On July 3, 2025, after a tumultuous week, the Senate and House passed a version of the One Big, Beautiful Bill Act that contains the most favorable renewable energy credit provisions in any iteration of the bill.
The version introduced on June 28, 2025, in the Senate would have required solar and wind projects to begin construction before the date of enactment, or they would be subject to a placed-in-service date of Dec. 31, 2027. Wind and solar projects beginning construction after June 16, 2025, would have been subject to the material assistance from a prohibited foreign entity requirements, as described below, and wind and solar projects that did not qualify for a credit or meet such requirements would have been subject to an excise tax.
Thanks to a last-minute deal from Sen. Murkowski of Alaska, the July 1, 2025, version of the bill passed by the Senate contained the same placed-in-service deadline for solar and wind projects, but only to the extent that they do not begin construction for tax purposes prior to 12 months after the date of enactment. This key provision allows solar and wind developers to safe harbor projects in 2025 and 2026 that will be placed in service in 2028, 2029 and 2030.
Additionally, the final bill adds no new limits on transferability, other than that credits cannot be transferred to prohibited foreign entities.
While the final version of the bill suggests that projects with planned placed-in-service dates in 2028, 2029 and 2030 can be safe harbored until 12 months after the President’s signature, clients should still consider beginning construction for projects with placed-in-service dates of 2028 or 2029 as soon as possible, since forthcoming IRS guidance that could affect the beginning of construction regime or related continuity safe harbor is possible.
McGuireWoods’ client alerts on the original version of the bill and the version passed by the House are available here and here.
A table summarizing the treatment of various credits under the final bill is below.
Beginning Construction
Despite favorable rules in the bill, McGuireWoods suggests that developers consider beginning construction on projects with a placed-in-service date of 2028 or 2029 as soon as possible.
Generally, the IRS recognizes two tests for a project to begin construction for tax purposes, the physical work test and the 5% safe harbor. Only one test must be satisfied to establish the beginning of construction. Once construction has begun, a taxpayer must make continuous efforts towards completion. Under a continuity safe harbor endorsed by the IRS, projects that begin construction in 2025 would have until the end of 2029 to be placed in service, and projects that begin construction in 2026 would have until the end of 2030 to be placed in service.
Under the physical work test, a taxpayer must perform physical work of a substantial nature on equipment that is an integral part of the facility. Off-site work must be performed pursuant to a binding written contract on components not normally held in the supplier’s inventory of the supplier that are critical to the project’s production of energy. For on-site work, work such as foundations uniquely designed to support electricity-generating equipment or other physical work of a substantial nature can establish the beginning of construction.
Under the 5% safe harbor, a taxpayer must, pursuant to a binding written contract, pay or incur at least 5% of the total cost of the facility and, for accrual-based taxpayers, take delivery of such components or expect to take delivery within 3.5 months of the execution of the binding written contract.
FEOC Rules
The bill would adopt a regime designed to stop credits claimed under 45Y, 48E, 45X, 45Q, 45Z and 45U from being claimed by or sold to certain prohibited foreign entities. For Section 45Y, 48E and 45X, this applies for credit claimed beginning Jan. 1, 2026. Additionally, (i) for Section 45Q, it applies beginning Jan. 1, 2026, and (ii) for Section 45Z and 45U, it applies beginning Jan. 1, 2026, in each case by determining if an entity is a prohibited foreign entity without regards to (b) and (c) under “foreign-influenced entity,” below.
Prohibited Foreign Entity: A specified foreign entity or a foreign-influenced entity.
Specified Foreign Entity: Foreign entities of concern, as described in the William M. (Mac) Thornberry National Defense Authorization Act of FY 2021, include Chinese military companies operating in the United States, any entity on a list required by the strategy to enforce prohibition on imported goods made through forced labor in the Xinjiang Uyghur autonomous region, an entity listed as ineligible for Department of Defense battery acquisition in the National Defense Authorization Act of FY 2024 or a foreign-controlled entity.
Foreign-Controlled Entity: Foreign-controlled entities include the government of a covered nation (the Democratic People’s Republic of North Korea, the Republic of China, the Russian Federation and the Islamic Republic of Iran); a person who is a citizen, national or resident of a covered nation, provided the person is not a U.S. citizen or lawful permanent resident; an entity or qualified business unit incorporated or organized under the laws of or having its principal place of business in a covered nation; or an entity controlled by any of the listed foreign-controlled entities.
Foreign-Influenced Entity: Foreign-influenced entities are entities:
- with respect to which, during the taxable year, (a) a specified foreign entity has the direct or indirect authority to appoint a covered officer, (b) a single specified foreign entity owns at least 25% of such entity, (c) one or more specified foreign entities own in the aggregate at least 40% of such entity, or (d) at least 40% of the debt of such entity is held in the aggregate by one or more specified foreign entities;
- which, during the previous taxable year, made a payment to a specified foreign entity pursuant to a contract, agreement or other arrangement which entitles such specified foreign entity to exercise control over a qualified facility or energy storage technology, including (a) determining the timing or production of electricity or an eligible component, (b) determining which entity may purchase or use the output of a project, (c) restrict access to data critical to the production of storage or energy or (d) repair or maintain the facility or energy storage technology on an exclusive basis; or
- which is party to a licensing agreement with a specified foreign entity that entitles such specified foreign entity to exercise effective control over a qualified facility or energy storage technology or is longer than 10 years.
Material Assistance From a Prohibited Foreign Entity: Material assistance from a prohibited foreign entity is determined with respect to the “material cost ratio” of a qualified facility, energy storage technology or product line that produces eligible components. Generally, the material cost ratio for Sections 48E and 45Y is the portion of the cost of manufactured products, for 45X, is the cost of materials used to produce an eligible component, which come from sources other than prohibited foreign entities. The bill requires the IRS to issue safe harbor tables with respect to the cost of manufactured products and materials by Dec. 31, 2026, and states that until then, taxpayers may use the existing tables in IRS Notice 2025-08 to determine the cost of manufactured products and materials.
Additionally, the bill introduces new certification rules, but until the IRS issues guidance on these, taxpayers may rely on certifications from manufacturers or suppliers regarding the material cost ratio, provided that they do not rely on certifications they have reason to know are false. Existing contracts are exempt from the material assistance rules, provided that they were entered into prior to June 16, 2025, and relate to property that will be placed in service prior to Jan. 1, 2030.
A table summarizing the material cost ratios applicable under Sections 45Y, 48E and 45X is below:
Changes to Depreciation
The bill would eliminate (a) 5-year Modified Accelerated Cost Recovery System depreciation for solar projects that do not qualify for a credit under Sections 48E or 45Y and (b) the energy-efficient commercial building deduction under Section 179D for projects beginning construction after June 30, 2026. Solar projects may still be able to utilize 100% bonus depreciation under Section 168(k).
Master Limited Partnerships
The bill would cause hydrogen storage, carbon capture, advanced nuclear, hydro-power and geothermal activities to constitute “qualifying income” under the master limited partnership tax regime. This provision creates an interesting regime that could pass tax credits through to master limited partnership investors and provide a method of raising capital for capital-intensive technologies. Additionally, this provision appears to be a boost to the oil and gas industry, which already uses the master limited partnership structure and could benefit from the inclusion of Section 45Q.
