On June 16, 2025, the Senate Finance Committee released the text of its version of the “One Big, Beautiful Bill Act,” which would phase out the investment tax credit (ITC) under Section 48E and production tax credit (PTC) under Section 45Y for solar and wind projects that begin construction in 2026 or later, other than certain large wind projects utilizing federal leases. Notably, the Senate version would preserve transferability and the ITC for battery energy storage systems. McGuireWoods’ previous client alerts addressed the original version of the bill and the version passed by the House.
Compared to the version passed by the House, the Senate version extends the runway for many credits and eases impractical foreign entity of concern (FEOC) restrictions. The Senate version would slow the depreciation schedule for technologies other than solar, wind and geothermal, as well as the energy efficient commercial buildings deduction. The master limited partnership restructure would also receive a boost, with income from certain renewable activities designated as “qualified income.” Last, the bill would increase the domestic content percentage under Section 48E to more closely mirror Section 45Y.
While the final provisions surrounding the ITC, PTC and other credits are uncertain, developers should consider whether to begin construction for tax purposes for wind, solar and hydrogen projects as soon as possible for planned projects that could foreseeably be placed in service on or before Dec. 31, 2029. As of the date of publication, House and Senate members are pushing for a more favorable regime, while at least one representative has vowed to vote against a bill containing the Senate’s changes.
Modification of Renewable Energy Tax Credits
Beginning Construction
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.
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. For many projects, on-site work may prove to be a more attractive option, as suppliers of transformers and other bespoke components would likely be strained due to a “run” on beginning-of-construction components.
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 three and a half months of the execution of the binding written contract. Similar to the off-site physical work test, the supply chain could face challenges with fulfilling all orders needed for projects to begin construction pursuant to the 5% safe harbor prior to 60 days after the enactment of the bill.
Domestic Content — Section 48E
The Inflation Reduction Act, in what is widely considered to be a drafting error, allowed a 10% domestic content adder under Section 48E if a project achieves 40% domestic content, instead of phasing in an increased domestic content percentage of 55% like in Section 45Y. The bill would increase that amount to qualify for the domestic content adder to 45% for projects beginning construction after June 16, 2025, 50% for projects beginning construction in 2026, 50% for projects beginning construction in 2027 and 55% for projects beginning construction in 2028.
Rooftop Solar
The ITC and PTC are disallowed for solar, wind and qualified fuel cell property that are leased to residents. Structures where a residential solar business retains ownership of the qualified property then sells power to the resident pursuant to a power purchase agreement appear to be unaffected. Additionally, battery storage is not affected.
FEOC Rules
The bill would adopt a regime designed to stop certain credits, including 45Y, 48E, 45Z, 45Q, 45X and 45U, from being claimed by or sold to certain prohibited foreign entities after the date that the bill is enacted. The bill also disallows taxpayers from claiming credits under Sections 45Y, 48E and 45X if qualified facilities, energy storage technology or product lines producing eligible components, as applicable, receive material assistance from a prohibited foreign entity. The material assistance from a prohibited entity rules would apply to projects which begin construction in 2026 or later for Section 45Y and 48E and for eligible components sold in 2026 or later for Section 45X. The FEOC rules use the below definitions.
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.
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, and for 45X, is the cost of materials used to produce an eligible component, which come from sources other than prohibited foreign entities. The Senate version 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 Senate version introduces new certification rules, but until the IRS issues guidance, 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 show below:
Changes to Depreciation
The bill would eliminate (i) five-year modified accelerated cost recovery system depreciation for all tech-neutral projects except wind, solar and geothermal, effective after the date that the bill is enacted and (ii) the energy efficient commercial building deduction under Section 179D for projects beginning construction 12 months after the enactment of the bill.
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 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 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.
