Rolling back renewable energy tax credits: Senate passes One Big Beautiful Bill

On July 1, 2025, the Senate passed One Big Beautiful Bill (OBBB) in a 51-50 vote, with Vice President J.D. Vance casting a tiebreaker vote. Although the House of Representatives previously passed its own version of OBBB (see our previous Alert for coverage of the House version), both chambers of Congress needed to pass identical bills before sending the bill to President Trump for signature. After a long night of deliberations among House Republicans, the House passed the Senate’s version of the OBBB on July 3, 2025. The passage of the OBBB by the both the Senate and the House accomplishes the Republican’s stated goal of having the OBBB on President Trump’s desk for signature by July 4, 2025, and the President is expected to sign the bill into law by that date. Much like earlier iterations of the bill, the final OBBB makes significant changes to many energy tax credits created or expanded by the Inflation Reduction Act of 2022. The OBBB also includes many provisions that impose significant burdens on a taxpayer’s ability to qualify for credits with respect to projects involving certain foreign entities of concern.

Certain Changes to Clean Energy Credits Under Sections 45Y and 48E

Taxpayers generally may claim the section 45Y production tax credit for electricity produced and sold by a qualifying facility. Alternatively, taxpayers generally may claim the section 48E investment tax credit for qualified investments in a qualified facility or energy storage technology. For these purposes, in general, a “qualified facility” is a facility that is determined to have greenhouse gas emissions of less than zero, which generally includes facilities that generate electricity using wind or solar energy. 

For both wind and solar facilities and other types of facilities, the sections 45Y and 48E credits begin phasing out for projects beginning construction during the second calendar year following the later of (i) 2032 or (ii) the calendar year after domestic greenhouse gas emissions from the production of electricity are 25 percent of the amount emitted in 2022 (25 percent GHG Phaseout). 

For purposes of the domestic content rules under section 48E, under law prior to enactment of the OBBB, the “adjusted percentage” level that applies in determining whether manufactured products included in a facility are produced in the United States are based on references to sections 48 and 45, which references result in the adjusted percentage being fixed at 40% (or 20% in the case of offshore wind facilities). In contrast, under section 45Y, the applicable adjusted percentage increases over time depending on when a facility is considered to begin construction.

Changes under the OBBB

• For facilities other than wind or solar, the section 45Y and 48E credits generally phase out in the same manner as before the OBBB, except that the OBBB eliminates the 25 percent GHG Phaseout. In other words, under the OBBB, the credits begin to phase out for facilities which begin construction during the second calendar year following 2032. 
• Under the OBBB, wind and solar facilities are subject to an accelerated phase out as compared to the law before the OBBB. More specifically, under the OBBB, credits are not allowed for a wind or solar facility that is placed in service after December 31, 2027; however, the December 31, 2027, placed-in-service deadline applies only to wind or solar facilities that begin construction after the date which is twelve months after the date of enactment of OBBB. Accordingly, to be eligible for section 45Y or 48E credits under the OBBB, a wind or solar facility must either (i) begin construction on or before the date that is twelve months after the date of enactment of the OBBB, or (ii) be placed in service on or before December 31, 2027.
• For purposes of the domestic content rules under section 48E, the OBBB updates the “adjusted percentage” levels that apply in determining whether manufactured products included in a facility are produced in the United States, based on when the facility is considered to begin construction. Under the OBBB, facilities that began construction prior to June 16, 2025, have an adjusted percentage of 40 percent; facilities that begin construction on or after June 16, 2025, and prior to January 1, 2026 have an adjusted percentage of 45 percent; facilities that begin construction during 2026 have an adjusted percentage of 50 percent; and facilities that begin construction in 2027 and beyond have an adjusted percentage of 55 percent. This change applies on or after June 16, 2025.
• For purposes of section 45Y and section 48E, no credit would be allowed for residential solar water heating property or small wind energy property if the taxpayer/owner rents or leases such property to a third party. This change applies to taxable years beginning after the date of enactment of the OBBB.
• The OBBB makes the section 48E credit available for qualified fuel cell property at a fixed 30 percent credit percentage for property which begins construction after December 31, 2025.
• For purposes of section 45Y, but not for purposes of section 48E, the OBBB adds a new type of energy community eligible for the 10% energy community adder that applies to advanced nuclear facilities that are placed in service in metropolitan statistical areas having employment related to the advancement of nuclear power. This change applies to taxable years beginning after the date of enactment of the OBBB.

New Restrictions Related to “Prohibited Foreign Entities”

Definitions

• The OBBB introduces the concept of “prohibited foreign entities” in new section 7701(a)(51). Prohibited foreign entities are ineligible for the energy tax credits, and taxpayers receiving material assistance from such entities are ineligible for certain credits. Additionally, taxpayers are prohibited from making an election under section 6418 to transfer certain credits to specified foreign entities. The concept targets entities associated with jurisdictions that the United States considers adversarial, primarily China, Russia, Iran, and North Korea, and prevent these entities from receiving tax benefits in the US. 
• The OBBB defines prohibited foreign entity as a “specified foreign entity” or a “foreign influenced entity.”
• The definition of specified foreign entity generally includes terrorist organizations, specially designated nationals, organizations found to be engaging in conduct detrimental to the interests of the United States, Chinese military companies, and foreign-controlled entities. Foreign-controlled entities are generally the governments and entities associated with the governments of China, Russia, Iran, and North Korea. These definitions cite several other statutes, some of which are based on designations that are made or updated by the executive branch. Because of this, the list of specified foreign entities may change.
• A foreign influenced entity is generally one in which a specified foreign entity can appoint an officer or board member of such entity, a single specified foreign entity owns at least 25 percent of such entity, one or more specified foreign entities own at least 40 percent of such entity, or at least 15 percent of the debt of such entity has been issued to one or more specified foreign entities. An entity may also be a foreign influenced entity if it makes payments to a specified foreign entity subject to an agreement and under such agreement the specified foreign entity may exercise “effective control” over a facility or energy storage technology of the taxpayer. Effective control is generally the unrestricted contractual right to make key choices with respect to the production or activities of the facility or energy storage technology. 

Material Assistance from a Prohibited Foreign Entity 

• For certain energy tax credits (the section 45Y credit, the section 48E credit, and the section 45X credit), taxpayers who receive “material assistance from a prohibited foreign entity” are ineligible for credits.
• A prohibited foreign entity is considered to provide assistance to a project when the prohibited foreign entity supplies manufactured products (including components) to such project.
• Whether a taxpayer received material assistance from a prohibited foreign entity is an objective test determined by comparing the “material assistance cost ratio” to a defined threshold percentage. If the material assistance cost ratio is less than the threshold percentage, the taxpayer has received material assistance from a prohibited foreign entity.
• The material assistance cost ratio is generally calculated by subtracting the total direct costs to a taxpayer attributable to all products from a prohibited foreign entity from the total direct construction costs of the project. This number is then divided by the total direct construction costs.
• The OBBB has threshold percentages differentiated by types of property. By way of example, the table below shows the threshold percentages for qualified facilities.

Threshold Percentage for Qualified Facilities:

• OBBB amends section 50 to allow for 100 percent recapture of the section 48E credit if a “specified taxpayer” makes an applicable payment before the close of the 10-year period beginning on the date the taxpayer placed in service investment credit property. An applicable payment is any payment described in the effective control provisions. A specified taxpayer is a taxpayer who has claimed a section 48E credit for any taxable year beginning after the date which is two years after the date of enactment. 

Impact of Prohibited Foreign Entity Provisions on the Tax Credits

Termination of Certain Credits

• No section 25E previously-owned clean vehicle credit shall be allowed for any vehicle acquired after September 30, 2025.
• No section 30D clean vehicle credit shall be allowed for any vehicle acquired after September 30, 2025.
• No section 45W qualified commercial clean vehicles credits shall be allowed for any vehicle acquired after September 30, 2025.
• No section 30C credit alternative fuel vehicle refueling property credit shall be allowed for any property placed in service after June 30, 2026. 
• No section 25C energy efficient home improvement credit shall be allowed for any property placed in service after December 31, 2025.
• No section 25D residential clean energy credit shall be allowed with respect to any expenditures made after December 31, 2025.
• No section 45L new energy efficient home credit shall be allowed for any qualified new energy efficient home acquired after June 30, 2026.
• Facilities which begin construction after December 31, 2027 would be ineligible for the section 45V clean hydrogen production credit.