Policy and tariff

Why a lease still gets a federal credit and you do not

Two credits, two sections, two timetables. The asymmetry is going to shape what you are offered.

Updated September 2026 · Data as of Enacted public law text and IRS Notice 2025-42 read on 3 September 2026

Written by HyreSolar Research team Research and analysis

Audited by HyreSolar Research team Data audit and fact check

4 Jul 2026 the construction-start date that matters PL 119-21 § 70513(g)(5)

1.5 MW below which rooftop gets the easier test IRS Notice 2025-42 § 6

(1) or (4) are the paragraphs the leasing denial names PV is paragraph (2)

The short answer

Because they are different credits in different sections of the tax code, claimed by different people, and the 2025 budget act treated them differently. Section 25D was the homeowner's credit and it was terminated for expenditures made after 31 December 2025. Section 48E is a business investment credit, and under a lease or power purchase agreement it is the third-party owner, not you, who owns the equipment and claims it. The act did not terminate 48E on the same timetable: for solar it ends for property placed in service after 31 December 2027, and even that only bites on facilities whose construction begins after 4 July 2026. There is also a leasing restriction in the act that is very widely reported as banning the credit for solar leases. Read literally, the enacted text names solar water heating and small wind, and residential solar electric is a different paragraph. We set the text out and let you read it, because no interpretive guidance on it exists yet.

Not tax advice, and unusually so on this page

Section 48E is described here from enacted statutory text and one IRS notice. It is not tax advice, we are not accountants, and none of this is a recommendation about how to structure anything.

One section below sets out statutory text whose plain reading differs from how the provision is widely reported. We publish the text and the definitions so you can read them yourself. We do not tell you what the outcome is, because Treasury has not yet said and we are not going to pre-empt it.

Why there are two credits at all

The asymmetry looks arbitrary until you see what each credit was for.

Section 25D was a personal credit. It was claimed by an individual who made a qualifying expenditure on a dwelling they use as a residence. Its whole design assumed a homeowner buying equipment for their own home. It was terminated for expenditures made after 31 December 2025.

Section 48E is a business investment credit. It is claimed by whoever owns the generating property as a business investment.

Now apply that to a lease or a power purchase agreement. You do not buy the equipment. A company installs it on your roof, owns it, and sells you either the use of it or the electricity from it. You make no qualifying expenditure, so 25D was never the relevant credit for that arrangement in the first place. The company does make an investment, and it claims under the business provision.

So the two structures were always on different tracks. What changed in 2025 is that one track ended and the other did not, at least not on the same schedule. The practical consequence is that a homeowner-owned system on your roof now attracts no federal credit, while a third-party-owned system on the same roof can still be built with one behind it.

That is not a loophole and nobody is doing anything improper. It is two provisions with two timetables, and it is likely to change the mix of what you are offered.

The vocabulary, because the provisions are written in it

Third-party ownership (TPO): An arrangement where a company owns the system on your roof and you either lease it or buy the power from it. You are not the owner, which is precisely why the homeowner credit was never the relevant one for this structure.
Placed in service: When property is ready and available for its intended use. The business credit’s termination is keyed to this, and it is a different event from when construction begins.
Beginning of construction: A term of art with a defined test. It matters more than the placed-in-service date here, because whether the 2027 cliff applies to a facility at all turns on whether construction began before or after 4 July 2026.
Physical work test: Establishing that construction began by pointing to physical work of a significant nature, together with a continuous programme of construction. Now the sole general method for this purpose, with a small-project exception.
Five percent safe harbour: Establishing that construction began by incurring at least five percent of total cost. Restricted here, but expressly preserved for a "low output solar facility" of not more than 1.5 MW AC, which covers residential rooftop.
Domestic content: A threshold share of a project’s components that must be US-made to qualify for an increased credit. The act stepped the thresholds up: 45% from mid-2025, 50% during 2026, 55% after 2026.

The deadlines on the business credit, which are not simple

The business credit was not left untouched. It was given an end date, and the end date has a condition on it that matters more than the date itself.

The termination provides that the section does not apply to qualified property placed in service after 31 December 2027 that is part of an applicable facility, where an applicable facility is one using wind or solar energy to produce electricity.

But that amendment applies only to facilities the construction of which begins after a date twelve months from enactment. The IRS has stated that date plainly: the termination applies to wind and solar facilities the construction of which begins after 4 July 2026.

Read the two together and the structure is this. A solar facility that began construction on or before 4 July 2026 is not subject to the 2027 placed-in-service cliff. One that begins construction after that date must be placed in service by 31 December 2027 or it gets nothing.

Storage is carved out separately and entirely. The termination expressly does not apply to energy storage technology placed in service at an applicable facility, so batteries are not caught by the wind and solar cliff.

The exception that covers residential rooftop

"Beginning construction" is a term of art with a test attached, and the general rule was tightened.

For establishing that construction began before 5 July 2026, the IRS notice states that the Physical Work Test is "the sole method that a taxpayer may use for these purposes", together with a continuity requirement. That is a meaningful tightening, because the alternative five percent safe harbour had been the easier route.

Except for small projects. The notice provides a five percent safe harbour for what it calls a "low output solar facility", defined as an applicable solar facility with maximum net output not greater than 1.5 megawatts measured in alternating current. Such a facility may establish beginning of construction either by the physical work test or by the safe harbour.

A residential rooftop system is very far under 1.5 MW. So the harder test is aimed at utility-scale projects, and the arrangements behind residential leases sit in the exception.

The leasing provision, and what the enacted text actually names

The leasing provision is the part that is widely reported as banning the federal credit for solar leases. We are going to set out the text and the definitions and let you read them, for reasons we explain below.

The enacted provision says: no credit shall be determined under this section for any qualified investment with respect to "property described in paragraph (1) or (4) of section 25D(d)", applied by substituting lessee for taxpayer, if the taxpayer rents or leases such property to a third party during the taxable year.

So the question is what paragraphs (1) and (4) of section 25D(d) are. That subsection lists the qualifying expenditure types in order, and they are:

(1) qualified solar water heating property. (2) qualified solar electric property. (3) qualified fuel cell property. (4) qualified small wind energy property. (5) qualified geothermal heat pump property. (6) qualified battery storage technology.

Paragraph (1) is solar water heating. Paragraph (4) is small wind. Residential solar electric, which is photovoltaic panels, is paragraph (2), and paragraph (2) is not in the list the leasing denial names.

That is the text. We have quoted the provision and the definitions it points to, and the reader can see what they say.

Why we stop there rather than drawing the conclusion

A confident headline off the paragraph above would be easy to write, and we are not going to, for three reasons.

We found no interpretive guidance on this provision. We could not locate an IRS notice, a Treasury regulation or a committee explanation addressing it. A plain reading of enacted text is a good starting point and it is not the last word on how a tax provision operates.

Treasury guidance could still land. This is a recent provision in an area the administration has been actively issuing notices on, and guidance can clarify, narrow or extend how a section is applied.

And the stakes are asymmetric. If we tell you leased photovoltaic systems are safely outside the denial and that turns out to be wrong, we have caused real harm to somebody making a large financial decision. If we set out the text and you take it to a professional, nobody is worse off.

So the honest statement is this: the enacted text names paragraphs (1) and (4) of the definition, those paragraphs are solar water heating and small wind, and photovoltaic property is paragraph (2). What follows from that is a question for a tax professional, and it is a much better question than the one most coverage of this provision equips you to ask.

The dates on the business credit, in one place

What	Date	Provision
Act enacted	4 July 2025	Public Law 119-21
Leasing denial applies	Tax years beginning after 4 July 2025	§ 70513(c), (g)(1)
Domestic content threshold steps	45% from 16 June 2025, 50% during 2026, 55% after 31 December 2026	§ 70513(d), (g)(2)
Foreign entity material-assistance rules bite	Construction beginning after 31 December 2025	§ 70513(b)
The construction-start line for the termination	4 July 2026. Begin before this and the 2027 cliff does not apply	§ 70513(g)(5); IRS Notice 2025-42 § 1
Placed-in-service cliff for solar	31 December 2027, for facilities starting construction after 4 July 2026	§ 70513(a)
Storage	Not subject to the wind and solar termination at all	§ 70513(a), new 48E(e)(4)(C)

Public Law 119-21 § 70513 read from the enrolled text, with IRS Notice 2025-42 for the stated construction-start date and the small-project safe harbour.

The row that governs everything else is the construction-start line. The 2027 cliff is real and it is conditional, and the condition is about when construction began rather than when a system is finished.

What this means for what you get offered

You are not claiming this credit and you cannot. It is a business credit and you are not the business. But it will shape the market you are shopping in, and there are two practical consequences worth carrying.

Expect more lease and PPA proposals. When one structure carries a federal credit and the other does not, sellers move toward the one that does. That is not sinister and it does not make a lease a bad deal. It does mean the mix of what arrives at your door is being shaped by tax law rather than by what suits your roof.

And be careful about how the credit is described to you. A credit claimed by the system's owner is not a credit you receive. It may be reflected in the price you are quoted, which is a real benefit, and it is not the same thing as the 30% you might have claimed yourself under the old residential provision. If a proposal talks about "the federal credit" without saying who claims it, that is the question to ask.

The comparison that matters is unchanged by any of this: total cost to you over the term, against what you would otherwise pay for electricity. A tax credit somebody else claims belongs in that comparison only to the extent it moved your price.

Method and limitations

What was read

The enrolled text of the public law from the Government Publishing Office, for every provision quoted. IRS Notice 2025-42 read directly from the agency, for the stated construction-start date, the physical work test as the sole general method, and the low-output solar facility safe harbour. Section 25D of the United States Code, for the list of qualifying property that the leasing denial cross-references.

The limits, which matter more than usual here

No interpretive guidance on the leasing provision was located. We searched for a notice, a regulation or a committee explanation and did not find one. What is on this page is enacted text and the definitions it points to, nothing more.

We could not enumerate later legislation. The congressional site refused every request from our environment, so we cannot prove that nothing enacted after this act has amended these provisions again. This is verified as of the act and the notice; treat the absence of later change as strong but not proven.

And this is a rapidly moving area. The notice we rely on was itself issued under an executive order from July 2025. Provisions in this space have been amended, clarified and litigated repeatedly, and anything here should be checked against current guidance before it is relied on.

What we deliberately do not conclude

We do not state that leased photovoltaic systems fall outside the leasing denial. We state what the provision names, what those paragraphs are defined as, and which paragraph photovoltaic property sits in. That is the evidence, and the conclusion belongs to someone with professional responsibility for your position.

Questions

Why does a solar lease still get a federal credit when I do not?

Because they are different credits. Section 25D was a personal credit for an individual who made a qualifying expenditure on their own home, and it was terminated for expenditures made after 31 December 2025. A lease or PPA involves no qualifying expenditure by you; the third party owns the equipment and claims a business investment credit under a different section, which the 2025 act put on a later timetable.

Do I receive the credit if I lease?

No. It is claimed by whoever owns the system, which is the provider. It may be reflected in the price you are quoted, which is a genuine benefit, but it is not a credit you claim and it is not equivalent to the 30% a homeowner could once claim directly. If a proposal mentions the federal credit without saying who claims it, ask.

When does the business credit end for solar?

For property placed in service after 31 December 2027, but only for facilities whose construction begins after 4 July 2026, a date the IRS has stated explicitly. A facility that began construction on or before that date is not subject to the 2027 cliff. Energy storage is carved out of the termination entirely.

What is the "beginning of construction" test?

For this purpose the IRS notice makes the physical work test the sole general method, with a continuity requirement, which is a tightening. There is an exception for a "low output solar facility" of not more than 1.5 megawatts AC, which may also use a five percent safe harbour. Residential rooftop is far below that threshold, so the harder test is aimed at utility-scale projects.

Did the act ban the credit for solar leases?

That is how it is widely reported. The enacted text denies the credit for leased property "described in paragraph (1) or (4) of section 25D(d)". Those paragraphs are solar water heating and small wind energy property. Residential solar electric is paragraph (2). We publish the text and the definitions and stop there, because we found no interpretive guidance and this is a question for a tax professional.

Why will not you just say whether leased solar is affected?

Because a plain reading of new statutory text is a starting point rather than the last word, no Treasury or IRS guidance interpreting the provision could be found, and being wrong would cause real harm to someone making a large financial decision. Setting out the text costs you nothing and gives you a far better question to ask than the coverage does.

Does any of this affect batteries?

The wind and solar termination expressly does not apply to energy storage technology placed in service at an applicable facility, so storage is not caught by that cliff. Separate restrictions in the same act, including the foreign entity material-assistance rules, do reach storage on construction beginning after 31 December 2025.

Should I lease rather than buy because of this?

Not on this basis alone. The comparison that matters is unchanged: total cost to you over the term against what you would otherwise pay for electricity. A credit claimed by somebody else counts only to the extent it moved your price, and a lease brings its own consequences for appraised value, for selling the house and for the escalation clause you inherit.

Written and audited by

HyreSolar Research

Primary-source research, data analysis and fact checking

We are a research desk, not a sales floor. We read the statute, the tariff, the code section, the federal filing or the manufacturer data sheet ourselves, and we publish the figure with the document it came from and the date we retrieved it. Where a number cannot be traced to a primary source, we publish the shorter page and say what we could not verify. That rule has cost us whole sections, and it is the reason the rest can be trusted.

160: primary sources read and cited
220: figures with a retrieval date
115: federal and state government sources
66: researched pages published

How this desk works

Primary sources only. Statutes from the legislature’s own publishing system, federal data from the agency that collects it, code text from the adopted edition, manufacturer claims from the data sheet. We do not cite an article that cites a source; we go and read the source.
Every figure carries its provenance. A named document and the date we retrieved it, so you can check it and so you know how old it is. Retrieval dates are not decoration: an EIA rate from May is a different fact from an EIA rate from August.
We publish what we could not verify. Every research page carries a section naming the things we tried to establish and could not, and why. A paywalled standard, a state website that refused the request, a manufacturer that publishes no figure at all.
We separate measurement from modelling from our own reasoning, and label which is which on the page. A laboratory measurement, an assumption inside a modelling tool and our own inference are three different kinds of claim and they are never presented as one.
We do not sell solar, and we take no payment for placement, ranking or a favourable mention. Nobody buys a position on this site.

Data as of Enacted public law text and IRS Notice 2025-42 read on 3 September 2026. Authorship on this site is organisational: the analysis belongs to the desk rather than to a named individual, and we do not publish credentials we do not hold. Our editorial policy sets out how we source, date and correct what we publish.

Sources & retrieval dates

Public Law 119-21, § 70513, Termination and Restrictions on Clean Electricity Investment Credit — Enacted 4 July 2025, read from the enrolled text at the Government Publishing Office. Source for the placed-in-service termination after 31 December 2027 for applicable wind and solar facilities, the provision applying that termination only to facilities whose construction begins twelve months after enactment, the express carve-out for energy storage technology, the leasing denial and the paragraphs of section 25D(d) it names, the foreign entity material-assistance rules on construction beginning after 31 December 2025, and the domestic content percentage steps. Retrieved 3 September 2026.
IRS Notice 2025-42 — Source for the statement that the credit termination applies to applicable wind and solar facilities the construction of which begins after 4 July 2026, for the physical work test being the sole method for establishing beginning of construction subject to the notice’s exceptions, and for the five percent safe harbour available to a low output solar facility with maximum net output not greater than 1.5 megawatts AC. Retrieved 3 September 2026.
26 U.S.C. § 25D(d), qualifying expenditures — United States Code, 2024 edition, from the Government Publishing Office. The list the leasing denial cross-references, in statutory order: (1) qualified solar water heating property, (2) qualified solar electric property, (3) qualified fuel cell property, (4) qualified small wind energy property, (5) qualified geothermal heat pump property, (6) qualified battery storage technology. Retrieved 3 September 2026.

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