On May 22, 2025, the House passed the legislation entitled "The One Big Beautiful Bill" (the "BBB") that would, if enacted into law, severely restrict clean energy tax incentives. This client update addresses the BBB's phase-outs, restrictions, and repeal of transferability with respect to certain clean energy tax credits enacted or extended under the Inflation Reduction Act of 2022 (the "IRA"). For our separate discussion of the provisions of the BBB that affect general business, international, and individual taxation, click here.
The BBB will face further negotiation and likely modifications in the Senate under a process called reconciliation. While the reconciliation process requires only a simple majority of Senate members to approve the BBB, Senate Republicans are not yet aligned on the BBB and significant modifications are expected before it is in agreed form.
Clean Electricity Investment and Production Tax Credits (Sections 48E and 45Y)
Accelerated Termination
The BBB would terminate the Clean Electricity Investment Credit (the "ITC") under Code Section 48E and the Clean Electricity Production Credit (the "PTC") under Section 45Y for facilities that either —
- begin construction more than 60 days after the enactment of the BBB; or
- are placed in service after December 31, 2028.1
Under current law, the ITC and PTC gradually phase out for facilities beginning construction after 2032 or, if later, the year in which the United States achieves certain greenhouse gas emissions targets. Earlier versions of the BBB had proposed an accelerated phase-out of the credits, however, in a last-minute change before passage of the BBB, the phase-out was changed to complete termination by imposition of deadlines for beginning construction and placement in service. We expect the accelerated termination of the ITC and PTC in the BBB to be a focal point for further negotiations when the BBB reaches the Senate.
The addition of an absolute deadline for placing a facility in service will mean that a facility that timely begins construction but encounters unexpected construction delays pushing its placement in service beyond the deadline will be exposed to complete loss of the credits that the facility's developers anticipated. This risk of complete credit loss will make project financing extremely difficult if the BBB is enacted into law.
Restrictions on Certain Foreign Connections
The BBB imposes restrictions on the ability of entities with certain connections to a "prohibited foreign entity" ("PFE") to claim the ITC or PTC. These restrictions are sometimes referred to as "FEOC" rules, after an existing statute targeting "Foreign Entities of Concern" that partially inspired these restrictions.
The BBB creates several new defined terms for purposes of these restrictions:
- A PFE is either of a "specified foreign entity" ("SFE") or a foreign-influenced entity ("FIE");
- An SFE is an entity designated as a bad actor under the
authority of a variety of existing statutes (including the FEOC
rules) or a "foreign controlled entity"
("FCE");
- An FCE is (i) the government of a covered nation, (ii) a person who is a citizen or resident of a covered nation (and not also a citizen or lawful permanent resident of the United States), (iii) an entity organized or having its principal place of business in a covered nation, or (iv) an entity majority-controlled by one of the preceding types of FCEs;
- A "covered nation" is China, Russia, Iran, or North Korea;
- An FIE is an entity that (i) may have a board member, executive officer or similar person appointed by, (ii) has a specified percentage of its debt or equity held by, or (iii) in the preceding year made more than a specified portion of its total payments of interest, dividends, rent, royalties, or similar items to, one or more SFEs;
- "Material assistance" from a PFE is any component, subcomponent, or applicable critical mineral (as defined in Section 45X) that is extracted, processed, recycled, manufactured, or assembled by a PFE; any design of such property based on any copyright or patent held by a PFE; or any know-how or trade secret provided by a PFE. The definition excludes parts or materials that are (i) not uniquely designed or formulated for use in property that will generate credits under Sections 45Y, 48E, or 45X, and (ii) are not exclusively or predominantly produced by PFEs.
The restrictions imposed by the BBB include:
- An SFE is not eligible to claim the ITC or PTC in tax years beginning after enactment of the BBB;
- An FIE or an entity that in the current year makes more than a specified portion of its total payments of interest, dividends, rent, royalties, or similar items to one or more PFEs is not eligible to claim the ITC or PTC in tax years beginning two years after enactment of the BBB;
- For any facility that begins construction after December 31, 2025, the ITC and PTC is entirely disallowed if construction of the facility includes any "material assistance" from a PFE; and
- An entity that claims the ITC during a tax year beginning two years after enactment of the BBB is subject to 100% recapture of such ITC if, during any of the 10 years following placement in service of the property generating the ITC, it makes more than a specified portion of its total payments of interest, dividends, rent, royalties, or similar items to PFEs.
The restriction on material assistance from a PFE will have no impact if the BBB is enacted by November 1, 2025 and includes the accelerated termination of the ITC and PTC. In such case, no facility that begins construction after December 31, 2025 (which would be 60 days after enactment) will be eligible for the ITC or PTC, let alone subject to the material assistance restriction. If the accelerated termination is removed in any future version of the BBB, the material assistance restriction will be especially disruptive to ITC and PTC eligibility for any facility that sources unique parts or materials from China or any other covered nation.
No Transferability Restrictions
While the BBB proposes to restrict the transferability (sale) of most clean energy credits, making investment in the underlying clean energy projects less attractive, the BBB makes no changes to the transferability of the ITC and PTC under Section 6418. Earlier versions of the BBB had proposed a sunset of ITC and PTC transferability for any facility beginning construction more than two years after the date of enactment, but the BBB as passed by the House does not include any such sunset for these credits, since any such facility would not be eligible for the ITC or PTC under the accelerated termination. If the accelerated termination is removed in any future version of the BBB, it is possible that the transferability sunset will be reintroduced for the ITC and PTC.
Note Regarding Legacy ITC and Legacy PTC
The BBB makes no changes with respect to the production tax credit under Section 45 (the "Legacy PTC") and impacts the investment tax credit under Section 48 (the "Legacy ITC") only with respect to geothermal heat pump property. Accordingly, any wind, solar, or energy storage technology (among other technologies) that began construction for tax purposes on or before December 31, 2024 may be eligible for the Legacy ITC or Legacy PTC and in such case can avoid altogether the adverse tax consequences proposed under the BBB (including limitations on transferability).
Restrictions on Certain Leased Property Used at Residences (Such as Rooftop Solar)
The BBB disallows the ITC and PTC for certain solar and wind property (but not storage property) (i) of a type that qualifies for the Residential Clean Energy Credit under Section 25D, (ii) that is leased or rented to a third party, and (iii) with respect to which the lessee would be eligible for a credit under Section 25D if the lessee owned the property. If enacted, this restriction may be disruptive to the residential rooftop solar industry, as residential rooftop systems are regularly leased to customers. However, since the BBB would repeal the Section 25D credit for property placed in service after 2025, it is not clear whether this provision would have any practical impact absent changes in the effective dates of the provisions.
Clean Fuel Production Credit (Section 45Z)
The Clean Fuel Production Credit under Section 45Z receives unique treatment as the only IRA tax credit to have its availability extended under the BBB. The BBB extends the availability of the credit for transportation fuel sold through December 31, 2031, from the current cutoff date of December 31, 2027. However, the BBB also limits the availability of the credit to sales of transportation fuel exclusively derived from feedstock produced or grown in the United States, Mexico, or Canada. Additionally, the BBB modifies the determination of emissions rates for purposes of the credit by excluding any emissions attributed to indirect changes to land use and calling for additional Treasury guidance regarding transportation fuels derived from animal manure.
The BBB also makes changes to the Section 45Z credit consistent with changes to other tax credits. The BBB disallows the Section 45Z credit for tax years beginning after enactment for SFEs and for tax years beginning two years after enactment for FIEs. Finally, the BBB repeals transferability of the Section 45Z credit for fuel produced after December 31, 2027.
Other Credits
The BBB includes significant modifications to several other IRA credits:
- Carbon Capture -- Section 45Q: The Carbon Oxide Sequestration Credit under Section 45Q is largely unchanged by the BBB. The credit is disallowed for SFEs for tax years beginning after enactment, and for FIEs for tax years beginning two years after enactment. Transferability of the credit is repealed for credits derived from the capture of carbon using carbon capture equipment that begins construction more than two years after enactment.
- Nuclear -- Section 45U: The Zero-Emission Nuclear Power Production Credit under Section 45U is disallowed for SFEs for tax years beginning after enactment, and for FIEs for tax years beginning two years after enactment. Termination of the credit is accelerated by one year, with the credit unavailable for taxable years beginning after December 31, 2031.
- Hydrogen -- Section 45V: The Credit for Production of Clean Hydrogen under Section 45V applies only to facilities that begin construction before January 1, 2026, instead of the current deadline of January 1, 2033. Current law also offers an ITC for hydrogen storage property. Any taxpayer claiming the ITC for hydrogen storage property would be subject to the same restrictions on the ITC described above, including accelerated termination of the ITC for any hydrogen storage property that begins construction more than 60 days after the enactment of the BBB or is placed in service after December 31, 2028, and FEOC-type restrictions on certain foreign connections.
- Manufacturing -- Section 45X: The Advanced Manufacturing Production Credit under Section 45X is generally phased out for components sold after December 31, 2031, instead of the current cutoff of December 31, 2032. However, no credit is allowed with respect to wind energy components sold after December 31, 2027. The credit for the production of critical minerals, which does not phase out under current law, is also phased out after December 31, 2031 under the BBB. The credit is disallowed for SFEs for tax years beginning after enactment, and for FIEs for tax years beginning two years after enactment. The credit is also disallowed for tax years beginning two years after enactment for any component that includes material assistance from a prohibited foreign entity or is produced subject to a licensing agreement with a PFE which has a value greater than $1,000,000. Additionally, the credit is disallowed for tax years beginning two years after enactment for taxpayers that make payments to PFEs of interest, dividends, rent, royalties, or similar items that are related to the production of eligible components, and which represent more than a specified portion of a taxpayer's total payment of such items. Transferability of the credit is repealed for components sold after December 31, 2027.
Several other green energy tax credits are, subject to certain narrow exceptions, terminated for tax years after 2025 or for property acquired after December 31, 2025. These include:
- The Energy Efficient Home Improvement Credit under Section 25C,
- The Residential Clean Energy Credit under Section 25D,
- The New Energy Efficient Home Credit under Section 45L,
- The Credit for Previously Owned Clean Vehicles under Section 25E,
- The Alternative Fuel Vehicle Refueling Property Credit under Section 30C,
- The Clean Vehicle Credit under Section 30D, and
- The Credit for Qualified Commercial Clean Vehicles under Section 45W.
Exceptions exist for credits under Section 45L for homes that began construction before May 12, 2025, Section 45W for vehicles acquired pursuant to a written binding contract entered into before May 12, 2025, and Section 30D for vehicles placed in service during 2026 if certain criteria are met.
The BBB will face further negotiation and likely modifications in the Senate before being returned to the House and then sent to the President for approval, at which point it would be expected to become law. We will continue monitoring the BBB's progress and other developments affecting clean energy tax incentives. Baker Botts would be pleased to assist you in your analysis of the upcoming legislative changes and other clean energy tax incentive matters.
Footnote
1 Certain nuclear facilities would be eligible for the credits if their construction or expansion commences before 2029.
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.
