in 2026 with $1,000,000 of taxable income, considering a solar project that produces a $100,000 federal tax credit. We’ll walk through the calculation step by step under both §48 and §48E.

Step 1: Calculate Regular Federal Tax

Apply the 2026 married filing jointly tax brackets (per IRS Rev. Proc. 2025-32, reflecting OBBBA’s targeted 4% bump for the bottom two brackets, plus the regular approximately 2.3% CPI adjustment elsewhere) to $1,000,000 of taxable income. The 37% top rate only applies to dollars above $768,700; the rest is taxed in lower brackets.

Step 2: Calculate Tentative Minimum Tax (TMT)

TMT is the AMT calculation on Form 6251. It’s a parallel tax calculation: instead of applying the regular brackets, you start from alternative minimum taxable income (AMTI), subtract an exemption, and apply a flat rate of 26% or 28%. The waterfall below shows what gets added, what gets subtracted, and how the rate stack lands at TMT.

Quick read: regular tax ($292,165) is higher than TMT ($240,054), so no additional AMT is owed for the year. But TMT still matters because it’s the floor that shows up in the credit-cap formula.

Step 3: Apply the §38(c) Credit Cap

Compute the 25% floor first. That piece is the same in both formulas:

Now plug it into both cap formulas:

Same household, same regular tax. The §48 cap is more than four times the §48E cap. That’s because §48 ignores the TMT floor and §48E doesn’t.

Step 4: Apply the Cap to Your $100,000 Credit

Under §48 (legacy), the cap is $225,374 and the $100,000 credit easily fits beneath it, so the household uses the full $100,000 in Year 1. Under §48E, the cap is $52,111 and the credit clips against it. $52,111 is usable in Year 1 and $47,889 carries forward to be used against future-year tax liabilities (within the §39 carryforward window).

How to Maximize Usability

If your household is squarely in the “TMT binds” zone (common for High Net Worth filers post-OBBBA), there are four practical levers to think about with your CPA:

• Right-size the credit to your cap. The cap is a function of your specific income and TMT. Plugging your numbers into the formulas above tells you the maximum credit you can fully absorb in Year 1. Sizing your project participation to that ceiling captures the most cash savings.
  
• Confirm non-passive treatment. If you materially participate, credits can generally offset tax from active or ordinary income; otherwise, passive activity rules may limit usage to passive income.
  
• Coordinate carrybacks and carryforwards. The 3-year carryback plus 22-year carryforward means an over-sized credit isn’t lost; it’s deferred or recovered against prior-year tax. Model which years can actually absorb the credit before sizing the project participation.
  
• Check the depreciation side separately. The depreciation deduction has its own usability constraints (material participation, the $512K married filing jointly Excess Business Loss cap, and the 80% Net Operating Loss (NOL) carryforward cap). These are the same under §48 and §48E. They don’t change the credit-cap analysis, but they shape the full Year-1 picture
  

Choosing Projects in 2026

For most high-income households today, §48E projects still produce strong Year-1 economics. The 22-year carryforward absorbs any unused credit, and the depreciation deduction (which is identical between §48 and §48E) typically delivers a substantial Year-1 benefit on its own.

For households solving for maximum Year-1 cash tax savings, the §48 vs §48E distinction is worth running through with your CPA. Project sizing matters: a credit that’s fully usable under §48 might leave significant carryforward under §48E for the same household. The right project size is the one that fits comfortably under your specific cap.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. All figures are estimates based on general assumptions and may vary depending on your specific income, tax situation, project details, and applicable federal and state tax rates. Consult with your CPA or tax advisor before making any decisions. Valur does not provide tax advice.

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