Applying the Federal Investment Tax Credit to North Carolina Solar Projects
The federal Investment Tax Credit (ITC) is one of the most significant financial mechanisms available to North Carolina property owners and businesses pursuing solar energy installations. This page covers how the ITC functions at the federal level, how it interacts with North Carolina's state tax landscape, the scenarios in which it applies, and the structural boundaries that determine eligibility. Understanding these distinctions is essential before making capital commitments on a solar project in the state.
Definition and scope
The Investment Tax Credit for solar energy is authorized under 26 U.S.C. § 48 (commercial) and § 25D (residential) of the Internal Revenue Code. The Inflation Reduction Act of 2022 (Public Law 117-169) extended and restructured the credit, setting the base residential and commercial ITC rate at 30 percent of eligible system costs for projects placed in service through 2032 (IRS Notice 2023-29).
Scope of this page: Coverage is limited to how the federal ITC applies to solar projects physically located in North Carolina. State-level tax treatment — including North Carolina's solar property tax exemption and the North Carolina solar sales tax exemption — is addressed separately and is not the subject of this analysis. Projects in other states, federal territories, or offshore installations fall outside this page's coverage. The ITC is a federal instrument administered by the Internal Revenue Service (IRS) and does not vary by state; however, how it layers with North Carolina-specific incentives affects net project economics.
How it works
The ITC reduces a taxpayer's federal income tax liability dollar-for-dollar by a percentage of the qualified solar property's cost basis. It is not a deduction — it offsets tax owed directly. For residential systems under § 25D, the credit flows to the individual homeowner. For commercial and business systems under § 48, the credit flows to the entity that owns the system.
Eligible cost basis includes:
- Battery storage systems that are charged exclusively by the solar array at installation (standalone storage added later uses separate rules under the Inflation Reduction Act)
Soft costs such as financing fees, extended warranties, and operational insurance premiums are generally excluded from the eligible basis (IRS Form 5695 Instructions for residential; IRS Form 3468 for commercial).
The credit is non-refundable for residential filers, meaning it can reduce tax liability to zero but does not generate a cash refund. Unused residential credit under § 25D can carry forward one year. Commercial credits under § 48 carry forward 20 years under standard tax rules.
For a conceptual grounding in how solar systems generate the energy value that justifies these tax incentives, see How North Carolina Solar Energy Systems Work.
Common scenarios
Scenario 1 — Residential homeowner, host-owned system: A homeowner in Wake County installs a 10 kW rooftop PV system with a total installed cost of $28,000. At the 30 percent rate, the ITC yields a $8,400 credit against federal income tax. If the homeowner's tax liability in the installation year is only $6,000, the remaining $2,400 carries forward to the following tax year. The homeowner, not a third-party financier, must own the system outright; leased systems do not qualify the homeowner for the credit.
Scenario 2 — Commercial building, C-corporation owner: A commercial property owner in Mecklenburg County installs a 150 kW rooftop array on a warehouse. Total installed cost is $285,000. The § 48 ITC at 30 percent produces a $85,500 credit. The corporation can apply this against its federal income tax liability and carry any excess forward for up to 20 years.
Scenario 3 — Agricultural solar with bonus credits: A farm in Duplin County may qualify for the ITC's Energy Community bonus (an additional 10 percentage points) if the installation is located in a qualifying census tract or brownfield site, per IRS Notice 2023-29. Agricultural solar installations present unique structural and land-use considerations covered at Agricultural Solar in North Carolina.
Scenario 4 — Third-party ownership (lease/PPA): When a third-party solar company owns the system and sells power to the property owner via a Power Purchase Agreement (PPA) or lease, the installer/owner entity — not the property owner — claims the § 48 ITC. The property owner receives no direct ITC benefit. This ownership distinction is a primary analytical boundary for evaluating solar financing options in North Carolina.
Decision boundaries
The following structured boundaries determine whether and how the ITC applies to a given North Carolina solar project:
- System ownership: Only the legal owner of the installed equipment can claim the credit. Lease and PPA arrangements transfer the credit to the system owner.
- Placed-in-service date: The system must be operational (interconnected and producing energy) within the tax year in which the credit is claimed. Partial installations do not qualify.
- New vs. existing equipment: The ITC applies to original installations. Equipment that was previously in service at another location generally does not qualify for a fresh credit claim.
- Storage attachment rule: Battery storage qualifies under the 30 percent ITC only if 100 percent charged by the co-located solar array at initial installation for residential projects. Separately sited or grid-charged storage follows different IRS rules. See battery storage integration in North Carolina for system-design implications.
- Business use percentage: For mixed personal/business properties, only the portion of system cost attributable to business use is eligible under § 48.
- Prevailing wage and apprenticeship requirements: Projects with a total capacity exceeding 1 megawatt (AC) must satisfy the prevailing wage and apprenticeship conditions introduced by the Inflation Reduction Act to access the full 30 percent rate; those not meeting these labor standards fall back to a 6 percent base rate (IRS Notice 2022-61).
The regulatory context for North Carolina solar energy systems provides additional framing on how federal and state rules interact at the project level. The broader North Carolina solar landscape — including how the ITC stacks with the North Carolina solar property tax exemption and other state-level programs — is catalogued at the North Carolina Solar Authority home.
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References
- 26 U.S.C. § 48 (commercial) and § 25D (residential)
- IRS Notice 2023-29
- IRS Form 5695 Instructions
- IRS Notice 2022-61