Investment Tax Credit for Commercial Real Estate Renewable Energy

                                       

By: Jonathan Suarez

Manager, Tax

Key Takeaways

• Base credit of 6% increases to 30% when projects meet prevailing wage and apprenticeship requirements—reaching up to 50% with domestic content and energy community bonuses.
• Compressed timelines require immediate action: Solar and wind projects must begin construction by July 4, 2026, and complete within four years to qualify for the credit.
• Equipment sourcing matters: Projects starting in 2026 face restrictions on materials from China, Russia, Iran, and North Korea—potentially affecting costs and supply chains.
• Tax-exempt entities get direct benefits: Nonprofits and government entities can convert the credit to refundable cash payments through direct pay provisions.
• Bottom Line: Commercial real estate developers have a narrow window to lock in tax credits covering up to half of renewable energy investments—but only if construction begins soon.

The federal Clean Electricity Investment Credit offers commercial real estate investors a chance to reduce project costs while adding sustainable infrastructure. But recent legislative changes have accelerated timelines, making it critical to understand what’s available and when you need to act.

What the Tax Credit Offers

The Clean Electricity Investment Credit replaced the Energy Investment Tax Credit starting January 1, 2025. This emissions-based incentive covers qualified facilities and energy storage systems placed in service after that date.

The base credit is 6% of the qualified investment. However, commercial real estate developers can increase this to 30% by meeting prevailing wage and registered apprenticeship requirements. Additional bonuses can push the total credit even higher:

A 10-percentage point increase applies if the project uses domestic steel, iron, and manufactured products meeting specific thresholds. Another 10-percentage point increase applies to projects located in designated energy communities—areas with prior coal mining or fossil fuel extraction activity, or regions with above-average unemployment.

Projects under 5 MW in low-income communities or on Indian land can add another 10 percentage points. Low-income residential buildings or economic benefit projects may qualify for a 20-percentage point bonus.

For a commercial real estate project that meets prevailing wage requirements and domestic content and energy community bonuses, the total credit reaches 50% of qualified investment costs.

Recent Changes Shorten the Timeline

The One Big Beautiful Bill, enacted in July 2025, accelerated phaseout schedules. The credit applies differently depending on when construction begins:

For solar and wind projects that begin construction before July 4, 2026, the system must be placed in service within four calendar years to qualify. For construction starting after July 4, 2026, the project must be completed by December 31, 2027.

Energy storage systems face less restrictive timelines. Stand-alone battery projects remain eligible under the original schedule, which extends into the 2030s.

Treasury guidance issued in September 2025 tightened safe harbor rules. Projects 1.5 MW (AC) and larger must now use the Physical Work Test. This requires significant on-site construction work—electrical work, racking and mounting preparation—not just preliminary activities. Projects must maintain continuous construction for four years after beginning.

Smaller projects under 1.5 MW can still use either the Physical Work Test or the 5% Safe Harbor Test, where incurring 5% of project costs qualifies.

Foreign Entity Restrictions Add Complexity

New Foreign Entity of Concern provisions prohibit equipment sourcing from specific countries. Projects starting construction in 2025 can source equipment from any country. Projects beginning in 2026 face restrictions on equipment from China, Russia, Iran and North Korea.

The Material Assistance Cost Ratio measures a project’s material content from prohibited sources. If a project exceeds this threshold, it loses tax credit eligibility. These restrictions may increase costs and create supply chain challenges for commercial real estate developers.

How Tax-Exempt Entities Benefit

Commercial real estate held by nonprofits, local governments, or houses of worship can use direct pay provisions. The credit converts to a refundable cash payment, reducing upfront project costs without requiring tax liability.

Third-party ownership models offer another option. An outside investor installs and owns the system on the property, claims the credits and other incentives, and then offers the property owner a low monthly rate for the solar energy produced.

Strategic Considerations for Developers

Commercial real estate investors should evaluate projects now rather than waiting. The compressed timelines mean projects planned for 2026 or beyond need construction to begin immediately to preserve credit eligibility.

Energy storage additions offer flexibility. If your property prioritizes resilience and self-consuming renewable energy, batteries benefit from longer eligibility windows.

Projects in designated energy communities receive bonus credits. Treasury guidance and Department of Energy GIS mapping tools identify qualifying locations, making it worth checking whether your properties fall within these zones.

Domestic content bonuses require planning. The 40% manufactured products threshold increases to 55% for projects beginning after 2026. Working with suppliers who track domestic sourcing strengthens credit claims.

The credit transfers to unrelated taxpayers through a one-time election. This monetization option helps developers without sufficient tax liability to use the full credit value.

What This Means for Your Portfolio

The federal investment in renewable energy creates a narrow window for commercial real estate developers to significantly reduce costs. Projects meeting prevailing wage requirements, domestic content thresholds, and energy community location criteria can recover half their investment through tax credits.

The accelerated timelines mean decisions made in 2025 determine which projects qualify. Understanding these provisions and planning construction schedules accordingly protects the financial benefits that renewable energy offers commercial properties.

Wiss works with commercial real estate investors to structure transactions that maximize available tax incentives while meeting compliance requirements. Our tax advisory team tracks regulatory changes and provides guidance on documentation needed to substantiate credit claims.

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