Common CPA FAQs: Solar Tax Credits (With IRS regulations)

Solar has become one of the most discussed tax-advantaged opportunities for high earners, and the rules have shifted meaningfully over the past two years. The Inflation Reduction Act of 2022 created the modern credit framework, and the One Big Beautiful Bill Act of 2025 (P.L. 119-21) reshaped several of the provisions that matter most to individual buyers. The result is a set of opportunities that can be powerful, alongside a set of technical questions that accountants reasonably want answered before signing off.

Valur operates as a marketplace that connects high-income individuals with vetted solar developers. We are not the project owner, and we do not provide tax or legal advice. What follows is an overview of the questions we hear most often from CPAs, written to reflect current law, with citations to the Internal Revenue Code and IRS forms so your accountant can verify every claim at the source. None of it is a substitute for your own analysis or for guidance from the developer’s tax counsel on a specific deal.

Which credit applies, Section 48 or Section 48E?

This is the threshold question for every deal, because it drives the credit rate, the form reporting, the K-1 coding, and, as covered below, whether the credit can offset alternative minimum tax. The dividing line is when the project began construction. Projects that began construction on or after January 1, 2025 fall under Section 48E, the Clean Electricity Investment Credit (IRC §48E; Treas. Reg. §1.48E-1). Projects that began construction before that date fall under the legacy Section 48 energy credit (IRC §48).

The practical differences show up in three places on the return. Section 48E credits are computed in Part V of Form 3468; legacy Section 48 credits are computed in Part VI. On the Schedule K-1 (Form 1065), a Section 48E credit basis is reported in Box 20 using Code AV, while a legacy Section 48 credit uses Code E. Using the wrong code routes the credit to the wrong part of Form 3468, and tax software will not pick it up correctly. Every developer agreement should be verified to reference the correct section before anything is relied on.

For a deeper walkthrough of the two regimes and how each affects how much of the credit year one can absorb, see our companion article: §48 vs §48E: How Much of Your Solar Credit Will Year One Absorb?.

Is this a syndication?

No. Each project is structured with a single owner, which is your client’s LLC. In a syndication, an individual would generally need to clear a higher participation bar or have passive income to offset. Because these are not syndicated, the more accessible material participation pathway is available, including the test that turns on 100 hours of participation rather than 500 (Treas. Reg. §1.469-5T(a)(3)).

What are the material participation requirements?

Whether a client can use solar losses against active income such as wages turns on material participation under the passive activity rules of IRC §469. The general principle is that the character of a deduction has to match the character of the income it offsets. Passive losses offset passive income; active losses can offset earned income. To use solar losses against W-2 or business income, the client needs to be an active, material participant in the solar business, which in practice means setting up an LLC and participating in the business in a way that is regular, continuous, and substantial (IRC §469(h)(1)).

A taxpayer, or their spouse (IRC §469(h)(5)), materially participates if they satisfy any one of the seven tests in Treas. Reg. §1.469-5T(a). The two most commonly relied on are participation for more than 500 hours, and participation for more than 100 hours where that is at least as much as any other individual involved in the business. The full set is summarized in IRS Publication 925.

The seven tests of Treas. Reg. §1.469-5T(a), in brief:

• More than 500 hours of participation during the year.
• Participation that constituted substantially all participation in the activity.
• More than 100 hours, and no less than any other individual’s participation.
• A significant participation activity, combined with other such activities, totaling more than 500 hours.
• Material participation in any five of the preceding ten years.
• A personal service activity for any three prior years.
• Participation for more than 100 hours on a regular, continuous, and substantial basis under all the facts and circumstances.

Note that material participation is generally tested in the year the loss or credit originates (Treas. Reg. §1.469-3T). For the documentation side, the accounting firm we work with can advise on what records are appropriate for a given client’s situation, and our platform lets clients log participation hours and store supporting documents in one place.

What activities count toward material participation?

This is the question clients ask most, because it is where the law is least precise. The IRS and the Tax Court have not published a list of activities that qualify specifically in the solar context, so there is no bright line. The governing standard is the general one in §469(h): activities should be the kind of work a business owner would do to build and run the business, performed on a regular, continuous, and substantial basis.

A solar project has one customer and runs largely on its own once operating, so the overhead is low. Activities we have seen relied on include site visits, project research and negotiation, financial modeling, and attendance at industry conferences. Because this is a grey area, the client and their accountant ultimately decide which activities they are comfortable counting, and more broadly whether solar is the right fit. The documentation should be able to stand on its own if examined.

Where are the credits, and their limits, in the code?

The Clean Electricity Investment Credit is in IRC §48E. It is an investment credit under IRC §46, which makes it a general business credit governed by IRC §38. Section 48E(a)(2) sets a 30% rate for qualifying projects that meet the prevailing wage and apprenticeship requirements or qualify under a limited exception, including the exception for facilities with a maximum net output of less than 1 megawatt (IRC §48E(a)(2)(A)(ii)(I)). All of the projects on our marketplace are under that 1 MW threshold.

On top of the base rate, projects can qualify for adders: 10% for domestic content (IRC §48E(a)(3)(B)), 10% for energy community siting (IRC §48E(a)(3)(A)), and 10% or 20% for qualifying low-income community projects (IRC §48E(h)). In practice, effective credit rates on these projects commonly run in the 40% to 50% range once adders are included.

The annual usage limit comes from IRC §38(c)(1): the general business credit cannot reduce tax below the greater of (a) the tentative minimum tax, or (b) 25% of net regular tax liability above $25,000. Unused credit carries to other years under IRC §39.

Here the two credit regimes diverge in a way that matters for high earners, and it is worth stating plainly. Legacy Section 48 credits are specified credits under IRC §38(c)(4)(B), which treats the tentative minimum tax as zero for them. A legacy §48 credit can therefore offset alternative minimum tax. Section 48E credits are not on the §38(c)(4)(B) specified credit list, so a §48E credit cannot reduce liability below the tentative minimum tax. For a client who is AMT-constrained, this single distinction can change the usable value of the credit in year one, and it should be modeled before the purchase is sized.

Can the credit offset alternative minimum tax?

Following from the section above: a legacy Section 48 credit can offset AMT because it is a specified credit under IRC §38(c)(4)(B), while a Section 48E credit cannot reduce tax below the tentative minimum tax. For clients with meaningful AMT exposure, the credit regime of the specific project is not a technicality; it determines how much of the credit is usable this year versus carried to other years. This is one of the first facts to establish about any project under consideration.

Why is so much of the depreciation in year one?

Two reasons. First, bonus depreciation: the One Big Beautiful Bill Act restored 100% bonus depreciation under IRC §168(k) for qualifying property, which means the full depreciable basis can be deducted in the year the property is placed in service. Second, solar energy property is 5-year property under IRC §168(e)(3)(B)(vi), so any basis not taken as bonus recovers on an accelerated MACRS schedule.

The credit and the depreciation interact through IRC §50(c)(3): the depreciable basis is reduced by half of the investment credit. Here is the arithmetic on a $100,000 purchase at the 30% base rate:

Item	Amount
Eligible cost basis	$100,000
Investment tax credit at 30% (IRC §48E(a)(2))	$30,000
Basis reduction: half the credit (IRC §50(c)(3))	($15,000)
Depreciable basis	$85,000
Year-one federal deduction at 100% bonus (IRC §168(k))	$85,000

So at the 30% rate, 85% of the purchase becomes a year-one federal deduction, alongside the $30,000 credit. The same mechanics scale with the credit rate: at a 40% effective rate the depreciable basis is 80% of cost, and at 50% it is 75%. This basis reduction is also why the year-one ordinary loss on the K-1 is smaller than the gross project cost. Section 50(c) applies whether the credit is claimed or transferred under IRC §6418.

MACRS non-bonus schedule for 5-year solar property (for any basis not taken as bonus, and for states that decouple from federal bonus depreciation):

Year	Percentage
1	20.00%
2	32.00%
3	19.20%
4	11.52%
5	11.52%
6	5.76%

Depreciation rules are in IRC §168. State treatment varies; several states do not conform to federal bonus depreciation and recover the basis over the standard schedule instead, which your client’s CPA will want to confirm for their state.

What are the limits on using the depreciation losses?

For an individual using losses against non-business income such as wages, the excess business loss rules under IRC §461(l) apply. These cap the net business loss an individual can use against non-business income in a year. For tax year 2026, the cap is approximately $256,000 for a single filer and $512,000 for a married couple filing jointly. The One Big Beautiful Bill Act made the limitation permanent and reset the inflation indexing, which is why the 2026 thresholds are lower than 2025’s ($313,000 single and $626,000 joint, per Rev. Proc. 2024-40, relevant for any 2025 returns still being prepared). Confirm the current-year figure before modeling, since these adjust annually.

Any loss above the cap is not lost; it becomes a net operating loss carried forward to the next year under IRC §461(l)(2) and §172. The at-risk rules of IRC §465 and §49 also apply, which is why deal structures use entity-level recourse debt or full cash funding to establish at-risk basis.

One clarification we often give: the excess business loss rules cap the use of depreciation losses, not the credit. The investment tax credit is governed separately by the §38(c) limitation described above. The two limits operate independently.

When does a client need to buy to qualify?

To be eligible for the credit and depreciation, the client has to buy the project and place capital at risk before the project is placed in service. Placed in service means the project is ready and available for its intended use. In practice, the client signs the paperwork and funds before the project comes online. The credit is claimed for the tax year in which the project is placed in service (Treas. Reg. §1.48E-1(a)(2)), which is not necessarily the moment electricity first flows, since approvals can sit between readiness and switch-on.

How do the projects generate income?

Each project sells the electricity it generates to an offtaker, typically a commercial business at the site or a utility. The economics work because the solar electricity is cheaper than what the offtaker would otherwise pay. This revenue matters for tax purposes too: because the project has genuine cash flow and a profit motive under IRC §183, the depreciation does not run into hobby-loss problems.

How to file for the tax benefits

We have put together sample K-1s and a CPA reference guide, including a sample for both a Section 48E project and a legacy Section 48 project, available here. The filing chain below reflects a Section 48E project, which is the current regime for projects placed in service after December 31, 2024. Each step is verifiable against the 2025 IRS forms and instructions.

Step 1: Form 3468, Investment Credit

For a Section 48E project, the K-1 reports the credit basis in Box 20, Code AV. The partner computes the credit in Part V of Form 3468 using that basis, beginning at line 1a. The K-1 does not pre-compute the credit, so the CPA calculates it from the basis figure. A legacy Section 48 project instead uses Part VI and Box 20, Code E. (Form 3468 and Instructions, 2025.)

Step 2: Form 3800, General Business Credit

The credit computed in Part V of Form 3468 is reported on Form 3800, Part III, line 1v. The general business credit is then subject to the §38(c) tax-liability limitation and totaled in Part II of Form 3800. (Instructions for Form 3800, 2025.)

Step 3: Schedule 3, Form 1040

The allowed general business credit flows from Form 3800 to Schedule 3 (Form 1040), line 6a, among the other nonrefundable credits.

Step 4: Form 1040

The Schedule 3 nonrefundable credit total carries to Form 1040, line 20. Keep in mind the credit is nonrefundable and does not offset other taxes such as self-employment or Medicare tax.

How We Can Help

So, how can you go about investing in qualified solar projects? It’s relatively simple: Valur has partnered with nationally recognized accounting and investment firms to facilitate these investments.  We will help you identify the opportunity and choose between different types, visualize the potential benefits, and calculate how much you need to invest to capture the right sized tax benefits. From there, we and our partners will help you seamlessly finalize your investment and keep track of the relevant data for ongoing tax purposes. 

About Valur

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