The One Big Beautiful Bill Modifies Renewable Energy Tax Credits

After weeks of negotiations and multiple rounds of changes and political negotiation, Congress today passed The One Big Beautiful Bill Act (the “Act”).  The Act makes a number of significant changes to the tax credits available with respect to renewable energy and energy storage projects, including the clean electricity production credit under Section 45Y of the Internal Revenue Code (the “PTC”) and the clean electricity investment credit under Section 48E of the Internal Revenue Code (the “ITC”), among others.  These changes also scale back some of the taxpayer-favorable renewable energy-related provisions of the Inflation Reduction Act.  For a description of the renewable energy and energy storage-related changes made in the Inflation Reduction Act, see our prior alert.

Following is a summary of some of the more significant provisions of the Act related to renewable energy and energy storage projects.

PTC and ITC Phase-Out for Wind and Solar

If construction of a qualified wind or solar facility begins after the 12-month anniversary of enactment of the Act, the facility must be placed in service on or before December 31, 2027 to qualify for the PTC or ITC, as applicable.  This phase-out only applies to wind and solar facilities, and the Act makes clear that the phase-out does not apply to the ITC with respect to energy storage technology, including energy storage technology that is placed in service at a wind or solar facility.  If construction of a project begins before the 12-month deadline, the December 31, 2027, placed-in-service deadline does not apply, and the normal beginning-of-construction rules would apply, including the four-year continuity safe harbor. 

The phase-out does not impact the pre-2025 production tax credit under Section 45 of the Internal Revenue Code or the pre-2025 investment tax credit under Section 48 of the Internal Revenue Code.  In both cases, if construction of a project began before January 1, 2025, there is no statutory placed-in-service phaseout, although the continuous efforts requirements (including the four-year continuity safe harbor) in the beginning-of-construction guidance would continue to apply.  The phasedowns of these credits under the IRA remain in place.

There has been some discussion among members of Congress and the Executive Branch about narrowing the longstanding beginning-of-construction rules.  Those rules are contained in IRS Notices, which can be changed without legislative or regulatory action and can be changed retroactively.  We are not aware of any specific effort to change these rules, but there is some concern that changes could be made.

Domestic Content Threshold for ITC

The Act corrects a mistake in the IRA related to the domestic content bonus credit threshold applicable to the ITC.  To qualify for the domestic content bonus for either the PTC or the ITC, a designated adjusted percentage of manufacturer’s costs related to manufactured products in a facility must be attributable to manufactured products that were mined, produced, or manufactured in the U.S.  Under the provisions adopted in the IRA, the adjusted percentage for the PTC is 40% if construction of a facility begins before 2025, 45% if construction begins in 2025, 50% if construction begins in 2026, and 55% if construction begins after 2026.  The adjusted percentage for the ITC was mistakenly fixed in the IRA at 40% regardless of when construction of a facility began. 

The Act corrects this mistake and applies a graduated adjusted percentage requirement for the ITC domestic content bonus credit similar to the PTC.  Under the Act, if construction of a facility with respect to which the ITC is claimed begins before June 16, 2025, the adjusted percentage is 40%.  If construction begins after June 16, 2025, and before January 1, 2026, the adjusted percentage is 45%.  If construction begins in 2026, the adjusted percentage is 50%; if construction begins after 2026, the adjusted percentage is 55%.

Prohibited Foreign Entity (“PFE”) Rules

The Act contains a number of rules applicable to PFEs.  Following is a summary of some of the more significant aspects of these rules:

Material Assistance from a Prohibited Foreign Entity

The Act includes provisions that disallow the PTC and ITC with respect to a facility construction of which includes any “material assistance from a prohibited foreign entity.” 

A PFE is defined for this purpose to include any “specified foreign entity” and any “foreign-influenced entity.”

A “specified foreign entity” is defined for this purpose to include:

• A foreign entity of concern described in 15 USC § 4651(8)(A), (B), (D), or (E) (e., designated terrorist organizations, designated blocked persons, entities that have been alleged to be involved in certain espionage, arms dealing, or similar crimes, and entities determined to be involved in conduct that threatens national security);
• An entity identified as a Chinese military company operating in the US in accordance with 10 USC § 113;
• An entity included on a list required by Public Law 117-78 Section 2(d)(2)(B)(i), (ii), (iv), or (v), of entities in the Xinjiang Uyghur Autonomous Region that uses forced labor;
• An entity specified under Section 154(b) of the National Defense Authorization Act for Fiscal Year 2024; or
• A foreign-controlled entity. This includes the government of a covered nation (North Korea, China, Russia, and Iran), an agency or instrumentality of a covered nation, a person who is a citizen or national of a covered nation, an entity organized or headquartered in a covered nation, or an entity controlled by any of the foregoing.

A “foreign-influenced entity” is defined to include any entity for any taxable year:

• With respect to which a specified foreign entity has the direct authority to appoint a covered officer;
• In which a single specified foreign entity owns a 25% or greater interest;
• In which one or more specified foreign entities collectively own a 40% or greater interest;
• 15% or more of the debt of which is held 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 that entitles a specified foreign entity (or related entity) to exercise “effective control” over any qualified facility or energy storage technology owned by the taxpayer (or a related person).

“Effective control” is defined to include:

• An agreement or arrangement that provides a contractual counterparty with “specific authority over key aspects of * * * energy generation in a qualified facility, or energy storage * * *.” The Bill directs the Treasury Department to issue guidance to implement this rule and provides that, until this guidance is issued, “the term ‘effective control’ means the unrestricted contractual right of a contractual party to,” among other things:
  • Determine the amount or timing of activities related to the production of electricity undertaken at a qualified facility or storage of electricity in energy storage technology owned by the taxpayer,
  • Determine which entity may purchase or use the output of a qualified facility,
  • Restrict access to data critical to production or storage of energy undertaken at a qualified facility of the taxpayer, or to the site of production or any part of a qualified facility or energy storage technology, or to the personnel or agents of the contractual counterparty, or
  • “On an exclusive basis,” maintain, repair, or operate any equipment which is necessary to the production by the taxpayer of electricity.
• With respect to a licensing or similar agreement for the provision of intellectual property with respect to a qualified facility or energy storage technology, any of the following:
  • A right to specify or direct one or more sources of components, subcomponents, or applicable critical minerals used in the qualified facility or energy storage technology;
  • A right to direct the operation of any qualified facility or energy storage technology;
  • A right to limit the taxpayer’s utilization of intellectual property related to the operation of a qualified facility or energy storage technology;
  • A right to receive royalties under a licensing agreement or similar agreement beyond the 10^th year of the agreement;
  • A right to require the taxpayer to enter into an agreement for the provision of services for a duration longer than two years; or
  • A contract that was entered into on or after enactment of the Act.

“Material assistance from a prohibited foreign entity” is defined as, with respect to any qualified facility or energy storage technology, having a “material assistance cost ratio” that is less than the threshold percentage designated for the year in which construction begins. 

• The designated material assistance cost ratio thresholds applicable to a qualified facility are:
  • If construction begins in 2026, 40%
  • If construction begins in 2027, 45%
  • If construction begins in 2028, 50%
  • If construction begins in 2029, 55%
  • If construction begins after 2029, 60%
• The designated material assistance cost ratio thresholds applicable to energy storage technology are:
  • If construction begins in 2026, 55%
  • If construction begins in 2027, 60%
  • If construction begins in 2028, 65%
  • If construction begins in 2029, 70%
  • If construction begins after 2029, 75%
• The term “material assistance cost ratio” is defined as the percentage of the total direct costs to the taxpayer attributable to all manufactured products that are incorporated into a facility or energy storage technology that relate to manufactured products or components that are mined, produced, or manufactured by a person other than a prohibited foreign entity.
• The Treasury Department is directed to issue safe harbor tables and guidance to determine the direct costs of any manufactured product that are attributable to a prohibited foreign entity, and to adopt rules to determine the amount of a taxpayer’s material assistance from a prohibited foreign entity. Prior to the date the Treasury Department issues these safe harbor tables and rules:
  • The tables included in IRS Notice 2025-08 (related to the domestic content bonus credit) may be used to establish “the percentage of the total direct costs of any listed eligible component and any manufactured product,” and
  • A taxpayer may rely on a certification by the supplier of a manufactured product, eligible component, or constituent element, material, or subcomponent of an eligible component regarding (i) the actual direct costs of the product or component that was not produced or manufactured by a prohibited foreign entity, or (ii) that the product or component was not produced or manufactured by a prohibited foreign entity. The certification must comply with specific requirements in the Act.
• Under certain circumstances, manufactured products, eligible components, or constituent elements, materials, or subcomponents that are acquired pursuant to a binding written contract entered into prior to June 16, 2025, may be excluded from the material assistance cost ratio.
• The Act extends the statute of limitations and increases the penalty applicable to an understatement of tax if the PTC or ITC is disallowed as a result of an overstatement of the material assistance cost ratio for a facility. The Act also imposes a penalty on any person that provides a non-PFE certification that was inaccurate or false and that results in a reduction in the PTC or ITC.

The Act includes an anti-circumvention provision that authorizes the Treasury Department to adopt rules to avoid circumvention of the material assistance provision.  These may include rules to prevent any abuse of the special rule related to contracts entered into before June 16, 2025, by “stockpiling” manufactured products or components and any evasion of the material assistance rules where facts and circumstances demonstrate that construction of a facility or energy storage technology has not in fact occurred. 

Recapture of ITC for Certain Payments to Prohibited Foreign Entity

The Act also imposes 100% ITC recapture if any “applicable payment” is made by a “specified taxpayer” with respect to a facility during the 10-year period beginning on the placed-in-service date. 

• “Applicable payment” is defined to include any payment to a specified foreign entity pursuant to a contract, agreement, or other arrangement that entitles such specified foreign entity (or an entity related to such specified foreign entity) to exercise effective control over any qualified facility or energy storage technology owned by the taxpayer.
• “Specified foreign entity” and “effective control” have the same meanings as described above for purposes of the material assistance from a PFE rules.
• The term “specified taxpayer” means a taxpayer that has claimed the ITC for any taxable year beginning after the date that is two years after the date of enactment of the Act. 

The material assistance and applicable payment rules may create challenges for projects that involve Chinese-made components, particularly including energy storage technology.  In particular, there is concern regarding installation, operating and maintenance, and other arrangements with these manufacturers.  The material assistance rules apply to any project construction of which begins after December 31, 2025.  Thus, a taxpayer may avoid the material assistance rules by beginning construction of a project before the end of the year.  The applicable payment rules apply only to the extent a taxpayer has claimed the ITC for any taxable year beginning after the date that is two years after the date of enactment of the Act.

In addition to the material assistance and applicable payment rules, the Act provides that no PTC or ITC is allowed for any taxable year if the taxpayer is a specified foreign entity or a foreign-influenced entity.  This prohibition applies to tax years beginning after the date of enactment of the Act.

Other Energy-Related Changes

Some of the other significant energy-related changes in the Act include:

• Denial of the PTC or ITC with respect to solar or small wind energy property that qualified for the residential clean energy credit under Section 25D of the Internal Revenue Code and is subject to a lease arrangement.
• Various changes to the manufacturing credit under Section 45X of the Internal Revenue Code, including addition of PFE rules and early phase out related to wind turbine components.
• Restriction on transferability under Section 6418 of the Internal Revenue Code applicable to facilities that are subject to the prohibited foreign entity limitations.
• Accelerated phaseout of the tax credits applicable to clean hydrogen facilities.

A number of the changes in the Act will be supplemented by further guidance from the Treasury Department.  Until that guidance is issued there will be uncertainty regarding the operation of some of the changes.  The Act also constitutes a significant change to the landscape of renewable energy project finance.  Please call us if you have questions.