Senate Moves To Scale Back Clean Energy Tax Credits Under Inflation Reduction Act

Highlights

The U.S. Senate Committee on Finance released legislative text within its jurisdiction for inclusion in the Senate Republicans' budget reconciliation bill.
This Holland & Knight alert summarizes certain key proposals in the Senate text as they relate to the Inflation Reduction Act's clean energy tax credits.

The U.S. Senate Committee on Finance on June 16, 2025, released legislative text within its jurisdiction for inclusion in the Senate Republicans' budget reconciliation bill. This is the Senate's response to the One Big Beautiful Bill Act that was passed by the U.S. House of Representatives on May 22, 2025. (See Holland & Knight's previous alert, "House of Representatives Moves to Scale Back Clean Energy Tax Credits Under IRA," May 22, 2025.)

This Holland & Knight alert summarizes certain key proposals in the Senate text as they relate to the Inflation Reduction Act's (IRA) clean energy tax credits.

If you have any questions, please contact a member of Holland & Knight's Renewable and Alternative Energy Tax Team. To receive additional analysis from the team, please subscribe to our alerts. Please also check out our Inflation Reduction Act Tax Resource Library.

Technology-Neutral Tax Credits

Tax Credit

Termination Date

Transferability

Foreign Entity of Concern (FEOC) Restrictions

Other Rules

Section 45Y (Clean Electricity Production Tax Credit)

Available for facilities that satisfy the beginning of construction (BOC) requirement by 2033, phases down afterward as provided under current law (but no extension based on greenhouse gas (GHG) targets not being reached)

Exception: Wind and solar facilities generally phase down and out rapidly based on BOC date; if BOC during calendar year (CY) 2026, 60 percent of otherwise available credit; BOC during CY 2027, 20 percent of otherwise available credit; thereafter, zero

Available, but no transfers under Section 6418 to Specified Foreign Entities (SFEs) (see FEOC discussion below)

Yes (see FEOC discussion below)

Eliminates credit for wind and solar leased property that would otherwise qualify for the residential credit under Section 25D (as in effect prior to its termination)

Provides additional methods for measuring additions of capacity, providing taxpayer flexibility

Requires satisfaction of domestic content requirements for entitlement to direct pay (with no exceptions for cost, availability, etc.)

Section 48E (Clean Electricity Investment Tax Credit

Available for facilities that BOC by 2033, phases down afterward as provided under current law (but no extension based on GHG targets not being reached)

Exception: Wind and solar facilities generally phase down and out rapidly based on BOC date; if BOC during CY 2026, 60 percent of otherwise available credit; BOC during CY 2027 20 percent of otherwise available credit; thereafter, zero

Available, but no transfers under Section 6418 to SFEs (see FEOC discussion below)

Yes (see FEOC discussion below, including discussion of the 10-year recapture period)

Eliminates credit for leased property that would otherwise qualify for the residential credit under Section 25D (as in effect prior to its termination);

Provides additional methods for measuring addition of capacity, providing taxpayer flexibility

Changes the domestic content percentage in current law to increase over time (consistent with current law under Section 45Y)

Requires satisfaction of domestic content requirements for entitlement to direct pay (with no exceptions for cost, availability, etc.)

Investment Tax Credits

Tax Credit	Termination Date	Transferability	FEOC Restrictions	Other Rules
Section 48 (Investment Tax Credit)	No change from current law; credit remains available for geothermal property	No changes from current law	None	None
Section 48C (Qualifying Advanced Energy Project Credit)	No new allocations will be provided	No changes from current law	None	None

Production Tax Credits

Tax Credit	Termination Date	Phase Out	Special Rules	Transferability	FEOC Restrictions
Section 45Q (Carbon Oxide Sequestration Credit)	No change from current law	None	Credit amount for utilization of captured carbon increased to align with sequestration effective facilities or equipment placed in service after 2022	Available, but no transfers under Section 6418 to SFEs (see FEOC discussion below)	Yes (see FEOC discussion below)
Section 45U (Zero-Emission Nuclear Power Production Credit)	No change from current law	None	None	Available, but no transfers under Section 6418 to SFEs (see FEOC discussion below)	Yes (see FEOC discussion below)
Section 45V (Credit for Production of Clean Hydrogen)	Not available for facilities that BOC *after* Dec. 31, 2025	None	None	Unchanged	None
Section 45X (Advanced Manufacturing Production Credit)	No credit for wind components produced and sold *after* Dec. 31, 2027	For critical minerals produced: - in 2031, 75 percent of otherwise available credit - in 2032, 50 percent of otherwise available credit - In 2033, 25 percent of otherwise available credit - In 2033 and thereafter, zero	Effective tax years after enactment, definition of battery module is modified to require that such module is "comprised of all essential equipment needed for battery functionality" Effective for tax years after Dec. 31, 2026, a person shall not be treated as having sold an eligible component that is integrated into another eligible component	Available, but no transfers under Section 6418 to SFEs. (See FEOC discussion below)	Yes. (See FEOC discussion below)
Section 45Z (Clean Fuel Production Credit)	Not available for transportation fuel sold *after* Dec. 31, 2031 Eliminates enhanced rates for Sustainable Aviation Fuel (SAF), effective fuel produced after Dec. 31, 2025	None	No negative emissions rate, except the U.S. Department of the Treasury secretary "may" provide an exception for manure feedstocks Amount of credit reduced for use of foreign feedstocks for fuel produced after 2025 Indirect land use emissions are excluded for purposes of GHG emissions rate as determined consistent with forthcoming regulations or methodology; directs the Treasury to provide emissions for specific animal manure after Dec. 31, 2025 No credit for fuel produced from fuel for which Section 45Z was allowed and no double benefit with Section 6426(k)(1) credit	Available, but no transfers under Section 6418 to SFEs (see FEOC discussion below)	Yes (see FEOC discussion below)

Clean Vehicles and Refueling Property Tax Credits

Tax Credit	Termination Date	Exceptions
Section 25E (Previously Owned Clean Vehicles)	For vehicles acquired after Dec. 31, 2025	None
Section 30C (Alternative Fuel Vehicle Refueling Property Credit)	For property placed in service 12 months after enactment	None
Section 30D (Clean Vehicle Credit)	For vehicles acquired more than 180 days after enactment	None
Section 45W (Credit for Qualified Commercial Clean Vehicles)	For vehicles acquired more than 180 days after enactment (rules regarding critical minerals and battery components under Section 30D also apply to commercial vehicles with a gross vehicle weight rating of less than 14,000 pounds)	None

Energy Efficient Homes and Buildings Tax Incentives

Tax Incentive	Termination Date	Exceptions
Section 25C (Energy Efficient Home Improvement Credit)	For property placed in service more than 180 days after enactment	None
Section 25D (Residential Clean Energy Credit)	For expenditures made more than 180 days after enactment	None
Section 45L (New Energy Efficient Home Credit)	For qualified new energy efficient homes acquired more than 12 months after enactment	None
Section 179D (Energy Efficient Commercial Buildings Deduction)	For property the construction of which begins more than 12 months after enactment	None

Tax Depreciation

Tax Incentive	Termination Date	Exceptions
Section 168 (Accelerated Cost Recovery System)	Removes five-year property designation under Section 168 for any qualified facility (as defined in Section 45Y(b)(1)(A)), any qualified property (as defined in Subsection (b)(2) of Section 48E) that is a qualified investment (as defined in Subsection (b)(1) of such section), or any energy storage technology (as defined in Subsection (c)(2) of such section) for property placed in service after enactment	None

FEOC Restrictions

Section	Specified Foreign Entity	Foreign Influenced Entity	Material Assistance from Prohibited Foreign Entity	Other Special Rules
Section 45Y	Tax years beginning after enactment	Tax years beginning after enactment	Facilities/projects that BOC after Dec. 31, 2025	N/A
Section 48E	Tax years beginning after enactment	Tax years beginning after enactment	Facilities / projects that BOC after Dec. 31, 2025	Special 10-year recapture period – looks to payments made to SFEs pursuant to arrangement that provides SFEs with "effective control" for tax years beginning two years after enactment
Section 45X	Tax years beginning after enactment	Tax years beginning after enactment	Tax years beginning after enactment	N/A
Section 45Q	Tax years beginning after enactment	Tax years beginning after enactment and determined without regard to payment rule	N/A	N/A
Section 45Z	Tax years beginning after enactment	Tax years beginning two years after enactment and determined without regard to payment rule	N/A	N/A
Section 45U	Tax years beginning after enactment	Tax years beginning two years after enactment and determined without regard to payment rule	N/A	For tax years after 2027, nuclear fuel must not be produced in a covered nation or by a covered entity, or exchanged with, traded for, substituted for, nuclear fuel produced in a covered nation or by a covered entity Exception for certain pre-2023 contracts

FEOC Definitions

"Prohibited Foreign Entity" (PFE) includes both "Specified Foreign Entities" and "Foreign-Influenced Entity"

generally determined on the last day of taxable year
except in the first taxable year after enactment, determined on the first day of the taxable year

"Specified Foreign Entity" (SFE) is an entity that:

meets the definition as provided in Section 9901(6) of the William Thornberry National Defense Authorization Act (NDAA) for fiscal year (FY) 2021:
- designated as a foreign terrorist organization by the U.S. Secretary of State under Section 219 of the Immigration and Nationality Act (8 U.S.C. 1189)
- included on the list of specially designated nationals and blocked persons maintained by the Treasury Department's Office of Foreign Assets Control (OFAC)
- alleged by the U.S. Attorney General to have been involved in activities for which a conviction was obtained
is identified as a Chinese military company
is included on a list as a result of the Uyghur Forced Labor Prevention Act
is specified under Section 154(b) under the NDAA of FY 2024 (specifically, the entities listed in paragraphs 1-7 on page 47 of L. 118-31)
is a "foreign controlled entity" (the government of a covered nation, an agency or instrumentality, a person who is a citizen or national of a covered nation, an entity or business unit incorporated or organized or having its principal place of business in a covered nation, or any entity "controlled" by those described in this parenthetical) (where "control" = 50 percent vote or value of stock of corporation, or 50 percent capital interest or beneficial interests)

"Foreign Influenced Entity" (FIE) is an entity, except for certain publicly traded companies, whereby:

an SFE has direct or indirect authority to appoint a covered officer (where "covered officer" = board of director, supervisor or equivalent, or executive officer or equivalent)
a single SFE owns at least 25 percent of such entity
one or more SFEs own, in aggregate, 40 percent or more of such entity
at least 40 percent of the debt is held in the aggregate by one or more SFEs
during the previous taxable year, made a payment to an SFE pursuant to a contract, agreement or other arrangement under which SFE has effective control (referred to as "payment rule")
- Effective control means authority over key aspects of production of eligible components, energy generation or energy storage, which are not included in measures of control through authority, ownership or debt.
- With respect to licensing agreement, this includes when such agreement allows SFE to source items (components, subcomponents, critical minerals), direct the operation, utilize intellectual property, receive royalties, etc. The only exception is for bona fide purchase of intellectual property.

"Material Assistance to a Prohibited Foreign Entity" means:

requires consideration of "material assistance cost ratio" to determine if below "threshold percentage"
- Threshold percentages vary by year and technology but increase over time.
For Section 45Y and Section 48E, the ratio looks to total costs to the taxpayer for all "manufactured products (including components)" from PFEs.
For Section 45X, the ratio looks to the total direct materials costs for the production of the eligible component that are attributable to a PFE (applying Section 461 and regulations under Section 263A).
- Safe harbor tables are available for certain facilities.
There are some exceptions for existing contracts.
There is a six-year statute of limitations on material assistance and increased tax penalties on taxpayer and suppliers making certifications.

"Covered Nation" means North Korea, China, Russia and Iran.

"Covered Entity" means an entity organized under laws or is otherwise subject to jurisdiction of a covered nation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.