The One Big Beautiful Bill Act: Navigating clean energy tax credits in a new era

On July 4, 2025, US President Donald Trump signed into law a budget reconciliation bill known as H.R.1: the One Big Beautiful Bill Act (OBBBA). The OBBBA generally accelerated phase-outs to the Inflation Reduction Act of 2022 (IRA) energy tax credits, dictated shortened deadlines for project credit qualification (particularly targeting solar and wind facilities), broadened domestic content restrictions, and most prominently, restricted credit availability to “prohibited foreign entities” of concern (FEOCs) – all of which raises important project planning considerations for developers, energy producers, and investors in the US renewables energy space.

The legislative precept of restricting FEOCs is not new. Its roots can be found in legislation stemming back to the Embargo Act of 1807, and it reappears in tax legislation as recently as 2022. The OBBBA continues this legacy approach by implementing a regime that restricts interactions with FEOCs in the US renewables energy space by curbing availability to IRA energy tax credits.

On a more positive note, the OBBBA retains transferability of credits, provides a new location-based bonus credit for certain nuclear facilities, offers new life to fuel cell credit eligibility, and extends the Section 45Z clean fuel production credit’s availability, among other potential nuggets of positivity. Under this backdrop, in this article we explore the new provisions and significant amendments made by the OBBBA and highlight key takeaways for developers, energy producers, and investors in the US renewables energy space.

In Depth

The OBBBA’s enormous impact requires immediate and significant rethinking on the existing development and infrastructure of renewable energy projects, especially with respect to solar and wind facilities. Consistent with promises made by the president, the OBBBA portends a campaign to eventually eliminate the IRA energy tax credits while disrupting procurement and supply chain structures via the FEOC rules. The myriad delegations of rulemaking to the US Department of the Treasury adds fuel to this campaign. In light of such specters, we outline some paramount considerations:

Globally applicable changes

• FEOC rules:
  • The FEOC rules effectively operate under three categories: (i) the specified foreign entity (SFE)/foreign influenced entity (FIE) prohibition, which bars tax credit eligibility where the project is owned by an SFE or FIE, (ii) the effective control rule, which prevents the SFE from exercising “effective control” over the project, and (iii) the material assistance rule, which prevents material reliance on products/materials sourced by an SFE or FIE.
  • Although the definitions are complicated in scope, for practical purposes, “SFE” [1] generally means (i) parties specifically identified on a list of concerning actors and (ii) companies and persons (including their subsidiaries) from China, North Korea, Iran, and Russia. A “FIE” [2] generally means parties with material legal and/or financial relationships with such SFEs.
  • The FEOC rules apply broadly to almost all the energy tax credits, as discussed below.
  • The effective dates of the FEOC rules depend on the type of tax credit at issue (see tax credit specific discussions below).
    • SFE/FIE prohibition:
      • IRA energy tax credits are generally unavailable to any SFE or FIE. This includes potential tainting by up-the-chain ownership where ownership thresholds are met.
    • Effective control:
      • The effective control rule prohibits any payments made by the project owner (or its affiliates) to an SFE in a contractual agreement or arrangement where the SFE would be entitled to exercise effective control over the project or production of eligible components.
      • Effective control generally means specific authority over key aspects of the production of eligible components or energy generation in a project, which are not included in measures of control through authority, ownership, or debt. This includes licensing agreements that would allow the SFE to source items (components, subcomponents, critical minerals), direct operations, use intellectual property, and receive royalties – excepting bona fide purchases or sale of intellectual property under certain circumstances.
    • Material assistance:
      • The material assistance rule operates to limit sourcing of equipment from China (and, less significantly, North Korea, Iran, Russia, and the other concerning parties identified as SFEs). The costs of this foreign equipment must account for less than a specified percentage of total equipment costs, with the percentage depending on the type of tax credit.
      • The material assistance rule prescribes a “material assistance cost ratio” that determines a threshold percentage that takes into account total direct costs for a manufactured product or total material costs that are paid or incurred for production of eligible components. The non-SFE or non-FIE cost percentage cannot be below the prescribed threshold percentage. Threshold percentages are prescribed for qualified facilities, battery energy storage systems (BESS), and (in the case of Section 45X) certain types of eligible components, each of which varies by the year of begin construction (or, in the case of Section 45X, year of sale). An election may be available to exempt products/materials for which a written, binding contract was entered into prior to June 16, 2025, provided certain begin construction and placed in service conditions are met.
      • By no later than December 31, 2026, the Treasury is to issue “safe harbor” tables that may be applied for the determination of the costs attributed to an SFE or FIE. Until then (and for a facility or BESS that begins construction on or before the date that is 60 days after the date of issuance of such tables), taxpayers may generally rely on the tables under Internal Revenue Service (IRS) Notice 2025-08 and valid certifications from suppliers to confirm that goods or components are not attributable to an SFE or FIE (e.g., that the direct costs are not attributable to an SFE or FIE). Practically, this appears to mean that a project achieving, for example, a domestic content percentage of 40% under the safe harbor in IRS Notice 2025-08 under Sections 48E and 45Y should likewise be treated as having at least a 40% threshold for purposes of the material assistance rule (subject to substantiation requirements under the FEOC rules). Further, until the IRS issues the new safe harbor tables, it appears that for purposes of Sections 45Y and 48E, the safe harbor tables under IRS Notice 2025-08 would dictate the level of components or subcomponents required to be domestic content. Conversely, for purposes of Section 45X, the applicable supplier certification appears to require language that each “constituent element, material, or subcomponent” must also be accounted for, suggesting that notwithstanding IRS Notice 2025-08, a look-through approach up the supply chain is necessitated.
      • The material assistance rule carries a six-year statute of limitations and increased tax penalties, including penalties imposed on suppliers for non-complying certifications.
    • Solely for purposes of the FEOC rules, the OBBBA expressly codifies the begin construction rules under IRS Notices 2013-29 and 2018-59 (as well as any subsequently issued guidance clarifying, modifying, or updating either such Notice), as in effect on January 1, 2025.
      • Taxpayers should review ownership chains and related party statuses for SFE or FIE implications, including with respect to their counterparties (e.g., investors, lenders, and suppliers).
      • The effective control rule suggests that taxpayers should be very careful in structuring payment arrangements with manufacturers and suppliers that may have SFE implications. Taxpayers should also reassess procurement and safe harboring strategies in light of the material assistance rule and consider whether existing due diligence processes and procedures need to be revised with respect to manufacturer, supplier, and vendor certifications. Even where taxpayers are comfortable with the non-SFE and non-FIE status of their counterparties, taxpayers need to ensure they obtain required evidence and certifications.
      • The codification of the begin construction rules strikes a cautionary note. Careful reassessment of begin construction strategies is in good order. For purposes of the FEOC rules, begin construction may be relevant for determining the relevant “material assistance” percentage and for whether a project is grandfathered out of the FEOC rules.

• Section 6418 transferability and Section 6417 direct pay:
  • Transferability is generally preserved. In other words, as long as credits remain available under the newly accelerated timeline, they are generally eligible for transfer. However, generally effective for tax years beginning after amendment, transfers to an SFE are prohibited under Sections 48E, 45Y, 45Q, 45U, 45X, and 45Z. Notably, the prohibition does not appear to apply to Section 45V.
  • Likewise, Section 6417 direct pay is preserved. Accordingly, it remains a planning option for credits under Sections 45X and 45V to the extent those credits are otherwise available under the OBBBA.

• Depreciation:
  • Five-year Modified Accelerated Cost Recovery System (MACRS) designation is removed for Section 48 energy property beginning construction after December 31, 2024.[3] However, the five-year MACRS designation is retained for Section 45Y and 48E property. A revisit on the applicability of bonus depreciation may be merited for projects acquired and placed in service after January 19, 2025.

IRA tax credit code section specific changes

• Sections 48E and 45Y | Clean energy investment tax credit (ITC) and production tax credit (PTC):
  • Wind/solar repeal: The credit terminates for solar and wind facilities that (i) begin construction 12 months after enactment (i.e., July 4, 2026) and if (ii) placed in service after December 31, 2027. In other words, a wind or solar project that begins construction on or before July 4, 2026, is not subject to the statutory end-of-2027 cliff while wind and solar projects beginning construction after July 4, 2026, would in all cases need to be placed in service by the end of 2027. The changes highlight the importance of reassessing safe harboring strategies in conjunction with a careful review of existing begin construction guidance.
    • Other technologies: All other qualified facilities/BESS are generally subject to pre-OBBBA Section 48E and 45Y begin construction (generally by 2033) and phase-outs provisions. Notably, however, the “later of” phase-out from the IRA has been struck (i.e., where the phase-out would not take effect until the later of 2033 and hitting national emissions targets).
    • Residential solar leasing: In a shift from previous proposals, leased residential solar electric property retains eligibility for Section 45Y and 48E credits. Prior drafts had proposed eliminating tax credits for residential solar projects using this structure. In the final OBBBA, the leasing restriction is limited to solar water heating and small wind energy property.
    • Section 45Y only:
      • Nuclear: A new nuclear energy community bonus credit is available for advanced nuclear facilities located in a metropolitan statistical area that has (or, at any time after December 31, 2009, had) 0.17% or greater direct employment related to the advancement of nuclear power.
    • Section 48E only:
      • Fuel cell: Fuel cell property is newly eligible for Section 48E tax credits. Under prior law, fuel cell property was eligible for the Section 48 credit so long as it began construction before 2025 but was ineligible for credits under Section 48E unless it met the emissions neutral requirements of that section. Under the OBBBA, fuel cell property is entitled to the Section 48E credit regardless of emissions. The credit rate is fixed at 30% for Section 48E fuel cell property beginning construction after December 31, 2025. Accordingly, fuel cell property beginning construction during 2025 is not credit eligible (unless it is emissions neutral).
      • Domestic content drafting fix: Effective on or after June 16, 2025, the domestic content adder thresholds for manufactured property are revised to be in parity with Section 45Y. For facilities/BESS that begin construction before June 16, 2025, the threshold remains at 40%. For such property beginning construction on or after June 16, 2025, and before January 1, 2026, the threshold is increased to 45%, with increases in future years in line with Section 45Y. This change is not wholly unexpected, given that the IRA drafting error had been flagged by the Joint Committee on Taxation. Taxpayers who had taken a protective approach in anticipation of the parity correction may have already accounted for the increased step-up in their domestic content strategies.
      • Section 48E 10-year FEOC recapture: There is a new 100% credit recapture for a 10-year recapture period beginning on the date the project is placed in service if any payments are made to SFEs that exercise effective control, applying to any tax year beginning two years after enactment.
    • Timing and applicability of the FEOC rules to Sections 48E and 45Y:
      • SFE/FIE prohibition: Applies to tax years beginning after enactment.
      • Effective control rule: Applies to tax years beginning after enactment.
        • Section 48E 10-year recapture applies to tax years beginning two years after enactment.
      • Material assistance rule: Applies to tax years beginning after enactment for facilities that begin construction after December 31, 2025. Facilities beginning construction before 2026 are exempt from the material assistance rule.

• Sections 48 and 45 | Legacy ITC and PTC:
  • For Section 48, taxpayers should note the termination of the 2% energy credit for any energy property beginning construction on or after June 16, 2025. Only ground or groundwater thermal projects beginning construction on or after January 1, 2025, remain eligible for the Section 48 6% legacy credit. Absent this revision, Section 48 might have provided an ongoing legacy credit of 10% for certain technologies, even where Sections 45Y and 48E became unavailable.
  • Sections 45 and 48 are otherwise untouched by the OBBBA. Accordingly, facilities that continue to qualify for and claim Section 45 or 48 can completely avoid the FEOC rules, which will significantly simplify transacting. As a reminder, Sections 45 and 48 are generally only available for projects beginning construction before 2025.
  • Timing and applicability of the FEOC rules to Section 48:
    • SFE/FIE prohibition: N/A
    • Effective control rule: N/A
    • Material assistance rule: N/A

• Section 45Q | Carbon sequestration:
  • Base credit rate parity is adopted by equalizing the amount irrespective of the end-use of the sequestered carbon (e.g., regardless of enhanced oil recovery, use, storage). Taxpayers may want to reassess existing carbon sequestration and use operations in relation to credit eligibility and rates.
  • Timing and applicability of the FEOC rules to Section 45Q:
    • SFE/FIE prohibition: Applies to tax years beginning after enactment.
    • Effective control rule: Applies to tax years beginning after enactment.
    • Material assistance rule: N/A

• Section 45U | Nuclear PTC:
  • Taxpayers should note that the termination date was not changed. Credit terminates for electricity produced and sold after December 31, 2032.
  • Timing and applicability of the FEOC rules to Section 45U:
    • SFE/FIE prohibition: SFE prohibition applies to tax years beginning after enactment. FIE prohibition applies to tax years beginning two years after enactment.
    • Effective control rule: Applies to tax years beginning after enactment.
    • Material assistance rule: N/A

• Section 45V | Hydrogen:
  • Taxpayers should note the revised termination date. Credit terminates for facilities that begin construction after December 31, 2027. This is an improvement to previous proposals, which had the Section 45V credit expiring at the end of 2025.
  • Timing and applicability of the FEOC rules to Section 45V:
    • SFE/FIE Prohibition: N/A
    • Effective Control Rule: N/A
    • Material Assistance Rule: N/A

• Section 45X | Manufacturing PTC:
  • Taxpayers should carefully review the credit phase-out schedules with respect to their specific eligible components and critical minerals. Eligible components and critical minerals (other than metallurgical coal) are subject to differing phase-out schedules. “Metallurgical coal” is added as a critical mineral. Notably, however, credits are terminated for wind energy components produced and sold after December 31, 2027. Phase-out schedules for other types of eligible components, such as solar modules, have not changed.
    • Battery modules need to be comprised of all other essential equipment needed for battery functionality, such as current collector assemblies and voltage sense harnesses, or any other essential energy collection equipment.
    • The related person election appears intact. However, for tax years beginning after December 31, 2026, sales of integrated components qualify only if the “primary component” is generally incorporated into a “secondary component” that (i) is produced within the same manufacturing facility as the primary component, (ii) sold to an unrelated person, and (iii) for which not less than 65% of the total direct material costs are attributable to the domestic primary component.
  • Timing and applicability of the FEOC rules to Section 45X:
    • SFE/FIE prohibition: Applies to tax years beginning after enactment.
    • Effective control rule: Applies to tax years beginning after enactment.
    • Material assistance rule: Applies to tax years beginning after enactment.

• Section 45Z | Clean fuel PTC:
  • The credit is extended by two years for qualifying fuel sold by December 31, 2029. Emissions rates would exclude any emissions attributed to indirect land use change. The Treasury is to provide distinct emissions rates for fuel derived from animal manure, including dairy, swine, and poultry (which may be prescribed with negative emissions rates). No double credit is allowed for fuel produced from a fuel that generated a credit under Section 45Z. Taxpayers, especially US ethanol producers, may want to reassess their strategies on optimizing the benefits made by the amendments.
  • Beginning after December 31, 2025, fuel produced (i) must be derived from feedstock produced or grown in the US, Mexico, or Canada, (ii) cannot have negative emissions rates (unless otherwise prescribed by the Treasury), and (iii) the increased credit rate for sustainable aviation fuels cannot be applied.
    • Many clean fuel producers, particularly those engaged in renewable natural gas production, structure calculations in reliance on the applicable GREET model and guidelines promulgated thereunder. The OBBBA amendments provide welcomed clarity in sync with such guidelines.
    • While the OBBBA does not provide any clarifying intermediary sales provisions, the Treasury is now authorized to promulgate rules for related persons whom the taxpayer has reason to believe will sell fuel to an unrelated person, suggesting forthcoming clarifications on intermediary sales.
  • Timing and applicability of the FEOC rules to Section 45Z:
    • SFE/FIE prohibition: SFE prohibition applies to tax years beginning after enactment. FIE prohibition applies to tax years beginning two years after enactment.
    • Effective control rule: Applies to tax years beginning after enactment.
    • Material assistance rule: N/A

Beginning of construction guidance

Many provisions under the IRA and the OBBBA turn on when a project or facility has begun construction. Significantly, eligibility for the legacy ITC and PTC under Sections 45 and 48, the new OBBBA 2027 cliff for solar and wind under Sections 45Y and 48E, and application of the material assistance rules in many cases turns on the date construction begins. The IRS previously issued guidance pursuant to a series of notices, laying out very specific rules and tests for determining when a project begins construction, including the Five Percent Safe Harbor and the Physical Work Test (both of which are beyond the scope of this update). In 2022, the IRS confirmed that the principles of those notices continue to apply for the determination of when construction begins for purposes of the energy tax credits. The OBBBA codified those IRS notices as they exist as of today’s date, but the codification was limited to the FEOC rules. Confusingly, on the day the US House of Representatives voted in favor of the OBBBA, reports emerged that certain House members had received assurances from the executive branch that it would enforce a more restrictive definition of “beginning construction” than the rules in the existing IRS guidance. No formal announcement has been made on this subject, and even if true, it remains unclear whether and how the IRS could be required to apply different interpretations of the same statutory term within the same tax credit regime. McDermott will be following this issue closely in the coming days, and taxpayers are cautioned to carefully assess their beginning of construction strategies in light of these reports.

Conclusion

The sun is yet to rise on the OBBBA, and more guidance should be forthcoming from the Treasury and the IRS. Taxpayers and their tax advisors are left to decipher fundamental questions of tax law and interpretation that US Congress, seemingly in part, left to the Treasury to address.