The "One Big Beautiful Bill Act" Substantially Alters Clean Energy Tax Landscape

On July 4, 2025, the legislation commonly known as the "One Big Beautiful Bill Act" (the "BBBA") was enacted. The BBBA makes significant changes to the tax credits available under the Inflation Reduction Act of 2022 (the "IRA"), including

• termination of 7 clean energy tax credits in 2025 or 2026
• disallowance of most surviving credits when the taxpayer, facility, or product has impermissible connections to China or other disfavored countries or entities, under provisions commonly referred to as foreign entity of concern ("FEOC") rules
• rapid termination of ITC and PTC for wind and solar¹
• accelerated phaseout of ITC and PTC for all other activities, and of the section 45V credit for clean hydrogen production
• an increase to the section 45Q carbon capture credit rate for enhanced oil recovery or commercial utilization
• an extension of section 45Z credit for clean fuel production but a drop in the credit amount for sustainable aviation fuel ("SAF").

On July 7, 2025, the President issued a related Executive Order (the "BOC Order") regarding the rapid termination of the ITC and PTC for wind and solar. This client update will focus on the effect of the BBBA and the BOC Order on clean energy tax incentives. For our coverage of the general business tax provisions of the BBBA, click here.

1. Revision to the ITC and PTC

A. Rapid Phaseout of ITC and PTC for Wind and Solar

The eligibility of wind and solar projects for the ITC and PTC is being phased out rapidly. To be eligible for either credit, the wind or solar facility must either

• begin construction on or before July 4, 2026 (the date which is 12 months after the July 4, 2025 date of enactment of the BBBA), or
• be placed in service prior to January 1, 2028.

B. Beginning of Construction (BOC)

Existing IRS guidance provides liberal rules for determining when construction begins for purposes of ITC and PTC phaseouts. Under the existing IRS guidance, a taxpayer can begin construction ("BOC") by commencing physical work on the project (including certain off-site work on a component of the project) or incurring 5% of the cost of equipment for the project. Under a safe harbor in the existing IRS guidance, a project that begins construction in 2026 can be placed in service as late as December 31, 2030, or in some circumstances even later. However, unlike the beginning of construction principles applicable under the FEOC rules (discussed below), the applicable IRS guidance is not statutorily frozen as of January 1, 2025.

The BOC Order directs that "[w]ithin 45 days following enactment of the One Big Beautiful Bill Act, the Secretary of the Treasury shall take all action as the Secretary of the Treasury deems necessary and appropriate to strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities. This includes issuing new and revised guidance as the Secretary of the Treasury deems appropriate and consistent with applicable law to ensure that policies concerning the 'beginning of construction' are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built."

It seems likely that the new IRS guidance issued pursuant to the BOC Order will be more restrictive than existing IRS guidance. The scope and effective date of the new guidance is unknown.

C. Accelerated Phaseout of ITC and PTC for Other Technologies

For technologies other than wind and solar, the BBBA accelerates the phaseout of the ITC and PTC by eliminating the prong of the phaseout that was based upon the year that U.S. greenhouse gas emissions from electricity production fall to 25% of 2022 levels. As a result, such projects that begin construction before 2034 will generally be entitled to the full ITC or PTC rate, but those rates will drop to 75% for construction begun in 2034, 50% for construction begun in 2035, and 0% thereafter. The scope of the BOC Order is limited to the phaseout of the ITC and PTC for wind and solar, so it is not clear to what extent any IRS guidance issued pursuant to the BOC Order might apply to other technologies or for other purposes of the ITC or PTC (including, for example, the domestic content or energy community adders).

D. Increased Domestic Content Requirement to Qualify for ITC Adder

Under prior law, the level of domestic content required to qualify for the domestic content adder for the ITC was permanently set at 40% (or 20% for offshore wind), while the percentage required to qualify for the PTC version of the adder increased over time. Under the BBBA, property that began construction before June 16, 2025 will continue to require 40% domestic content; however, projects beginning construction in 2025 after June 16, in 2026, or in a later year must consist of 45%, 50%, or 55% U.S. components, respectively, to qualify for the domestic content adder. These required percentages are lower (20%, 27.5%, and 35%) for offshore wind facilities beginning construction before 2027, then 55% thereafter.

E. PTC Adder for Nuclear Energy Communities

The BBBA expands the energy community credit adder to apply to certain advanced nuclear facilities that claim the PTC, but not to any such facilities that claim the ITC. An "advanced nuclear facility" is defined as any nuclear facility for which either the reactor design was approved after December 31, 1993, by the Nuclear Regulatory Commission and such a design or a substantially similar one was not approved before such date, or the Nuclear Regulatory Commission has authorized construction and issued a site-specific construction permit or combined license. To qualify for the energy community bonus credit on this basis, the advanced nuclear facility must be located in a metropolitan statistical area which has (or at any time after December 31, 2009, had) 0.17% or greater direct employment related to the advancement of nuclear power.

F. Leased Systems Formerly Eligible for Section 25D Credit for Solar Water Heating or Wind

The BBBA disallows the ITC and PTC for solar heating property and wind property that qualifies for the homeowner's credit under section 25D, as in effect prior to its repeal by the BBBA. This disallowance is limited to property that is leased to the homeowner. An earlier version of the BBBA would have extended this disallowance to leased rooftop solar systems, but that provision was not included in the bill as enacted.

G. ITC for Fuel Cells

The BBBA creates a 30% ITC specifically for qualified fuel cell property that begins construction after 2025. This credit is not subject to the prevailing wage and apprenticeship requirements, but it also does not benefit from other ITC adders. Fuel cells had previously struggled to qualify for the ITC after revisions in the IRA required property for which the credit is claimed to have an anticipated greenhouse gas emissions rate of no greater than zero. Under the BBBA, fuel cells qualify for the full 30% ITC regardless of technology, fuel type, or greenhouse gas emission profile.

2. Transferability (Sale) of Credits

Section 6418, allowing transfers (sales) of tax credits, has been revised to disallow the transfer of most clean energy tax credits to any entity that is a specified foreign entity (see the discussion of the FEOC rules below). This is an improvement over earlier versions of the bill that would have more broadly phased out the ability to transfer credits.

3. Advanced Manufacturing Production Credit (Section 45X)

A. Phaseout of Credit for Applicable Critical Minerals

Under prior law, the section 45X manufacturing credit for applicable critical minerals had no expiration date. The BBBA adds a phaseout that starts one year later than the pre-existing phaseout for other section 45X eligible components. The full credit rate is available for applicable critical minerals sold before 2031. Applicable critical minerals sold in 2031, 2032, or 2033 will be eligible for 75%, 50%, or 25% respectively of the currently allowable credit. Applicable critical minerals sold after 2033 will not qualify for a credit.

B. New Applicable Critical Mineral Category: Metallurgical Coal

The BBBA creates a separate category of applicable critical minerals for metallurgical coal, defined as coal suitable for use in the production of steel within the meaning of guidance published by the Department of Energy. Metallurgical coal produced before January 1, 2030, will qualify for a credit of 2.5% of the relevant production costs.

C. Changes to Rules Regarding Other Eligible Components

The credit for production of wind energy components will not apply to components produced and sold after December 31, 2027. The phase-out for other eligible components is unchanged.

An additional requirement was added for a component to qualify for the $10 credit for battery modules. The module must be "comprised of all other essential equipment needed for battery functionality, such as current collector assemblies and battery harnesses, or other essential energy collection equipment."

D. Reduced Scope of Integrated Component Rule

The BBBA modifies the rule that deems one or more eligible components to be sold to an unrelated person (as required to qualify for the credit) if such eligible components are integrated, incorporated, or assembled into another eligible component that is produced and sold to an unrelated person. Under the BBBA, the integration, incorporation, or assembly into the second eligible component must occur in the same manufacturing facility, at least 65% of the direct materials costs for the second eligible component must be for components mined, produced, or manufactured in the United States, and the credit is unavailable if the second component is integrated, incorporated, or assembled into a third component. This rule applies to components sold during taxable years beginning after December 31, 2026.

4. Carbon Capture and Sequestration Credit (Section 45Q)

The credit for carbon capture and sequestration was largely untouched by the BBBA and, in one respect, was significantly enhanced: the credit amount per ton of captured carbon oxide that is used in enhanced oil or gas recovery or for other commercial purposes, such as food and beverage, was increased from the current rate of $60 per ton to $85 per ton, the rate that was previously available only for carbon oxide disposed of by sequestration. This increase in the credit amount is equally available to carbon oxide captured from industrial emissions or direct air capture. The increased credit amounts apply to facilities or equipment that are placed in service after July 4, 2025; carbon capture projects already placed in service would not be able to claim the higher credit amounts for these uses. The requirement that construction of carbon capture projects begin before January 1, 2033, is unchanged. The FEOC rules also apply to the Section 45Q credit as covered below.

5. Clean Fuel Production Credit (Section 45Z)

The BBBA extends the availability of the Clean Fuel Production Credit under Section 45Z to fuel sold through December 31, 2029. However, qualifying fuels produced after December 31, 2025, must be exclusively derived from feedstock produced or grown in the United States, Mexico, or Canada. Under prior law, there had been a question as to whether certain production processes could be considered to have a negative emissions rate for most fuels by resulting in an enhanced credit amount. The BBBA explicitly rules out application of a negative emissions rate by providing that, for purposes of determining the emissions factor, qualifying fuels may not be treated as having an emissions rate of less than zero. However, the BBBA offers a significant exception to this prohibition in allowing biofuels derived from animal manure (which is the fuel category most commonly assigned a negative emissions rate) to have a negative emissions rate. In a blow to the sustainable aviation fuel ("SAF") industry, the BBBA reduces the per gallon credit for SAF from $1.75 to the amount available to other transportation fuels of $1.00, effective for fuel produced after December 31, 2025. As with other credits, these changes are in addition to the limitations under the FEOC rules covered below.

6. Clean Hydrogen Production Credit (Section 45V)

The BBBA accelerates the date by which clean hydrogen production projects must begin construction to December 31, 2027. This is considered a win for the sector after earlier versions of the BBBA would have required a 2025 beginning of construction date. The sector also benefits from the continued availability of the investment tax credit for hydrogen storage, compression and liquefaction equipment under section 48E and, as discussed above, the investment tax credit for hydrogen fuel cell property.

7. Termination of Other Clean Energy Credits

The BBBA significantly accelerates the end date for various tax credits relating to the acquisition of clean energy-related property. These credits, and the new applicable end dates, are as follows:

• Section 25E Previously Owned Clean Vehicle Credit—property must be acquired by September 30, 2025;
• Section 30D Clean Vehicle Credit—property must be acquired by September 30, 2025;
• Section 45W Qualified Commercial Clean Vehicles Credit—property must be acquired by September 30, 2025;
• Section 25C Energy Efficient Home Improvement Credit—property must be placed in service by December 31, 2025;
• Section 25D Residential Clean Energy Credit—expenditures must be incurred by December 31, 2025;
• Section 30C Alternative Fuel Vehicle Refueling Property Credit—property must be placed in service by June 30, 2026;
• Section 45L New Energy Efficient Home Credit—home must be purchased by June 30, 2026; and
• Section 179D Energy Efficient Commercial Buildings Deduction—property must begin construction by June 30, 2026.

8. Foreign Entities of Concern (FEOC)

With the exception of the Section 45V credit for hydrogen production, all IRA tax credits that survive beyond 2026 are subject to disallowance under new FEOC rules if the taxpayer, facility, or product has impermissible connections to China or other disfavored countries or entities. The FEOC rules may disallow the relevant tax credit to a "specified foreign entity," a "foreign-influenced entity," or an entity that receives "material assistance" from a "prohibited foreign entity." Each of those terms has a complex definition, as described below. The particular rules that apply, and the effective date of those rules, varies from credit to credit, as set forth in the table below.

A. Prohibited Foreign Entities, Specified Foreign Entities, and Foreign-Influenced Entities

1. Prohibited Foreign Entities (PFE)

A "prohibited foreign entity" ("PFE") is defined as either a "specified foreign entity" ("SFE") or a "foreign-influenced entity" ("FIE").

2. Specified Foreign Entities (SFE)

An SFE is defined as a "foreign-controlled entity" ("FCE") or an entity designated as a bad actor under certain existing statutes, including designation as a "foreign entity of concern," a "designated foreign terrorist organization," or a "Chinese military company operating in the United States." An FCE is defined as any of (i) the government of a covered nation (including any level of government below the national level and any agency or instrumentality thereof), (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 any of China, Russia, Iran, or North Korea.

3. Foreign-Influenced Entities (FIE)

An entity is an FIE if it satisfies either

• a direct control test for the current tax year, or
• with respect to the ITC, PTC, or section 45X manufacturing credit, an "effective control" test for the preceding tax year.

Under the direct control test, an entity is classified as an FIE if (i) a single SFE has the direct authority to appoint a board member, executive level officer, or person with similar powers or responsibilities, (ii) a single SFE owns at least 25% of the entity, (iii) one or more SFEs own in the aggregate at least 40% of the entity, or (iv) at least 15% of the debt of the entity has been issued, in the aggregate, to one or more SFEs. Special rules apply for determining whether a publicly traded entity is an FIE.

Under the effective control test, an entity is classified as an FIE if it makes a payment to an SFE pursuant to an agreement that entitles the SFE or a related party to exercise effective control over (i) a facility with respect to which the ITC or PTC may be available or (ii) the production of an "eligible component" under the section 45X manufacturing credit. The statute sets forth thirteen different powers, any one of which alone will constitute "effective control." These powers generally relate to power over operations or output of a facility, including exclusive control over a critical system within the facility. Six of those specified powers are operative immediately; seven of those specified powers are only relevant to the extent provided in regulations to be issued in the future. The BOC Order directs that "within 45 days following enactment of the One Big Beautiful Bill Act, the Secretary of the Treasury shall take prompt action as the Secretary of the Treasury deems appropriate and consistent with applicable law to implement the enhanced Foreign Entity of Concern restrictions in the One Big Beautiful Bill Act."

B. Material Assistance Rules for ITC, PTC, and Section 45X Manufacturing Credit

1. General Rules

A taxpayer is not entitled to claim the ITC, PTC, or section 45X manufacturing credit with respect to property with respect to which it receives "material assistance" from a PFE. Whether "material assistance" has been received is determined by comparing the "material assistance cost ratio" for such property to a "threshold percentage."

The material assistance cost ratio ("Cost Ratio") of a qualified facility (under the ITC or PTC) or energy storage technology (under the ITC) is the ratio of (i) the total costs attributable to manufactured products (as defined for purposes of the domestic content adder) incorporated upon completion of construction excluding costs of products that are mined, produced, or manufactured by a PFE, to (ii) the total costs attributable to manufactured products incorporated upon completion of construction. The Cost Ratio for a facility that produces eligible components under the section 45X manufacturing credit is the ratio of (i) the total direct costs that are paid or incurred for the production of an eligible component excluding costs paid or incurred for production of such eligible component that are mined, produced, or manufactured by a PFE, to (ii) the total direct costs paid or incurred for the production of the eligible component.

Threshold percentages are established by statute and vary by the type of property with respect to which a credit is being claimed and the year in which such property begins construction or is sold. Generally, the threshold percentages range from 40% to 95% and increase over time.

The BBBA requires the Secretary to issue safe harbor tables no later than December 31, 2026, which will identify the percentage of total direct costs of any manufactured product or total direct material costs of any eligible component which are attributable to a PFE and provide rules necessary to determine the amount of a taxpayer's material assistance from a PFE. As noted above, the BOC Order directs Treasury to provide guidance regarding FEOC matters within 45 days of the July 4, 2025 date of enactment of the BBBA. Until such safe harbor tables are issued, taxpayers may rely on tables issued in guidance on the domestic content adder (Notice 2025-08) and certifications provided by suppliers under penalty of perjury stating that property or direct material costs were not produced or manufactured by a PFE.

For purposes of the ITC and PTC, property acquired pursuant to a binding written contract entered into before June 16, 2025, for use in a facility that begins construction before August 1, 2025 and is placed in service before January 1, 2030 (or January 1, 2028 for wind and solar facilities), will not be considered in the calculation of the Cost Ratio.

For purposes of the section 45X manufacturing credit, property acquired pursuant to a binding written contract entered into before June 16, 2025 and used in a product sold before January 1, 2027 will not be considered in the calculation of the Cost Ratio.

2. Beginning of Construction (BOC)

Within the definitions of a PFE and "material assistance," the BBBA directly incorporates IRS Notice 2013-29 and subsequent related guidance addressing the beginning of construction of a project or facility for tax purposes, as in effect on January 1, 2025. The narrow context (PFE and material assistance) in which the BBBA adopts the BOC principles in effect on January 1, 2025, suggests that this "freeze" of BOC guidance as of January 1, 2025, does not apply in any other context. That appears to be the theory underlying the President's direction to Treasury in the BOC Order to provide "new and revised" guidance regarding the meaning of "beginning of construction" for purposes of the phaseout of the ITC and PTC for wind and solar.

3. Penalties and Statute of Limitations

The FEOC rules impose new or harsher penalties relating to the material assistance rule and a longer statute of limitations for IRS examination of material assistance issues.

A taxpayer that claims a credit which is later disallowed due to an IRS adjustment to the Cost Ratio of the underlying property may be liable for a substantial understatement penalty on understatements of tax greater than 1% of the true tax liability, as opposed to the normal 10%.

A supplier who makes a certification under the material assistance rules that it knows or reasonably should have known is false will generally be required to pay a penalty of 10% of the resulting underpayment of tax by its customer.

The period during which the IRS may assess additional tax for an error relating to material assistance from a PFE is extended to six years.

4. ITC Recapture Rule for FEOC Effective Control Payments

A taxpayer will be subject to recapture of 100% of the ITC claimed with respect to a property if within 10 years after the property is placed in service it makes a payment that would be deemed to provide an SFE with "effective control" over the taxpayer as described above. This rule applies to property placed in service in tax years beginning after July 4, 2027.

5. Summary of Application of FEOC Rules to Surviving Tax Credits

The table below summarizes the applicability of the FEOC rules disallowing tax credits to specified foreign entities, foreign-influenced entities and taxpayers who receive material assistance from a prohibited foreign entity.

In addition to the time pressure to implement begun construction strategies and understand the implications of the FEOC rules, the BBBA creates a number of significant changes to existing tax credits, as well as adding new uncertainties for credit qualification, which may affect tax equity and transferability strategies. We at Baker Botts would be pleased to assist you in these and other clean energy tax incentive matters.

Footnote

1 "ITC" refers to the clean electricity investment credit under section 48E. "PTC" refers to the clean electricity production credit under section 45Y. Apart from some changes affecting geothermal heat pump property, the BBBA did not impose new restrictions or limitations on the energy credit under section 48 or the renewable electricity production credit under section 45, both of which are generally available only if construction of the relevant property began before 2025.

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.