MEMBERS-ONLY FACT SHEET
FAQ on Changes to the ITC in the Budget Reconciliation Bill
Last Updated December 5, 2025
Please note that all responses are general in nature and should not be treated as legal, accounting, or tax advice from CALSSA. The facts and circumstances for a specific case related to the Section 25D Residential Energy Credit or the Section 48 ITC will help to determine the ultimate outcome. You should seek counsel from an experienced tax accountant and/or attorney prior to moving forward with any development and/or investment plans.
Residential ITC (25D)
What is the expiration date for the residential ITC?
The Budget Reconciliation bill says, “The credit allowed under this section shall not apply with respect to any expenditures made after December 31, 2025.”
What does “expenditure” mean in this context? Does this mean a system will qualify if the customer signs a contract or submits an interconnection application by 12/31/25?
The tax code states, “an expenditure with respect to an item shall be treated as made when the original installation of the item is completed.” This appears to indicate that contract signing or application submission alone are insufficient. The IRS has no definition for when the installation of an item is completed.
Before the Budget Reconciliation bill modified 25D, it said the system needed to be “placed in service” by a particular date. CALSSA previously advised that it was best to have PTO before claiming a project was placed in service, but it is possible that having the system fully functional before PTO would survive an audit. The IRS may consider the term “expenditures made” to be more lenient to taxpayers than “placed in service.” Certainly, the most conservative approach would still be for customers to have PTO before claiming the ITC. A final building permit might also be sufficient proof that installation is completed.
Could “expenditure made” mean that the project has passed the local jurisdiction final inspection or does it need to be powered up?
Again, the tax code states, “an expenditure with respect to an item shall be treated as made when the original installation of the item is completed.” A customer could plausibly argue that the installation is completed before the system has utility approval and is actively producing power, but this has not been tested at the IRS. The clearest way to document that installation is completed is with the final building permit. Other evidence of installation completion might survive an audit, but it would certainly help to have the final building permit as an external document.
Can a customer frontload payment for work not yet completed to claim the ITC? The
California Business & Professions Code states, “Except for a downpayment, the contractor shall neither request nor accept payment that exceeds the value of the work performed or material delivered.” A violation of this requirement is a misdemeanor and could impact a contractor license. Contractors should not accept payment that does not accord with this requirement even if the customer approves it. Furthermore, as noted earlier, expenditure made requires more than mere payment, but also completed installation.
Can the ITC be claimed if expenses were covered by the contractor, but not the customer?
No. The tax credit eligibility and amount are based on the money spent by the tax filer alone.
Is there an allowance for construction to be completed after 12/31/25 due to factors outside of the customer’s control?There is no provision for exceptions to the deadline.
Can residential batteries be installed after 12/31/25?
Residential batteries that are not part of a leased/PPA system must be installed by 12/31/25 to claim the Section 25D tax credit.
When must third-party owned (TPO) systems be installed?
See the next section on 48E.
Will residential systems that are financed with solar loans be able to claim the ITC after this year?
No. Systems financed with loans are customer owned and subject to Section 25D. They are not third-party owned and subject to Section 48E. They must be installed by 12/31/25.
How are systems installed at multifamily housing treated for the purposes of the ITC?
Whether a system is subject to Section 25D or 48E depends entirely on the tax filer. If the tax filer is identified with a social security number, it falls under 25D. If the tax filer has an EIN, it falls under 48E.
Can residential systems on new construction qualify if they are installed this year but not sold to a homeowner?
A builder can take ownership of a solar system and claim the tax credit, and then sell the home later.
If the residential project is installed by 12/31/25, but the customer does not have sufficient tax appetite to claim the entire residential ITC, can they carry forward any used tax credits?
Yes. The Budget Reconciliation bill did not modify the carry forward provisions.
Commercial ITC (48E)
What is the expiration date for the commercial ITC?
For projects that start construction before January 1, 2026:
These projects are safe harbored for the 30% ITC as long as the tax filer is not a Specified Foreign Entity (SFE). The projects do not need to comply with Prohibited Foreign Entity (PFE) sourcing ratios (aka FEOC rules) and the 10-year recapture rules on PFEs. The project must follow existing rules regarding starting construction.
For projects that start construction after 12/31/25 but before July 4, 2026:
These projects are safe-harbored for the 30% ITC as long as the tax filer is not an SFE. Projects must comply with the correct PFE sourcing ratios and the 10-year recapture rules on PFEs. The project must follow existing rules regarding starting construction. This includes either being placed in service within four years from the start of construction or being able to document continuous construction if they are not completed within four years. Those rules will be adjusted in response to the July executive order.
For projects that start construction on or after July 4, 2026:
These projects receive the 30% ITC as long as the taxpayer is not an SFE, they are placed in service by December 31, 2027, and they comply with the PFE sourcing ratios and the 10-year recapture rules on PFEs.
What does “begin construction” mean?
The IRS issued Notice 2018-59 on June 22, 2018 to provide guidance on the “begun construction” requirement. There are two methods to begin construction – performing physical work of a significant nature (the “physical work test”) or incurring at least 5% of total project costs (the “5% test”). If one of these tests is met, the taxpayer must thereafter maintain a continuous program of construction under the physical work test or continuous efforts to advance completion under the 5% test (the “continuity requirement”). If a taxpayer has met one of the begun construction tests and places a project in service no later than December 31 of the fourth calendar year after the year in which construction began, then the taxpayer will be deemed to have satisfied the continuity requirement. If the safe harbor deadline isn’t met, the taxpayer must satisfy the continuity requirement based on the relevant facts and circumstances.
What are the new rules regarding “beginning construction"?
On August 19, 2025, the U.S. Treasury Department released guidance related to new rules around starting construction and safe harboring for the commercial investment tax credit. The main change is that projects over 1.5 MW AC will lose the “5% Test” rule for starting construction and must rely on the “Physical Work” test only. Projects at 1.5 MW AC or less can still use the 5% Test. The guidance’s effective date is September 2, 2025, and is not retroactive. Projects that start construction before September 2 can safe harbor under the current rules. The new guidance does not change the rule that the “continuous work” requirement after on-site construction begins will be satisfied as long as the project is complete within four years.
What are the recapture rules?
O&M expenses and replacement parts also need to comply with PFE/FEOC rules. If you have a compliant system and you later swap out parts that put it out of compliance with the non-FEOC percentage requirement that was in place at the time the original system started construction, you will have to pay back the amount of the tax credit.
What happens to commercial projects that begin after July 4, 2026 but are not placed in service by December 31, 2027?
They will be ineligible for the ITC.
What about residential leases and PPAs for solar, which historically qualified for the 48E credit?
Because the tax filer for a TPO system is a business with an EIN, these projects fall under Section 48E. The same rules for the commercial ITC apply to residential leases and PPAs.
Will residential pre-paid leases qualify?
CALSSA expects financing companies to come up with new offerings in the coming months that will act like cash systems for the customers but allow the financier to claim the tax credit and price it in. Some of this might be very similar to pre-paid leases that have been offered in the past.
Do commercial systems need to be TPO?
No. Systems for a commercial tax filer can be purchased with cash.
Is commercial storage treated differently?
For storage projects that start construction by 12/31/25:
Same as solar. These projects are safe harbored for the 30% ITC so long as the tax filer is not a Specified Foreign Entity (SFE). The projects do not need to comply with Prohibited Foreign Entity (PFE) ratios and the 10-year recapture rules on PFEs.
For storage projects that start construction in 2026 or later:
These projects are eligible for the 30% ITC as long as the tax filer is not an SFE. Projects must comply with the correct PFE ratios and the 10-year recapture rules on PFEs. The storage ITC is available at 30% through 2033, then is 22.5% in 2034 and 15% in 2035.
The phase down does not begin if emissions from national electricity production do not drop 75% below 2022 levels.
Are residential leases and PPAs for storage eligible to claim the 30% ITC?
Yes. A TPO storage product will follow the ITC rules for commercial storage.
How do I account for a paired PV and battery system for the tax credit?
It remains to be seen whether requirements will be added for separate permitting or cost accounting. Contractors and developers should do their best to keep separate accounting for the PV and battery. If they share an inverter, it is unclear how to split the expense.
Is accelerated depreciation still available?
Yes. Solar and storage that is eligible for the Section 48E tax credit still qualifies for 5-year MACRS.
What about prevailing wage and apprentice requirements?
These rules have not changed. All projects with a maximum net output of less than 1 MW-AC are exempt from these requirements. This also applies to storage systems.
The California public works requirements are separate and are unchanged by the federal bill. All NBT systems for commercial customers, with the exception of multifamily less than 15 kW or less than three stories, need to follow California prevailing wage and apprenticeship rules.
Have the transferability rules changed?
Transferability remains intact with the exception being you cannot transfer to an SFE.
Have the domestic content rules changed?
You can still claim a 10% domestic content adder, but the percentage requirements have increased. The previous 40% threshold for the adjusted percentage of domestic content only applies to projects that started construction on or before June 16, 2025. It is 45% from June 17th through December 31, 2025, 50% in 2026, and 55% for 2027.
Has the energy community bonus changed?
There is no change to the energy community bonus.
Has the low-income community bonus credit program changed?
There is no change to the low-income community bonus credit program.
Foreign Entities of Concern
Is this the same as “Prohibited Foreign Entity?”
PFE is actually the more correct label for this requirement. FEOC is technically a subset of PFE. We use the terms interchangeably in this memo to align with how the industry has been talking about the requirement.
What projects need to comply?
These requirements apply to Section 48E for projects beginning construction in 2026 or later.
What are the Covered Nations?
China, Russia, Iran, and North Korea. People sometimes refer only to China because it is the most relevant of those four, but most of the requirements for China also pertain to the other countries.
What is the core requirement?
Systems must have a minimum percentage of components, by value, that are not made in Covered Nations, made by PFEs, or made with IP ties to PFEs.
For solar systems that begin construction in 2026, to qualify for the ITC, at least 40% of the system costs must be non-FEOC. This increases 5% per year until it reaches 60% in 2029.
For storage, the minimum percentage of non-FEOC content is 55% in 2026, increasing 5% per year until it reaches 75% in 2029
Are the FEOC percentages based on installation completion or safe harbor?
They are based on the construction start date. If you begin a project in 2026, it needs to be compliant with the 2026 percentage of minimum non-FEOC content.
Does FEOC apply to residential leases and PPAs the same way as it does to commercial systems?
Yes. After 12/31/25, residential leases will be subject to FEOC requirements.
What are all the types of Prohibited Foreign Entities?
A company incorporated in a FEOC country
A company owned by the Chinese military or government
Companies associated with Uyghur forced labor
CATL, BYD, Envision, EVE, Gotion and Hithium
A citizen of a Covered Nation who is not also a U.S. citizen or permanent resident
A company controlled by any of the above
A company with 25% ownership by a company covered above, 40% owned by multiple companies covered above, or with 15% of debt held by one of the above
A company that made a payment to a prohibited entity that gave that entity effective control, such as for intellectual property
What happens if we rely on manufacturer claims that they are FEOC-compliant and during an audit it turns out to be false?
The tax filer will have to return the tax credit if they are audited and the equipment turns out to have been ineligible.
Will manufacturers provide written guarantees?
There may be different levels of assurance from different manufacturers. Contractors will need to read non-FEOC claims carefully.