Tax equity financing for AI data center power

In short

AI data centers need massive amounts of electricity. Developers build solar farms, battery storage systems, nuclear plants, and other generation to supply them. Those projects qualify for large federal tax credits, mainly the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). For projects placed in service after 2024, the credits are now technology neutral under the Clean Electricity ITC of Section 48E and the Clean Electricity PTC of Section 45Y. 26 U.S.C. § 48E, 26 U.S.C. § 45Y. The base ITC rate is 6 percent and rises to 30 percent if the project meets prevailing wage and apprenticeship standards. 26 U.S.C. § 48(a). Bonus credits can push the rate to 70 percent. CRS Report R48583.

Most project developers do not have the large tax liability needed to use the credits themselves. For decades the main solution has been a tax equity partnership flip. A bank or insurance company puts up cash and receives 99 percent of the credits and depreciation until it earns a target after tax return of about 6.5 to 8.5 percent. The economics then flip, and the developer takes over nearly all of the project’s remaining value. Crux, Tax alert.

Since 2023, developers have had two faster cash tools. Under Section 6418, they can sell credits directly to an unrelated buyer for cash, typically at a 6 to 15 percent discount. 26 U.S.C. § 6418, Tax alert. Tax exempt entities like municipalities and rural electric cooperatives can elect direct pay under Section 6417 and receive the full credit amount as a refund from the IRS. 26 U.S.C. § 6417.

The One Big Beautiful Bill Act of 2025 accelerated the phaseout for wind and solar credits. To claim a Section 48E or 45Y credit, a wind or solar facility must be placed in service by December 31, 2027, or have started construction by July 4, 2026. Law firm analysis. Storage, geothermal, and other zero emission technologies are phased out starting in 2034, generally in accordance with the original IRA phaseout schedule, though the Act eliminates a potential extension based on greenhouse gas emissions. Law firm analysis. The 2025 law also added foreign entity restrictions, higher domestic content thresholds, and permanent 100 percent bonus depreciation. The market for monetizing these energy credits was about $40 billion in 2024, and it is growing. Law firm analysis.

What federal tax credits can power an AI data center project

The Investment Tax Credit under old Section 48

The Investment Tax Credit under Section 48 gives a one time credit based on a percentage of the qualified cost of energy property. The base credit is 6 percent. If the project meets prevailing wage and apprenticeship requirements, the rate jumps to 30 percent. 26 U.S.C. § 48(a). Energy property includes solar equipment, fuel cells, microturbines, geothermal, combined heat and power, small wind, energy storage, microgrid controllers, and biogas. 26 U.S.C. § 48(a)(3)(A). Energy storage is broadly eligible on a standalone basis as long as it has at least 5 kilowatt hours of capacity. 26 U.S.C. § 48(c)(6). Microgrid controllers are eligible if they are equipment that is part of a qualified microgrid and designed and used to monitor and control its energy resources and loads. A qualified microgrid must have generation capacity between 4 kilowatts and 20 megawatts, be capable of operating both connected to and independently from the grid, and not be part of a bulk-power system. 26 U.S.C. § 48(c)(8).

Bonus adders apply for meeting domestic content thresholds (up to 10 percentage points), siting the project in an energy community (up to 10 percentage points), and serving low income communities (up to 20 percentage points for certain projects), yielding a maximum total rate of 70 percent. 26 U.S.C. § 48(e)(1)(A)(ii). For projects of 1 megawatt AC or larger, the prevailing wage and apprenticeship rules require that laborers be paid prevailing wages and that a minimum share of labor hours be performed by qualified apprentices, 12.5 percent in 2023 and 15 percent after. 26 U.S.C. § 48(a)(9)(B), (10), (11), 26 U.S.C. § 45(b)(8).

The credit is claimed in the tax year the property is placed in service. If the property is sold or disposed of within five years, the recapture percentage is 100 percent if disposed of within the first full year after placed in service, declining by 20 percentage points each full year thereafter. 26 U.S.C. § 50(a)-(c). An ITC and a PTC cannot be claimed for the same facility. CRS Report R48583.

The Production Tax Credit under old Section 45

The Section 45 Production Tax Credit provides a per kilowatt hour credit for electricity produced and sold over a 10 year period. The credit amount is adjusted annually for inflation and is available for specific technologies such as wind, biomass, and geothermal. Like the ITC, the PTC has a base rate and a five times multiplier if prevailing wage and apprenticeship requirements are met. 26 U.S.C. § 45.

The technology neutral clean electricity credits under Sections 48E and 45Y

For facilities placed in service after December 31, 2024, the old technology specific ITC and PTC are replaced by the Clean Electricity Investment Credit under Section 48E and the Clean Electricity Production Credit under Section 45Y. 26 U.S.C. § 48E, 26 U.S.C. § 45Y. A project qualifies if it is used for the generation of electricity, is placed in service after December 31, 2024, and has an anticipated greenhouse gas emissions rate not greater than zero. 26 U.S.C. § 48E(b)(3).

The Section 48E ITC works the same as the old ITC, 6 percent base and 30 percent with prevailing wage and apprenticeship. The Section 45Y PTC gives a base rate of 0.3 cents per kilowatt hour, which multiplies to 1.5 cents with prevailing wage and apprenticeship, and is adjusted for inflation. The credit is claimed for 10 years. 26 U.S.C. § 45Y(a)-(c). A taxpayer cannot claim both a Section 48E ITC and a Section 45Y PTC for the same facility. Tax alert.

Projects that began construction before January 1, 2025 may choose between the old Sections 48/45 and the new Sections 48E/45Y, as long as they meet the eligibility rules for each. The choice is mutually exclusive. Tax alert.

Credits for nuclear, hydrogen, and carbon capture

Beyond solar, wind, and storage, several other federal credits are important for AI data center power.

Nuclear power. Existing nuclear plants can claim a production tax credit of about $15 per megawatt hour under Section 45U, available through 2032. 26 U.S.C. § 45U, CRS Report R48583. New nuclear could qualify under Section 45Y as zero emission generation.

Carbon capture. Under Section 45Q, a project that captures carbon dioxide and permanently sequesters it can claim up to $85 per metric ton if it meets prevailing wage and apprenticeship requirements. Without those requirements, the credit is $17 per ton. For direct air capture, the credit reaches $180 per ton. For equipment placed in service on or after February 9, 2018, the credit under subsection (a)(3) is available during the 12-year period beginning on the date the equipment was originally placed in service. 26 U.S.C. § 45Q(a)(3)(A).

Clean hydrogen. Section 45V provides a credit of up to $3.00 per kilogram of clean hydrogen, with the rate stepping down for hydrogen that has higher lifecycle greenhouse gas emissions. The top rate applies when emissions are less than 0.45 kilograms of carbon dioxide equivalent per kilogram of hydrogen. Federal Register § 45V proposed regulations. A hydrogen facility cannot claim Section 45V credits if it includes carbon capture equipment for which a Section 45Q credit has already been allowed to any taxpayer. Federal Register § 45V final rules.

How does a partnership flip structure turn tax credits into cash

A tax equity partnership flip is the most common way to monetize energy tax credits. The project developer, often called the sponsor, forms a partnership with a tax equity investor, typically a large bank or insurance company. The partnership owns the project entity that operates the clean energy facility.

The investor contributes nearly all of the partnership’s capital. In return, the investor receives 99 percent of the tax credits and depreciation deductions, plus a small share of the project’s cash distributions, often 5 to 30 percent, until the investor reaches a target after tax internal rate of return. That target typically falls between 6.5 and 8.5 percent. Once the target is met, the allocation flips. The sponsor then receives roughly 95 percent of the cash and remaining tax attributes, and the investor’s share drops to about 5 percent. The sponsor can then buy out the investor’s remaining partnership interest. Crux, Norton Rose Fulbright.

The tax equity investment is usually funded in two pieces. Around 20 percent comes at mechanical completion, and the remaining 80 percent at substantial completion. Crux. Depreciation and credits together provide over 80 percent of the investor’s total return, with depreciation alone delivering 10 to 20 percent of the project’s value. ACORE.

In 2024, more than 70 percent of tax equity transactions used the traditional flip structure. Many of those included an option to later transfer credits. Novogradac. Transfers of credits from such hybrid partnerships made up nearly 30 percent of the 2024 transferable credit market. Crux.

A real example is Ørsted’s $680 million tax equity financing with J.P. Morgan for the Eleven Mile Solar Center in Arizona, a 300 megawatt solar and 300 megawatt battery storage project, and the Sparta Solar project, a 250 megawatt solar plant in Texas. The deal used a combined PTC for solar and ITC for battery storage and included an option for credit transferability. Renewable Energy World.

How does selling credits under Section 6418 work

Congress added Section 6418 in the Inflation Reduction Act to let project owners sell credits directly for cash. Any eligible taxpayer can elect to transfer all or a portion of an eligible credit to an unrelated buyer. The buyer pays cash, and the seller recognizes no taxable income on the sale. The buyer does not get a deduction for the purchase price. 26 U.S.C. § 6418. The list of credits that can be sold includes the ITC under Sections 48 and 48E, the PTC under Sections 45 and 45Y, the nuclear PTC (45U), the carbon capture credit (45Q), the clean hydrogen credit (45V), and several others. 26 U.S.C. § 6418(f)(1).

A credit can be transferred only once. Both the seller and the buyer must complete a pre filing registration with the IRS, and both must attach a transfer election statement to their tax returns. Planning ahead is wise, the IRS recommends registering at least 120 days before filing. IRS Publication 5884, Tax alert, Crux, Crux, IRS Publication 5884, IRS Publication 5884, IRS Publication 5884, IRS pre-filing registration timing, IRS Publication 5884.

For ITC credits, the basis reduction rules under Section 50(c) still apply to the seller. The seller must reduce its basis in the property by the amount of the credit, as if it had used the credit itself. This reduces future depreciation deductions. Tax alert. Credits transferred under Section 6418 are treated as passive credits. Individuals and pass through entities, such as partnerships and S corporations, can only use them to offset passive income. Widely held C corporations do not face that limit. Crux, Tax alert.

Transactions close much faster than a partnership flip, often in about three months, and avoid the millions of dollars in legal fees a partnership deal can cost. Crux. The credits sell at a discount to face value, typically 6 to 15 percent. Tax alert. The highest prices go to wind and solar PTCs and to advanced manufacturing credits under Section 45X. Solar and storage ITCs come next. Larger deals often command better pricing per credit dollar because fixed transaction costs are spread over a bigger sale. Tax alert.

In 2024, the direct credit transfer market for wind, solar, and storage reached about $5 billion, with another $6 billion covering other credits like 45X and 45Q. Norton Rose Fulbright. Solar PV credits made up over 34 percent of all transferable credits in the first half of 2025, and solar plus storage credits surged to 20 percent, more than double their share from 2024. Solar & Storage Finance USA.

Who can get a direct IRS payment under Section 6417

Section 6417 allows certain entities to elect direct pay. Instead of selling a credit or using it to offset tax, a qualified entity can treat the credit as a payment from the IRS. The IRS sends the entity a refund for the full credit amount, even if the entity owes no tax. 26 U.S.C. § 6417(a).

The entities that can make this election are tax exempt organizations, state and local governments, tribal governments, the Tennessee Valley Authority, rural electric cooperatives, and Alaska Native Corporations. For taxable entities, direct pay is available only for Section 45Q (carbon capture), Section 45V (clean hydrogen), and Section 45X (advanced manufacturing) credits, and only for the first five years of production. 26 U.S.C. § 6417(d), Tax alert.

The election must be made on the entity’s original tax return after completing IRS pre registration. The election is irrevocable. T.D. 9988. For projects that began construction in 2024, the direct pay amount is subject to a 90 percent phaseout unless the project meets domestic content requirements. For 2025, the phaseout is 85 percent. CRS report on domestic content phaseout.

Partnerships cannot elect direct pay. However, proposed regulations under Section 761 allow an unincorporated organization that is co owned by tax exempt entities to opt out of partnership status , enabling those entities to use direct pay. Federal Register.

How did the One Big Beautiful Bill Act change the rules

The One Big Beautiful Bill Act, signed on July 4, 2025, made several significant changes that affect AI data center power projects.

A hard deadline for wind and solar credits

Under the new law, wind and solar facilities can claim the Section 48E or 45Y credit only if they are placed in service by December 31, 2027, or if construction begins by July 4, 2026. Projects that began construction before the end of 2024 are largely unaffected by the new law. Law firm analysis. This puts enormous pressure on AI data center solar projects that are still in development.

The law also eliminated the 5 percent safe harbor for beginning construction for wind projects and solar projects over 1.5 megawatts. Only the physical work test remains for those technologies. The continuity safe harbor, which requires a project to be completed within four years of starting construction, still applies for projects that begin by July 4, 2026. IRS Notice 2025-42, Law firm analysis.

Storage and other technologies keep their phaseout schedule

Battery storage, nuclear, geothermal, hydropower, marine, biogas, and fuel cells are not subject to the 2027 cliff. They follow the original Inflation Reduction Act phaseout. Under the OBBBA, Section 45Y and 48E credits for technologies other than wind and solar (including energy storage) begin to phase down after 2033, dropping to 75 percent in 2034, 50 percent in 2035, and zero after 2035. Tax alert. This long runway gives AI data center operators confidence to invest in large scale battery storage. Jefferies estimates that hyperscaler data centers will create a 20 gigawatt opportunity for battery storage through 2035. Latitude Media.

Fuel cells added as an eligible ITC category

The Act created a special ITC category for fuel cells at a flat 30 percent rate, exempt from prevailing wage and apprenticeship requirements and from emissions testing. The provision applies to projects that begin construction after 2025. Law firm analysis.

New foreign entity restrictions

For tax years beginning after July 4, 2025, no credit is allowed if the facility is owned by a Specified Foreign Entity or Foreign Influenced Entity, a term that covers entities controlled by China, Russia, North Korea, or Iran. For wind and solar projects that start construction after December 31, 2025, the credit is also denied if the facility receives material assistance from a foreign entity of concern. The OBBB requires the IRS to publish safe harbor tables for determining material assistance from a foreign entity of concern no later than December 31, 2026. Reunion, Bipartisan Policy Center

Escalating domestic content requirements

ITC projects that begin construction after June 16, 2025 must meet higher domestic content thresholds to qualify for the domestic content bonus credit. The threshold starts at 45 percent and rises to match the PTC schedule, eventually reaching 55 percent. Projects that started construction earlier remain at the 40 percent threshold. Law firm analysis.

100 percent bonus depreciation is now permanent

The Act made 100 percent bonus depreciation under Section 168(k) permanent for property acquired after January 19, 2025. This gives an immediate full deduction for the cost of eligible equipment, adding even more value to ITC projects. IRS Notice 2026-11, Law firm analysis.

Clean hydrogen deadline tightened

The beginning of construction deadline for the Section 45V clean hydrogen credit moved from January 1, 2033 to January 1, 2028. IRA Tracker. This could affect data centers planning to use hydrogen fuel cells or hydrogen based backup power.

Credit transferability preserved

Section 6418 credit sales remain available for the Section 45Y and 48E credits. The OBBBA did not impose a 2027 cutoff on transfers, so even after wind and solar credits stop, other credits can still be sold. Law firm analysis.

How are AI data center operators using these financing tools

The real world deals show how tax credits and the financing structures they enable are being put to work.

Solar and storage paired together. Ørsted’s $680 million tax equity package with J.P. Morgan funded a 300 megawatt solar plus 300 megawatt storage project in Arizona and a 250 megawatt solar project in Texas. The deal used PTCs for the generation and ITCs for the batteries. Renewable Energy World. Meta signed a power purchase agreement for a 600 megawatt Texas solar plant developed by Enbridge with a $900 million investment. ESG Dive. Meta also partnered with Silicon Ranch on a 100 megawatt solar farm in South Carolina with Silicon Ranch making a $100 million investment, coming online by 2027 to serve a new data center. ESG Dive.

Colocated battery storage. Aligned Data Centers announced a 31 megawatt, 62 megawatt hour battery energy storage system co located at a data center in the Pacific Northwest, developed by Calibrant Energy. The two hour batteries were sized to allow the interconnection to happen years earlier than a traditional utility upgrade would have permitted. Latitude Media.

Nuclear power. Microsoft struck a deal in September 2024 to reopen the shuttered Three Mile Island Unit 1 reactor, now renamed the Crane Clean Energy Center, by 2028, which may depend on federal nuclear production tax credits under Section 45U. MIT Technology Review via CRS R48583. Meta signed a 20 year nuclear power purchase agreement with Constellation Energy for the Clinton Clean Energy Center in Illinois, extending the plant’s operations beyond an expiring state tax credit. ESG Dive. Amazon expanded its nuclear relationship with Talen Energy to supply AI data centers from existing nuclear capacity. CRS R48583.

Geothermal and novel storage. Meta entered a 150 megawatt geothermal deal with XGS Energy for AI data centers in New Mexico. ESG Dive. Google signed with Energy Dome for long duration storage using a carbon dioxide battery. Latitude Media. Form Energy is scaling up its 100 hour iron air battery, targeting AI data center demand. Latitude Media.

In 2024, large technology companies accounted for 43 percent of all global clean energy power purchase agreements, and PPA prices rose 35 percent, driven by hyperscaler procurement. Brookings. The total market for monetizing these energy credits is projected to reach $55 to $60 billion in 2025. Solar & Storage Finance USA.

What should counsel and sponsors watch for now

Recapture exposure. If an ITC project is sold, disposed of, or ceases to operate within five years, the credits are subject to recapture on a sliding 20 percent per year schedule. The basis reduction that happens when an ITC is sold under Section 6418 can increase recapture risk on a later sale. 26 U.S.C. § 50(c), BDO.

Foreign entity ownership and supply chain. The new FEOC rules may disqualify a facility from receiving any credit if a covered foreign entity owns it or, for wind and solar starting after 2025, provides material assistance. Developers must screen investors, equipment suppliers, and lenders for ties to China, Russia, North Korea, or Iran. Tax alert.

Domestic content planning. To claim the 10 percentage point bonus credit and to avoid the direct pay phaseout, a project must meet the relevant domestic content threshold. The thresholds are rising for projects that start construction after mid 2025, so developers should model the cost benefit of sourcing domestic steel, iron, and manufactured products. Tax alert.

Passive activity limits for credit buyers. Buyers of Section 6418 credits who are individuals or pass through entities can only use the credits against passive income. C corporations are the most flexible buyers. This shapes who will pay top dollar for your credits. Cherry Bekaert.

IRS pre registration is mandatory. Both credit sales and direct pay elections require a successful pre registration with the IRS. The process can take months. Delays can hold up a closing or a return filing.

Beginning of construction hurdles. For wind and solar projects racing to meet the July 4, 2026 construction start deadline, the physical work test is now the only route above 1.5 megawatts. Developers must document the start of physical work of a significant nature and maintain continuous progress. The IRS continuity safe harbor gives four years after the year construction begins to complete the project, but projects that have not begun construction by July 4, 2026 face a separate, tighter placed in service deadline of December 31, 2027. IRS Notice 2025-42, Law firm analysis, Tax alert.

Key takeaways

• Tax equity partnership flips remain the dominant way to monetize clean energy credits, with over 70 percent of the 2024 market using that structure. The target after tax return for the tax equity investor runs around 6.5 to 8.5 percent.
• The ITC under Section 48 or 48E offers an immediate 30 percent credit on the cost of solar, storage, microgrid controllers, and other energy property if prevailing wage and apprenticeship rules are met. The PTC offers a 10 year stream of per kilowatt hour payments.
• Section 6418 credit transfers let developers sell credits for cash at a 6 to 15 percent discount, closing in about three months instead of many months for a partnership. C corporations make the best buyers because they avoid the passive income trap.
• Direct pay under Section 6417 is a powerful tool for municipal utilities, cooperatives, and tribal entities building power for data centers, but the domestic content requirements must be satisfied to avoid a steep phaseout.
• The One Big Beautiful Bill Act imposed a hard 2027 placed in service deadline for wind and solar projects unless construction begins by July 4, 2026. Storage, nuclear, and geothermal projects have a much longer runway, with phaseout starting in 2033.
• Fuel cells now have their own ITC with a flat 30 percent rate and no prevailing wage or emission test, available for construction after 2025.
• Foreign entity restrictions and rising domestic content requirements will affect project eligibility and credit pricing. Early screening of the ownership structure and supply chain is now essential.
• The total energy tax credit market continues to grow, with projections of $55 to $60 billion in 2025, fueled heavily by AI data center power demand.

Frequently asked questions

Q:What is the difference between the ITC and the PTC?

A:The ITC is a one time credit equal to a percentage of the project’s cost, claimed when the facility is placed in service. The PTC is a per kilowatt hour credit paid over the first 10 years of generation. A project cannot claim both for the same facility. CRS R48583.

Q:Can an AI data center operator claim the credits directly?

A:It can if it owns the power project and has enough federal tax liability to use the credits. Most AI data center companies prefer to buy power under a contract and let a developer handle the tax equity, but a large C corporation with its own on site generation could claim the ITC or PTC itself.

Q:How does a tax equity partnership flip work?

A:A developer brings in a financial institution as a partner. The investor puts up the cash and receives 99 percent of the credits and depreciation and a small share of the cash. Once the investor hits a target after tax return, the shares flip, and the developer takes over 95 percent of everything. Crux.

Q:How much do credits sell for under Section 6418?

A:Transfer prices typically range from 85 to 94 cents on the dollar. The discount varies by credit type, deal size, and buyer pool. Wind and solar PTCs and Section 45X manufacturing credits command the highest prices. Norton Rose Fulbright.

Q:Is direct pay available for a private company building a solar farm?

A:No. Direct pay for wind and solar credits is only available to tax exempt entities, governments, tribal entities, and rural electric cooperatives. A taxable C corporation cannot use Section 6417 for those credits, and a partnership or S corporation also generally cannot elect direct pay for those credits because it is not an applicable entity under Section 6417(d)(1). Section 6417(c) requires the partnership or S corporation, rather than its partners or shareholders, to file the election when the partnership or S corporation directly holds the applicable credit property, and sets out the resulting tax treatment, including payment, tax-exempt income characterization, and distributive share rules. 26 U.S.C. § 6417(c), 26 U.S.C. § 6417(a), 26 U.S.C. § 6417(d)(1), 26 C.F.R. § 1.6417-2(a)(1)(iv).

Q:How does the OBBBA deadline affect a solar project that will not be operating until 2028?

A:Unless construction on that solar project begins by July 4, 2026, it will not qualify for the Section 48E or 45Y credit if it is placed in service after December 31, 2027. To qualify for federal tax credits, wind and solar projects must either begin construction by July 4, 2026, or be placed in service by December 31, 2027. Latham & Watkins.

Q:What are the FEOC rules and why do they matter?

A:Foreign entity of concern rules block a credit if the facility is owned by or receives material assistance from an entity controlled by China, Russia, North Korea, or Iran. This can disqualify projects that use certain foreign equipment, investors, or contractors. Final guidance on the scope is still pending. Latham & Watkins.

Q:How long does a credit transfer take?

A:A typical transfer closes in about three months, though the IRS recommends starting the pre registration process at least 120 days before filing the return. Bricker Graydon.

Q:Can storage projects still get the ITC after the OBBBA?

A:Yes. The accelerated 2027 cutoff applies only to wind and solar. Standalone storage, as well as nuclear, geothermal, and other technologies, are not subject to the hard placed-in-service deadline and remain eligible for the full credit value through 2033, with a gradual phasedown beginning in 2034. Tax alert, Law firm analysis.

Q:What is the advantage of a partnership flip over a credit sale?

A:A partnership flip allows the developer to capture the value of both the tax credits and the depreciation and keeps a long term equity partner. A credit sale is simpler and faster but does not monetize depreciation directly, and the seller takes a discount on the credit. The flip typically yields higher total proceeds for the sponsor.

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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.