Section 25D Residential Clean Energy Credit: Final-Year Claim, Carryforward, and TPO Alternatives

If you put solar panels, a battery, a geothermal heat pump, or a small wind turbine on your home in 2025, your 2025 tax return may be the most valuable one you ever file. The Residential Clean Energy Credit under Internal Revenue Code Section 25D — the famous "30% solar credit" — was supposed to last through 2032 under the Inflation Reduction Act. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, accelerated the kill date to December 31, 2025.

That means homeowners who finished their installations on or before New Year's Eve 2025 are eligible for a 30% federal credit with no dollar cap (except a special limit on fuel cells). Anyone whose system was placed in service on or after January 1, 2026 gets nothing under Section 25D — period.

This guide is for two audiences. First, the homeowner sitting on a 2025 install who wants to make sure they capture every dollar of the credit, including any portion that has to carry forward because their tax liability was too low. Second, the homeowner considering solar in 2026 who's wondering whether the federal incentive is truly gone or whether there are still ways to participate. The answer to the second question is more nuanced than most people realize.

What the credit actually was

Section 25D allowed individual homeowners to claim a nonrefundable federal income tax credit equal to 30% of the cost of qualifying clean energy property installed at a U.S. residence they used as a home. There was no annual limit. There was no lifetime limit. A homeowner who spent $40,000 on a solar-plus-battery system in 2025 was looking at a $12,000 credit, full stop.

Qualifying property

Six categories of equipment qualified:

• Solar electric (photovoltaic) panels — the most common claim
• Solar water heating — at least half the home's water heating energy must come from the sun, and the equipment must be SRCC- or state-certified
• Small wind turbines for residential use
• Geothermal heat pumps meeting Energy Star requirements at the time of installation
• Battery storage technology with a capacity of at least 3 kilowatt-hours (a 2023 addition that made stand-alone storage eligible)
• Fuel cells — capped at $500 per half-kilowatt of capacity, which is the only category with a cap

Qualifying costs

The 30% applied not just to equipment but to a meaningful chunk of soft costs: onsite preparation, assembly, original installation labor, piping, wiring, sales tax on the equipment, and permit fees. Two important reductions: utility rebates for the system itself reduce the basis for the credit, but net metering payments for excess electricity sold back to the grid do not.

Who could claim

The credit was available for a main home or a part-time second home that the taxpayer occupied. Pure rental properties never qualified. If the home had mixed business use up to 20%, the homeowner claimed the full credit; above 20%, the credit was prorated.

What changed under the OBBBA

The IRA had originally locked in the full 30% rate through 2032, then ramped it to 26% in 2033 and 22% in 2034 before sunsetting in 2035. The OBBBA scrapped that schedule for residential property under Section 25D entirely. The single relevant date is now December 31, 2025: any qualifying property placed in service after that date is ineligible, regardless of when it was paid for or contracted.

"Placed in service" is doing a lot of work here. The IRS has been clear in guidance and in the Section 25D FAQs that the year of the credit is the year the property is installed and ready for use, not the year it was ordered or paid for. A homeowner who paid a deposit in October 2025 but had panels mounted on the roof in February 2026 has no federal credit. This rule has caught people off guard and there is no transition relief or grandfather clause in the statute.

The commercial side of the clean energy code (Sections 48E and 45Y) was treated more gently. Standalone storage, leased residential systems, and other technologies that flow through commercial taxpayers can still earn investment tax credits for projects that meet specific construction-start and placed-in-service deadlines. We'll come back to why that matters for homeowners in 2026.

Filing your final 2025 claim: a step-by-step

For homeowners who finished an install in 2025, the entire claim flows through Form 5695, attached to Form 1040.

Step 1: Confirm "placed in service"

The single most important documentation you can have is proof the system was operational by December 31, 2025. For a grid-tied solar system, that usually means a Permission to Operate (PTO) letter from your utility dated on or before that day. Save it. For a battery, geothermal, or fuel cell system that doesn't require PTO, save the installer's commissioning report and the inspection sign-off from your local jurisdiction. If the IRS questions a 2025 placed-in-service date, contemporaneous third-party paperwork is your defense.

Step 2: Total your qualifying costs

Build a single tally for each technology category. Include equipment, labor, permits, sales tax, and reasonable installation costs. Subtract any utility-paid rebates that reduce your cost (separate from net metering credits, which do not). State income tax credits typically do not reduce the federal credit basis, but state property tax exemptions and sales tax exemptions don't either — only direct cash subsidies do. If you used a low-interest loan, the full cost is still in the basis; financing terms don't change what you spent.

Step 3: Compute the credit on Form 5695, Part I

Part I of Form 5695 walks you through each technology line by line. Multiply the totals by 30%, sum them, and you have the credit before limits.

Step 4: Apply the tax liability limit

Section 25D is nonrefundable. It can wipe out your federal income tax owed but it can't put you below zero. The form's limitation worksheet looks at your total tax minus most other nonrefundable credits to find the maximum credit you can actually use this year.

Step 5: Document your carryforward

Anything left over rolls into 2026. There is no expiration on the carryforward, but the credit itself died on December 31, 2025, so future-year carryforwards will be the only Section 25D activity on your future returns. Keep your 2025 Form 5695 and your installation paperwork forever — you'll cite both to support the carryforward in any year you finally get to use it.

The carryforward most people will rely on

The interaction between a $12,000 to $20,000 credit and a typical middle-class tax bill matters. A married couple with two kids earning a combined $130,000 might owe roughly $13,000 to $15,000 in federal income tax after the standard deduction and the Child Tax Credit. A $15,000 solar credit could fully zero them out and still leave several thousand dollars of unused credit hanging.

Here's where the carryforward saves you. The IRS confirms unused 25D credit carries forward indefinitely under current law — there is no five- or ten-year cap. As long as you eventually have federal income tax liability to offset, the unused portion lives on Form 5695 from year to year until it's exhausted.

Three planning moves to consider if you have a sizable carryforward:

• Roth conversions create ordinary-income tax that the carryforward can absorb. If you've been holding off on converting a traditional IRA, this is a near-perfect time — you're paying tax in a year when the credit makes those dollars effectively free of federal income tax up to the carryforward amount.
• Capital gains harvesting at the 15% rate becomes more attractive when a credit is sitting there waiting. The credit reduces income tax including the tax on long-term gains.
• Income-shifting events like exercising nonqualified stock options, accelerating a bonus, or stopping retirement plan deferrals can speed up consumption of the carryforward.

A nonrefundable credit doing nothing is wasted credit. The carryforward turns it into a multi-year planning asset.

Where the credit went: 2026 alternatives that actually work

If you missed the 2025 deadline, the federal incentive is not entirely closed off — it's just no longer available directly to you as the homeowner. Several adjacent strategies preserve some or most of the value.

Third-party ownership (TPO): leases and PPAs

This is the option getting the most attention. Under Section 48E, commercial owners of clean energy property can still claim the 30% Investment Tax Credit on residential installations placed in service before 2028, provided construction begins by July 4, 2026. The "commercial owner" in this context is a solar leasing company. The homeowner doesn't own the system; they sign a multi-year lease or a Power Purchase Agreement (PPA) for the electricity it generates.

The economics: the leasing company captures the 30% credit and prices the lease or PPA below what an unsubsidized system would justify. The homeowner doesn't write a check for $40,000, doesn't claim a tax credit, but does pay a lower monthly bill than they would for utility power alone. Industry analysts expect TPO market share to rise significantly in 2026 as homeowners react to the loss of Section 25D.

Watch out for two things: the FEOC (Foreign Entity of Concern) component sourcing rules tighten in 2026 — at least 40% of components must come from outside designated countries — and not every installer's supply chain is ready. Ask your TPO provider for written confirmation that the system meets the FEOC content requirement for the year it's placed in service, because non-compliant systems may lose the underlying ITC and that loss often flows through to lease economics.

Prepaid TPO leases

A variation that has emerged as the post-25D era's signature product is the prepaid TPO lease: the homeowner pays the lease in a single upfront payment, the leasing company captures the ITC, and ownership transitions to the homeowner after a defined period (often six to seven years). The math typically beats a cash purchase that doesn't qualify for the credit, while preserving the option to fully own the system long-term.

State and utility incentives

State credits, rebates, and net metering policies were never tied to Section 25D and remain available. New York's NY-Sun, California's SGIP for batteries, Massachusetts' SMART program, and dozens of state-level personal income tax credits are still in force. Several states enacted backstop credits in late 2025 specifically because the federal credit was disappearing — check your state's 2026 incentive directory before assuming there's nothing left.

Section 25C for efficiency upgrades

Distinct from Section 25D and not affected the same way, Section 25C — the Energy Efficient Home Improvement Credit — covers heat pumps, heat pump water heaters, insulation, qualifying windows and doors, and electrical panel upgrades. The OBBBA also accelerated 25C's expiration, but with different cutoff rules; for 2026 work it's worth a separate look. Heat pumps in particular remain one of the higher-value home electrification investments and may still qualify for a partial federal credit depending on your installation date.

Documentation accountants will want from you

If you're working with a CPA on your 2025 return, these are the documents that turn a Section 25D claim into an audit-resistant filing:

• Itemized installer invoice broken down by equipment, labor, permits, and any add-ons
• Permission to Operate or commissioning certificate dated on or before December 31, 2025
• Manufacturer specification sheets showing equipment meets eligibility requirements (Energy Star certification for geothermal, SRCC certification for solar water heating, minimum 3 kWh capacity for batteries)
• Utility rebate statements if any rebates were paid directly to you
• Loan or financing documents if applicable, even though they don't change the credit basis
• Property tax records showing the home is yours and used as a residence

Keep this folder for at least three years after the credit is fully consumed (including via carryforward), not three years from the year of installation. The statute of limitations runs from each year a credit is claimed, so a long carryforward extends your records-retention obligation.

Common mistakes that cost the credit

The Tax Court and IRS guidance highlight a handful of recurring errors:

• Confusing payment date with placed-in-service date. A November 2025 deposit doesn't help if the panels weren't operational by year-end.
• Including ineligible items. Roof replacements, structural repairs, landscape changes around panels, and tree removal aren't qualifying costs. Only equipment integral to producing or storing energy and the labor to install it qualifies.
• Claiming on a rental property. If you don't live in the home — even part-time — you're not eligible. Pure rentals never qualified, and the OBBBA didn't change that.
• Double-dipping with utility rebates. Failing to subtract upfront utility rebates from the cost basis is one of the most common audit findings.
• Forgetting battery requirements. Batteries placed in service before 2023 only qualified if charged exclusively by solar. Standalone batteries qualifying on their own merit became eligible starting in 2023, with a 3 kWh minimum capacity.

Keep Your Energy and Tax Records Organized

Whether you're claiming a final 25D credit, tracking a multi-year carryforward, or evaluating a TPO lease, every dollar of value depends on durable records. A typical homeowner ends up holding installer invoices, utility rebate statements, PTO letters, and Form 5695 carryforward worksheets for a decade or more. Beancount.io gives you plain-text accounting that's transparent, version-controlled, and AI-ready — your home energy investment becomes a line in a ledger you actually own and can audit at any time. Get started for free and keep your most consequential tax records exactly where you can find them.