Clean energy incentives phased down and restricted by new foreign entity rules in sweeping tax and spending bill
Earlier today, the House passed President Trump's sweeping tax and spending legislation after overcoming resistance from some Republican members. A revised version of the legislation narrowly passed the Senate on July 1 in a reconciliation package, with Vice President Vance casting the tiebreaking vote. The final legislation will now be sent to the President for signing.
Clean energy tax incentives fared little better in the final version than in the prior version. However, the final version allows solar and wind projects to claim the full tax credits if they either begin construction within 12 months after enactment or are placed in service by December 31, 2027, but otherwise terminates them completely for new projects. Treatment of other clean energy technologies such as geothermal, hydroelectric, nuclear, hydrogen and fuel cells were saved from the chopping block in the final version.
Significantly, the final bill does not include the excise tax contained in the earlier Senate version that would have applied to facilities receiving assistance from prohibited foreign entities, which include businesses or organizations with strong links to China. Senate Republicans agreed to remove the excise tax in order to try and arrive at a version of the bill that could win approval in both the House and Senate.
In the Senate, Republicans Susan Collins of Maine, Rand Paul of Kentucky, and Thom Tillis of North Carolina all voted against the bill. Tillis stood against the bill over concerns for cuts to Medicaid and food assistance programs. Senator Lisa Murkowski of Alaska, who was thought to be another holdout on the bill, ended up voting in favor of the final Senate version. All Democrats in the Senate voted against it. In the House, Republicans Thomas Massie of Kentucky and Brian Fitzpatrick of Pennsylvania both voted against the bill. All Democrats in the House voted against it.
The final changes to the more significant energy tax credits include:
Solar and Wind Projects. Solar and wind projects that begin construction within one year after the date of enactment will qualify for the current clean electricity investment tax credit (ITC) (Section 48E) and clean electricity production tax credit (PTC) (Section 45Y) established under the Inflation Reduction Act of 2022 (IRA). Wind and solar projects beginning construction after that time, however, will have to be placed in service by the end of 2027 to qualify for the credits. Energy storage technology built at solar and wind facilities is not subject to these deadlines.
Batteries and Other Energy Technologies. Batteries (including, as noted, batteries at solar and wind projects) and electric generating technologies other than solar and wind – such as geothermal, hydropower, and nuclear—remain eligible for 100% of the current tax credits if the project begins construction by the end of 2033, after which a three-year phase-out begins before the credits expire in 2036. A separate post on how these clean energy technologies fared in the final Senate bill is forthcoming.
Domestic Content Percentages. By way of a correction, the domestic content percentages for the clean electricity ITC have been revised to match the domestic content percentages for the clean electricity PTC.
Residential Solar and Wind Projects. The final bill retains the prohibition on the clean electricity ITC and PTC for solar and wind facilities that are rented or leased to homeowners.
Foreign Entity Involvement. The prohibited foreign entity provisions are largely unchanged from the prior Senate version. For any project beginning construction after 2025, tax credits will not be available for taxpayers that are prohibited foreign entities or if construction includes any material assistance from a "prohibited foreign entity." "Material assistance" is measured by a cost ratio that measures the percentage of manufactured products and components incorporated into the project that do not involve prohibited foreign entities. In addition, the final bill retains the statute of limitations extension to 6 years and new penalties for errors in determining whether a project received material assistance from a prohibited foreign entity and for certain certification failures relating to whether prohibited foreign entities were involved in the manufacturing of property or components. Beginning two years after the bill is signed into law, the ITC will be subject to recapture if certain payments are made to a specified foreign entity during the 10-year period after the project is placed in service.
Transferability of ITC and PTC. The final bill generally retains transferability of credits until their repeal under the IRA (Section 6418). However, tax credits cannot be transferred to a "specified foreign entity." Projects will still need to satisfy the beginning of construction and placed-in-service deadlines described above to avoid phase-out or elimination of the ITC or PTC.
Advanced Manufacturing Production Credits. The final bill adds metallurgical coal, which is mainly exported to countries like India and Brazil for use in making steel, to the list of appliable critical materials eligible for the advanced manufacturing production credit (Section 45X). The Section 45X credit is eliminated for wind energy components produced and sold after 2027 and begins a three-year phaseout for the production of critical minerals (other than metallurgical coal) in 2031. The credit for metallurgical coal terminates at the end of 2029. Beginning in 2026, no credit is available to a taxpayer that is a prohibited foreign entity nor is any credit allowed for any component that is the subject of material assistance from a prohibited foreign entity.
Commercial Clean Vehicles. The tax credit for qualified commercial clean vehicles (Section 45W)—like the personal clean vehicle credit (Section 30D)—is eliminated for all such vehicles acquired after September 30, 2025, as compared to the prior Senate version, which allowed the tax credit for commercial vehicles acquired within 6 months after the bill is signed into law. The critical mineral and battery component restrictions for smaller commercial vehicles were stripped from the bill.
Charging Stations. Tax credits for alternative fuel vehicle refueling property (Section 30C) are eliminated for property placed in service after December 31, 2025, as compared to the prior bill's allowance for property placed in service up to one year after the bill is signed into law.
Clean Hydrogen Production Credit. The bill extends the Section 45V clean hydrogen production credit to include any project that begins construction by January 1, 2028, as compared to the December 31, 2025 deadline contained in the prior version.
We will continue to update this summary with greater detail on the final legislation after its expected enactment.
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