Did you install solar before Dec 31, 2025? Claim your §25D credit before it's gone

What qualifies for the §25D credit

Per IRC §25D(a)–(d), the Residential Clean Energy Credit equals 30% of qualified expenditures for property placed in service before January 1, 2026. Qualifying property includes:

• Solar photovoltaic panels— the primary qualifying property for most residential solar filers; all major manufacturers’ monocrystalline and polycrystalline panel products qualify
• Battery storage— eligible if the battery storage system has a capacity of at least 3 kWh (per IRS Notice 2023-29, the 3 kWh minimum applies to the battery’s nameplate capacity); the battery qualifies whether installed with solar panels or as a standalone system placed in service by December 31, 2025
• Solar water heaters — qualifying solar water heating property must meet the criteria of the Solar Rating and Certification Corporation or a comparable entity; must be certified for use in heating water for residential use
• Small wind turbines — qualifying small wind turbines used to generate electricity for residential use
• Geothermal heat pumps — qualified geothermal heat pump property meeting Energy Star requirements in effect for the taxable year

The credit is calculated on the total qualified expenditures including: equipment cost, installation labor (contractor and subcontractor charges), permitting fees, and sales tax paid on qualifying equipment. The credit does notapply to: roof repair or replacement costs (beyond what is structurally necessary to support the solar panels), structural improvements to the home unrelated to the solar installation, landscaping changes, or extended warranty costs beyond the manufacturer’s standard warranty.

Important clarification on the credit rate: the IRA of 2022 raised the §25D credit rate to 30% (from the prior 26%) for systems placed in service on or after January 1, 2022. It was scheduled to step down to 26% for 2033 and 22% for 2034 before expiring. OBBBA did not retroactively change the 30% rate for qualifying 2025 installations. If your system was placed in service in 2025, the credit rate is 30%.

What “placed in service” means — and why it matters more than the contract date

The IRS defines “placed in service” for §25D purposes as the date the property is installed and ready for use in its intended function. For a solar panel installation, this means the date the system is operational and connected to the home’s electrical system (and the grid, if grid-tied). The IRS does not use the contract date, the deposit date, or the date you made your final payment — it uses the installation completion date.

This creates important timing distinctions:

• Signed contract in October 2025, installation completed December 15, 2025: qualifies. Placed in service date is December 15, 2025, within the §25D eligibility window.
• Signed contract in November 2025, panels installed December 28, 2025, utility interconnection completed January 5, 2026: likely does not qualify. Per IRS Publication 946 guidance on placed-in-service dates, a grid-tied system is generally placed in service when the utility completes interconnection and the system can export to the grid. If interconnection completed after December 31, 2025, the IRS may treat the placed-in-service date as 2026. This is a gray area — consult a CPA or Enrolled Agent who has reviewed your specific interconnection documentation.
• Off-grid system installed by December 31, 2025: qualifies when the system is operational (inverter powered, panels charging batteries) even without utility interconnection.

Document your placed-in-service date carefully. Ask your installer for: (1) the installation completion certificate or commissioning report with the date the system was activated; (2) the utility interconnection approval letter with its date; (3) the inspection certificate and permit close-out date from your local jurisdiction. In the event of an IRS audit, these documents substantiate your claimed placed-in-service date.

IRS Form 5695: how to claim the credit, line by line

The §25D credit is claimed on IRS Form 5695 (Residential Energy Credits). The 2025 version of Form 5695 has two parts: Part I covers the Residential Clean Energy Credit (§25D) and Part II covers the Energy Efficient Home Improvement Credit (§25C — a separate credit for energy efficiency improvements like heat pumps, insulation, and windows; not the same as solar). You need Part I for solar.

Form 5695 Part I — Residential Clean Energy Credit (§25D)

Line 1:   Qualified solar electric property costs (solar panels + installation)
           Enter total cost including labor, permitting, sales tax

Line 2:   Qualified solar water heating costs (if applicable)

Line 3:   Qualified wind energy property costs (if applicable)

Line 4:   Qualified geothermal heat pump property costs (if applicable)

Line 5:   Qualified battery storage technology costs (if applicable; 3kWh min)

Line 6:   Total qualified costs (sum of lines 1–5)

Line 7:   Multiply Line 6 × 30% — this is your §25D credit before limitation

Line 8:   Carryforward from prior year (if any from a prior return)

Line 9:   Add Lines 7 + 8

[Lines 10–13 apply limitation based on your tax liability]

Line 14:  §25D credit allowable this year — flows to Schedule 3, Line 5

IMPORTANT: §25D HAS NO CARRYFORWARD PROVISION.
If Line 9 exceeds your total tax liability, you claim up to your tax
liability in 2025, and the remainder is permanently lost.
This is different from the §25C energy efficiency credit, which DOES
have a carryforward. Do not confuse the two.

After completing Form 5695, the credit amount from Line 14 flows to Schedule 3 (Additional Credits and Payments), Line 5, and from there to Form 1040, Line 20. It reduces your federal income tax owed dollar-for-dollar. If your total federal tax liability is less than the credit amount, the credit is limited to your tax liability — the remainder cannot be carried forward to 2026 and is permanently forfeited.

The nonrefundable, no-carryforward rule: why this is different from most tax credits

§25D is a nonrefundable credit — it can reduce your federal tax liability to zero but cannot generate a refund if the credit exceeds your liability. More critically, unlike the §48C manufacturing investment credit or the §25C energy efficiency credit (which have carryforward provisions), §25D has no carryforward. Under the statutory text of IRC §25D as amended, any unused §25D credit for a taxable year beginning after December 31, 2025 cannot be carried to a subsequent year.

For 2025 filers: if your 2025 federal income tax liability before credits is $12,000 and your §25D credit is $9,000, you use $9,000 of credits and owe $3,000 in federal tax — the credit is fully used. If your 2025 tax liability is $6,000 and your §25D credit is $9,000, you use $6,000 of credit (reducing your liability to zero), and the remaining $3,000 of credit is permanently lost. You cannot apply it to your 2026 return.

This no-carryforward rule is a significant planning consideration for homeowners with moderate income or substantial withholding who may have already reduced their effective tax liability through other credits (child tax credit, business deductions, education credits). Before closing on a solar installation in late 2025, consult a CPA or Enrolled Agent to estimate your 2025 tax liability and confirm whether your full §25D credit is usable in the year of installation.

§25D no-carryforward example

System cost:              $28,000 gross
§25D credit (30%):        $8,400

2025 tax liability:       $5,500 (after all other credits)
§25D credit used:         $5,500 (limited to tax liability)
Credit permanently lost:  $2,900

After-tax system cost with partial credit:
  $28,000 - $5,500 = $22,500 (not the $19,600 expected at full credit)

Lesson: If your 2025 tax liability is lower than your expected §25D credit,
discuss timing with your CPA before finalizing installation.

Five common mistakes to avoid on Form 5695

1. Claiming the credit on a leased system. If you leased your solar panels rather than buying them, you do not own the equipment. Under §25D, only the taxpayer who owns the qualifying property and uses it in their principal residence qualifies for the credit. Your installer (the system owner) claims the credit — specifically, they claim the commercial §48E credit applicable to their ownership. Homeowners who lease do not file Form 5695 for the leased panels.
2. Including non-qualifying costs in Line 1. Roof repair or replacement, electrical panel upgrades unrelated to the solar installation, landscaping, extended warranty premiums, and battery monitoring subscription fees are not qualified §25D expenditures. Include only: equipment cost, installation labor, permits, and applicable sales tax on qualifying equipment.
3. Confusing §25D with §25C. §25C is the Energy Efficient Home Improvement Credit — a separate credit for insulation, heat pumps, windows, and doors. §25C has a 30% credit rate (capped at $1,200/yr for most improvements, $2,000 for heat pumps), a carryforward provision, and annual reset. Solar panels go on Form 5695 Part I (§25D), not Part II (§25C). They are completely separate credits with different rules.
4. Using the wrong placed-in-service date. As discussed above, the placed-in-service date is the installation completion date (or utility interconnection date for grid-tied systems), not the contract date, deposit date, or delivery date. Filing with the wrong date — particularly claiming a 2026 installation on a 2025 return — is factually incorrect and may trigger an IRS inquiry.
5. Forgetting to reduce your home’s basis. Per IRC §25D(f), the basis of your home is reduced by the amount of the §25D credit claimed. This matters when you sell: a higher adjusted basis reduces your taxable capital gain. If you paid $28,000 for solar and claimed an $8,400 credit, your home’s basis increases by $28,000 but is then reduced by $8,400 — net basis addition of $19,600. Track this in your home’s cost basis records.

Installing solar in 2026? Here is what replaces §25D

If you are considering a new solar installation in 2026, §25D is no longer available for residential homeowners. The surviving financial case rests on state incentives — which remain rich in Massachusetts, New York, New Jersey, Maryland, Colorado, South Carolina, Hawaii, and other high-incentive states — plus the continued decline in hardware costs to a national median of $3.05/watt (NREL Tracking the Sun 2024).

Per Jigar Shah, DOE Loan Programs Office Director (DOE, 2025): the payback period in good solar markets is 6–9 years even without the federal credit, supported by state incentive stacking and falling hardware costs. Per Andrew Sendy, SolarReviews Founder (SolarReviews, 2024): in top-incentive states, the combined value of state income tax credits, SREC programs, property tax exemptions, and sales tax exemptions can equal or exceed the value of the old §25D credit for many homeowners.

Read the State Solar Incentives in 2026 guide for the complete state-by-state incentive map. Use the State Solar Incentive Stacker to compute your specific net effective cost after all applicable state-level programs.