Investment tax credits for clean energy at AI data centers

In short

AI data center owners and operators can claim a federal investment tax credit for on site clean energy generation and battery storage. The credit is governed by §48E of the Internal Revenue Code. It applies to any qualified facility that produces electricity with net zero greenhouse gas emissions and to standalone energy storage. The base credit is 6 percent of qualified investment. The rate rises to 30 percent if the project meets prevailing wage and apprenticeship requirements or is under one megawatt (AC). Bonus adders for energy communities, domestic content, and low income areas can push the total rate as high as 70 percent for certain solar projects. 26 U.S.C. § 48E, IRS guide to ITC bonus credits

The One Big Beautiful Bill Act of 2025 terminated the credit for new wind and solar projects placed in service after December 31, 2027, unless construction began by July 4, 2026 and the project finishes within a four year continuity window. Energy storage under the technology neutral credits was not accelerated and remains eligible at the full rate for projects that begin construction through 2033. 26 USC § 48E(e), Pub. L. 119-21, § 70513(g)(5), IRS Notice 2025-42

Tax-exempt entities can receive the credit as a direct cash payment from the IRS. For-profit companies can sell the credit for cash, typically at about 92.5 cents on the dollar, through the transferability market. IRS Transferability FAQ, IRS Elective Pay FAQ, IRS Elective Pay FAQ, Crux, Bipartisan Policy Center

What is the Clean Electricity Investment Credit (§48E)?

The investment tax credit first appeared in 1978 at 10 percent for wind and solar. Congress raised it and made it refundable in certain forms over the years. The Inflation Reduction Act created a new, technology-neutral version called the Clean Electricity Investment Credit, codified at 26 U.S.C. § 48E. It replaces the old technology-specific credit under § 48 for most new projects. The old § 48 still applies to projects that started construction before January 1, 2025. 26 U.S.C. § 48, IRS Publication 6045, Tax-Exempt Entities and the Investment Tax Credit

A 30 percent credit on a $100 million solar plus storage facility means a $30 million reduction in federal income tax, or its cash equivalent. For hyperscalers investing tens of billions each year, the savings are material. For smaller colocation operators installing a battery system, the credit can change the project’s economics.

The credit is a dollar for dollar offset against the owner’s federal income tax. Under §48E, it applies to any qualified facility placed in service after December 31, 2024 that is used to generate electricity with an anticipated greenhouse gas emissions rate not greater than zero. It also applies to energy storage technology that has a capacity of at least 5 kilowatt-hours and is not used primarily in transportation. 26 U.S.C. § 48E(b)(3)(A), 26 U.S.C. § 48E(c)(2), 26 U.S.C. § 48(c)(6)(A)(i), 26 U.S.C. § 48(c)(6)(A)

The IRS issued final regulations in January 2025 confirming that solar, wind, nuclear, and geothermal facilities are categorically deemed to have a zero emissions rate without further analysis. Combustion-based facilities must perform a lifecycle analysis. IRS Final Regulations (TD 10024)

What clean energy property qualifies at an AI data center?

An AI data center can install several kinds of qualifying property and claim the credit.

• Solar photovoltaic systems. Rooftop arrays or ground-mounted solar farms that supply power to the data center. Meta’s 600 MW Clear Fork Solar project in Texas, for example, will feed a 600 MW power purchase agreement dedicated to Meta data centers. PV Tech
• Wind turbines. On-site wind qualifies, though it is less common at the AI data center itself.
• Battery energy storage systems (BESS). Since the Inflation Reduction Act, standalone storage is eligible without being paired with solar. A data center can install a large lithium ion battery to shift grid power from cheap overnight periods to peak hours, or to provide backup power, and claim the ITC on the storage alone. Google has 312 MW of operational battery storage. SEIA
• Microgrid controllers. The credit specifically covers microgrid controllers, defined as equipment that is part of a qualified microgrid and is designed and used to monitor and control the energy resources and loads on such microgrid. 26 U.S.C. §48
• Fuel cells. The One Big Beautiful Bill Act created a new 30 percent ITC for fuel cell projects that begin construction after December 31, 2025, without requiring prevailing wages or greenhouse gas analysis. Fuel cells cannot claim the domestic content or energy community bonuses. Pub. L. 119-21, 26 U.S.C. § 48E(j)

The credit is calculated on the qualified investment, generally the tax basis of the eligible property. If a component serves both a qualifying and a non-qualifying purpose, only the incremental cost above the non-qualifying baseline counts. The final regulations adopted this incremental cost rule. IRS Final Regulations (T.D. 10024)

What are the credit rates and bonus adders?

The base credit is 6 percent of the qualified investment. A higher alternative rate of 30 percent applies if the project meets one of three conditions.

• The project’s maximum net output is under 1 megawatt (AC). For storage, the measurement is based on capacity.
• The project began construction before 60 days after the Treasury Secretary published prevailing wage and apprenticeship guidance, a window that has already closed.
• The project satisfies prevailing wage and apprenticeship (PWA) requirements.

Meeting PWA means the taxpayer pays laborers and mechanics at least the local prevailing wage rates during construction and during the first five years of operation for alteration or repair. It also requires using a minimum percentage of qualified apprentices. For a large-scale data center solar farm over 1 MW, meeting PWA is the only practical way to reach the 30 percent rate. 26 U.S.C. § 48E(d)(3), 26 U.S.C. § 48(a)(10)(A), 26 U.S.C. § 48E(a)(2)(A)(ii), 26 U.S.C. § 45(b)(8), 26 U.S.C. § 48E(a)(2)(A)(ii)(III)

Bonus adders can increase the rate above 30 percent. The table below lists them.

The maximum credit rate possible is 70 percent (30% base + 10% energy community + 10% domestic content + 20% low-income). This applies only to a qualified facility under 5 MW in specific areas. 26 U.S.C. § 48E(h), 26 U.S.C. § 48E(a)(3)(A), IRS Clean Electricity Low-Income Communities Bonus Credit Program

For a typical hyperscale AI data center project, a 200 MW solar farm paired with a 100 MW battery, the realistic credit rate is between 30 percent and 50 percent, depending on location and domestic content.

How did the One Big Beautiful Bill Act change the credit?

The OBBBA, enacted July 4, 2025, made several significant changes to the clean energy ITC. Most changes target wind and solar.

Wind and solar termination. For wind and solar facilities placed in service after December 31, 2027, the §48E credit is zero, unless construction of the facility began by July 4, 2026. Even if construction begins by that date, the project must be placed in service by the end of the fourth calendar year after the year construction began (the continuity safe harbor). A solar farm that starts construction in 2026, for example, must be operational by December 31, 2030. This creates a narrow window for new large-scale wind and solar. Pub. L. 119-21

Energy storage unaffected. The OBBBA did not change the credit phaseout for battery storage. Storage remains eligible at the full rate through 2033. After that, the original phaseout schedule from the Inflation Reduction Act applies. Under it, the credit is 75 percent of the otherwise applicable rate in 2034, 50 percent in 2035, and zero in 2036. Baker Tilly, Tax alert

FEOC restrictions tightened. For storage projects, the material-assistance threshold for prohibited foreign entities (FEOC) rises faster. For construction beginning in 2026, at least 55 percent of project costs must come from non-FEOC sources. That rises to 60 percent in 2027, and 75 percent for projects starting in 2030 and beyond. Basis Climate

Fuel cell ITC. A new 30 percent ITC for fuel cell projects beginning construction after 2025, with no PWA or emissions requirements. Pub. L. 119-21

Recapture risk. The OBBBA added a 10-year recapture rule. If the taxpayer later makes a payment to a specified foreign entity that gives that entity effective control over any facility that received the credit, 100 percent of the credit is recaptured. Pub. L. 119-21

Warning. The OBBBA cut the credit for wind and solar faster than many expected. Any AI data center development that plans on site solar should be in advanced permitting or construction by early 2026 at the latest.

What are the beginning-of-construction rules for wind and solar?

The IRS issued Notice 2025-42 in August 2025, updating how taxpayers must show they started construction. This is critical for solar and wind projects because of the OBBBA’s deadlines.

Physical Work Test is now the main method. For all wind and all solar facilities over 1.5 MW (AC), the only way to establish that construction has begun is the Physical Work Test. The taxpayer must perform physical work of a significant nature. This includes excavation for the foundation, installing power conditioning equipment, or starting work on roads specifically for the facility. Both off site and on-site work may be taken into account, whether performed by the taxpayer or by another person under a binding written contract. IRS Notice 2025-42

Five Percent Safe Harbor largely eliminated. Previously, a taxpayer could meet the beginning-of-construction test by paying or incurring at least five percent of the total project cost. Notice 2025-42 eliminated this safe harbor for wind facilities and for solar facilities over 1.5 MW (AC). The safe harbor remains available for solar facilities at or below 1.5 MW (AC). IRS Notice 2025-42

Grandfathering. Projects that began construction before September 2, 2025, under the prior guidance (Notice 2022-61) are not affected by the new rules. IRS Notice 2025-42

Continuity Safe Harbor. Construction must be continuous. The IRS provides a safe harbor. If the facility is placed in service by the end of the fourth calendar year after the year construction began, the continuity requirement is satisfied. For a 2025 start, the deadline is December 31, 2029. For a 2026 start, the deadline is December 31, 2030. IRS Notice 2025-42

FEOC rules still pending. The notice stated that separate guidance on beginning-of-construction rules related to foreign entities of concern is forthcoming. IRS Notice 2025-42

How can you turn the credit into cash?

Two mechanisms under the Inflation Reduction Act allow entities that cannot use the credit themselves to convert it into cash.

Direct pay (elective payment) under § 6417. Tax-exempt entities, state and local governments, rural electric cooperatives, nonprofits, and Indian tribes, can elect to receive the credit as a direct payment from the IRS. The payment equals the full credit amount and is treated as a cash refund. The entity must pre-register with the IRS’s online portal to obtain a registration number, then file Form 3468 and make the election on its tax return. For-profit entities generally cannot use direct pay, except for a few specific credits. IRS Elective Pay FAQ

Transferability under § 6418. A for-profit taxpayer that generates a credit but has insufficient tax liability to absorb it can sell the credit to an unrelated buyer for cash. The sale must be for cash. The payment is not taxable to the seller, and the buyer cannot deduct the purchase price. Bonus credits cannot be transferred separately from the base credit. The buyer takes on the recapture risk, if a recapture event occurs, the buyer must pay back the recaptured credit. IRS Transferability FAQ, 26 U.S.C. § 6418

The market for tax credit transfers has grown large. Transaction volume reached nearly $30 billion in 2024. The typical price for an ITC is about 92.5 cents on the dollar. A $10 million investment tax credit sells for roughly $9.25 million in cash, with the difference going to transaction costs. Bipartisan Policy Center

Practical note. Many data center operators are for-profit C corporations with large tax appetites from their core business, so they may not need to sell credits. For a developer that builds a clean energy asset adjacent to an AI data center under a long-term power contract, transferability offers a way to monetize the credit even if the developer’s investors cannot use credits efficiently.

What other federal tax benefits support AI data center energy projects?

Beyond the ITC, AI data center owners can layer several other federal tax provisions.

Section 179D deduction. A building owner can claim a per square foot deduction (capped at cost) for energy efficient interior lighting, HVAC, and building envelope improvements. AI data centers are prime candidates. However, the OBBBA added a termination provision to §179D for property whose construction begins after June 30, 2026, so the window is closing. DOE 179D overview

100% bonus depreciation. The OBBBA restored bonus depreciation to 100 percent and made it permanent for property acquired and placed in service after January 19, 2025. This allows immediate expensing of qualifying property, including solar equipment and storage. Tax alert

Cost segregation. An AI data center can accelerate depreciation of components like wiring, backup generators, and cooling systems by reclassifying them from 39-year property to 5-, 7-, or 15-year property. Combined with 100% bonus depreciation, this yields significant upfront deductions. CLA

These provisions stack with the ITC. For example, a storage system that qualifies for the ITC may also qualify for accelerated depreciation on the basis that remains after the credit reduces it.

Key takeaways

• For wind or solar projects, the clock is running. Construction must start by July 4, 2026, and the facility must be in service within four calendar years. Start site work early.
• Energy storage remains fully eligible through 2033. If your AI data center needs backup power or grid buffering, a standalone battery system is one of the best uses of the ITC right now.
• The Physical Work Test is now the only route for large solar and wind. Stockpiling equipment or incurring costs alone will not suffice. You need actual physical work on-site or off-site under a binding contract.
• Prevailing wage and apprenticeship requirements unlock the 30 percent rate. Build compliance into your construction contracts from day one.
• Domestic content can add 10 percentage points, but thresholds are rising rapidly. Supply chains for U.S.-made batteries and steel need early planning.
• Tax-exempt data center owners, such as universities and government labs, should elect direct pay to receive the credit as cash.
• For-profit sponsors with limited tax capacity can sell credits. Market pricing is about 92.5 cents on the dollar. Engage a broker early to handle IRS pre-filing registration.
• Watch for Treasury guidance on FEOC beginning-of-construction rules. Projects starting after 2025 must avoid material assistance from prohibited foreign entities.
• Nail down the qualified investment basis early. Identify any dual-use equipment and document the incremental cost.

Frequently asked questions

Q:Can a for-profit AI data center company get the credit as a cash payment directly from the IRS?

A:No. For-profit entities generally cannot use direct pay. They must have enough tax liability to absorb the credit or sell it through the transfer market. IRS Transferability FAQ

Q:What is the latest date to begin constructing a solar project and still get the credit?

A:July 4, 2026. If construction begins by that date and the project is placed in service by the end of the fourth calendar year after the year construction began, it can still qualify for the full credit. Pub. L. 119-21

Q:Does the ITC apply to battery storage without solar?

A:Yes. Standalone energy storage has been eligible since the Inflation Reduction Act took effect. The storage must have a nameplate capacity of not less than 5 kilowatt hours and must not be property primarily used in the transportation of goods or individuals and not for the production of electricity. 26 U.S.C. § 48E(c)(2)

Q:How much can a small data center expect to save with the ITC?

A:For a $1 million battery storage system that meets PWA and is located in an energy community, the credit could be 40 percent (30% base + 10% energy community), or $400,000. With domestic content, add another $100,000. That is before any bonus depreciation.

Q:Can an AI data center tenant claim the ITC if the building owner installs the system?

A:Generally not. The credit belongs to the owner of the eligible property for federal tax purposes. If the AI data center operator is the owner of the equipment, for example under a capital lease, it may claim the credit.

Q:What happens if a project fails to meet the continuity requirement?

A:The credit is lost. Continuous construction means that after beginning, work must proceed without significant interruption. The four-year continuity safe harbor is a safe harbor to satisfy the continuity requirement. IRS Notice 2025-42

Q:Are microgrid controllers really eligible for the ITC?

A:Yes. The statute and CRS report confirm microgrid controllers are qualified energy property. CRS Report R48583, 26 U.S.C. §48

Q:Can an AI data center on a brownfield site qualify for the energy community bonus?

A:Possibly. An energy community includes brownfield sites. If the site meets the statutory definition, the 10-percentage-point bonus could apply. 26 U.S.C. § 45(b)(11)(B)(i), 26 U.S.C. § 48E(a)(3)(A)

Q:Does the OBBBA affect the transferability market for wind and solar credits?

A:Not directly. The OBBBA did not change the transferability rules. The market remains active, though pricing may shift given the shortened eligibility window for wind and solar.

Q:Is the ITC better than the Production Tax Credit?

A:It depends. A facility can claim either the ITC under §48E or the PTC under §45Y, not both. The ITC provides an immediate upfront benefit based on capital cost. The PTC is paid over 10 years per kilowatt-hour produced. For an AI data center that builds a large solar farm, the ITC is often simpler and more valuable.

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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.