Battery energy storage systems (BESS) continue to represent a significant federal tax credit opportunity, even as recent legislation accelerated the phaseout of incentives for certain wind, solar, and other clean energy technologies. Although the One, Big, Beautiful Bill Act (OBBBA), enacted in July 2025, changed the credit landscape for applicable wind and solar facilities, energy storage technologies aren’t included in the list of technologies that have the accelerated Dec. 31, 2027, termination rule under Section 48E. As a result, BESS projects may continue to qualify for the investment tax credit (ITC) under the general Section 48E framework. However, developers, owners, tax-exempt entities, utilities, and investors should carefully evaluate domestic content and foreign entity of concern (FEOC) rules, which may affect both credit value and eligibility.
To understand why this continued credit availability matters, it’s helpful to consider the expanding role BESS plays across a range of energy and resiliency applications.
Why battery energy storage systems (BESS) matter now
BESS generally refers to a battery energy storage system that stores electricity for later use. These systems can support a broad range of business and public-sector needs, including:
- Grid-scale storage to help balance supply and demand and support grid reliability.
- Standalone storage projects that charge from the grid and discharge when power is needed or economically valuable.
- Co-located renewable projects, where BESS is installed with solar or wind to store generated electricity and improve dispatch flexibility.
- Backup power for data centers, manufacturers, healthcare facilities, schools, and other critical-load users.
While BESS is becoming an attractive investment for developers, businesses, investors, and utilities, tax-exempt entities may also benefit from BESS incentives through elective pay. This is becoming increasingly common for public sector organizations such as municipalities, government agencies, colleges and universities, and other entities that historically could not directly monetize federal tax credits. Demand for BESS is also increasing among utilities, electric cooperatives, and other power providers seeking to improve grid reliability and energy resiliency.
Another key planning point is that BESS doesn’t need to be paired with solar or wind to qualify for the ITC. Section 48E provides a credit for qualified investment in energy storage technology, which allows stand-alone storage or combined storage projects to qualify if the statutory requirements are met.
Given these varied applications, the next question for developers and investors is whether BESS projects still qualify for meaningful federal credit support despite legislative changes.
Battery energy storage systems (BESS) ITC availability after OBBBA
The OBBBA changed the credit landscape for many clean energy projects, particularly wind and solar. Under Section 48E, the accelerated termination rule generally disallows the credit for qualified property placed in service after Dec. 31, 2027, if the property is part of an applicable wind or solar facility that began construction after July 4, 2026.
That accelerated termination rule doesn’t apply to energy storage technology, including storage placed in service at a wind or solar facility. Instead, BESS remains subject to the general IRC Section 48E phaseout rules.
For energy storage technology, the general IRC Section 48E phaseout begins after the later of 2032 or the year in which the IRS determines that annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of 2022 levels. The available credit percentage then phases down for projects beginning construction in later years.
Under IRC Section 48E, energy storage technology generally qualifies for a 6% base credit. A 30% credit rate may be available for projects that satisfy prevailing wage and apprenticeship requirements or if the BESS has a maximum electrical output of less than one megawatt. For this purpose, megawatts measure how quickly the system can discharge electricity — not how much energy it can store, which is measured in megawatt-hours. Additional value may be available through domestic content and energy community bonus credits.
Continued eligibility under IRC Section 48E, however, is only part of the analysis because the ultimate credit value may still depend on satisfying additional sourcing and compliance requirements.
Opportunity and risk: Domestic content and FEOC rules
Although BESS remains eligible for the ITC, the compliance rules affect projects in different ways. Domestic content may increase the available credit, while FEOC restrictions may eliminate the credit entirely. Developers, owners, tax-exempt entities, and investors should evaluate both sets of rules early in the project life cycle.
The domestic content rules may increase the available credit by 10% of the project basis (or 2% if the prevailing wage or one megawatt threshold isn’t achieved). This bonus credit is available if the project satisfies applicable U.S. sourcing requirements. For IRC Section 48E qualified investment in energy storage technology, the threshold of domestic content:
- Starts at 40% for projects beginning before June 16, 2025.
- Increases to 45% on or after June 16, 2025, and before Jan. 1, 2026.
- Increases to 50% during 2026.
- And finally, increases to 55% after Dec. 31, 2026.
Structural steel and iron must be 100% U.S.-sourced. In practice, meeting these rules requires more than general vendor representations. Project owners should expect to obtain and retain documentation supporting the sourcing, classification, and cost treatment of relevant components.
The FEOC and prohibited foreign entity rules may be even more consequential because they can disallow the credit entirely. For tax years beginning after July 4, 2025, no IRC Section 48E credit is available if the taxpayer is a specified foreign entity or certain foreign-influenced entity. In addition, energy storage technology that begins construction after Dec. 31, 2025, won’t qualify if its construction involves material assistance from a prohibited foreign entity.
For BESS, material assistance is measured using the material assistance cost ratio (MACR), which has varied thresholds depending on the year construction began.
- For construction beginning in 2026: 55%
- For construction beginning in 2027: 60%
- For construction beginning in 2028: 65%
- For construction beginning in 2029: 70%
For projects beginning construction after Dec. 31, 2029: 75%
Applying this test generally requires component-level cost tracking, manufacturer and supplier diligence, and documentation demonstrating whether manufactured products or components were mined, produced, or manufactured by a prohibited foreign entity.
Because these rules affect both the amount of the credit and whether it’s available at all, BESS sponsors should address them as part of project planning rather than after key development decisions have already been made.
Strategic planning for battery energy storage systems (BESS) projects
Organizations considering BESS projects should evaluate the ITC early in the development process. Key planning steps include analyzing overall credit eligibility, determining whether the project should be treated as a single energy property or facility, identifying the relevant beginning of construction and placed in service milestones, modeling the applicable credit rate, and evaluating whether bonus credits such as domestic content or energy community may be available.
Supply chain diligence should begin before procurement decisions are finalized. Contract terms should require suppliers and contractors to provide the documentation needed to support domestic content, FEOC, and prohibited foreign entity analyses. In many cases, project owners discover that obtaining the necessary supplier certifications, cost data, and manufacturing information becomes significantly more difficult after procurement decisions have been finalized. Addressing these requirements early can help avoid documentation challenges and potential credit risks later in the project life cycle.
Top five questions for developers to ask BESS equipment vendors
- Can you provide component-level cost, manufacturer, and country-of-manufacture information for the battery cells, modules, inverters, controls, and other major components?
- Are any manufacturers, suppliers, or upstream entities considered prohibited foreign entities, and will you certify compliance with applicable restrictions?
- Will you provide the documentation needed to support the project’s domestic content analysis and material assistance cost ratio?
- Will you notify us and obtain approval before making supplier, manufacturing location, or component substitutions that could affect tax credit eligibility?
- Will the contract require timely delivery and retention of supporting records and provide audit rights and remedies if vendor information is inaccurate or the equipment fails agreed-upon tax credit requirements?
Planning ahead for battery energy storage systems (BESS) projects
BESS projects continue to represent one of the most significant federal energy tax credit opportunities available today. While recent legislation accelerated the phaseout of incentives for certain wind and solar projects, stand-alone and co-located BESS projects may still qualify for valuable investment tax credits under IRC Section 48E. However, maximizing those benefits requires more than simply constructing a qualifying project.
Organizations should proactively evaluate project structure, prevailing wage and apprenticeship requirements, domestic content opportunities, and evolving FEOC restrictions early in the development process. With proper planning and documentation, developers, utilities, businesses, tax-exempt entities, and investors can position BESS projects to capture meaningful tax incentives while avoiding costly compliance issues. Our energy tax credit specialists can help organizations navigate these complex requirements and develop a strategy to maximize available incentives.
