ARTICLE
23 October 2025

Energy Tax Credit Update: The Hunt For FEOCtober

CW
Cadwalader, Wickersham & Taft LLP

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Cadwalader, established in 1792, serves a diverse client base, including many of the world's leading financial institutions, funds and corporations. With offices in the United States and Europe, Cadwalader offers legal representation in antitrust, banking, corporate finance, corporate governance, executive compensation, financial restructuring, intellectual property, litigation, mergers and acquisitions, private equity, private wealth, real estate, regulation, securitization, structured finance, tax and white collar defense.
Enacted in August 2022, the Inflation Reduction Act (the "IRA") expanded energy tax credits by increasing credit amounts, broadening eligibility beyond wind and solar, and allowing credits to be developed and sold.
United States Tax
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Enacted in August 2022, the Inflation Reduction Act (the "IRA") expanded energy tax credits by increasing credit amounts, broadening eligibility beyond wind and solar, and allowing credits to be developed and sold, as outlined here.

Three years later, the One Big Beautiful Bill Act (the "OBBBA") has reined in that momentum. The widespread disappointment over its cutbacks to energy tax credits underscores how unusually generous the IRA was compared with prior climate legislation, providing a rare 10-year runway for a multibillion-dollar market to develop in just a few years.

The Crux mid-year report shows that deal volume in the first half of 2025 is more than double the total for record-setting 2024. Amid cutbacks to wind and solar, rising demand for electricity and higher prices have pushed an already booming market to diversify further, driving significant deal volume in clean fuels, energy storage, geothermal, and nuclear. Corporate tax liabilities are projected to be lower across the board this year, which could reduce demand for credits and, in turn, lead to lower credit prices and more favorable terms for buyers.

In our last update, available here, we covered the recent guidance that tightened the rules on what it means to "begin construction" for purposes of the 12-month safe harbor for wind and solar projects. Now the most significant open item is the long-awaited guidance on the "foreign entity of concern" ("FEOC") limitations that apply to most credit-eligible projects. The IRS missed the August deadline set by Trump's executive order, leaving the market in suspense as it awaits the guidance package.

Here's what we know about the FEOC rules so far: a developer cannot claim a credit if a project has impermissible ties to China, Iran, North Korea, or Russia. These ties go beyond where an entity is organized and disqualify any project that has received "material assistance" from a prohibited foreign entity during construction, requiring scrutiny of payments to suppliers, licensing arrangements, debt structures, and even warranty providers. There is also a 10-year recapture tax for the full value of the investment tax credit ("ITC") for any violation that occurs within 10 years after the project is placed in service. Because buyers bear this recapture risk under the rules governing credit sales, this will likely make ITCs less attractive than production tax credits ("PTCs"), which are not subject to recapture.

Although the rules are only forward-looking (i.e., not retroactive), forthcoming guidance should clarify how to cure a taint from impermissible ties to a prohibited foreign entity, potentially allowing developers to restructure projects to preserve credit eligibility. Guidance should also address whether developers can rely on certifications and de minimis rules when conducting supply chain due diligence.

As we wait for this crucial guidance, the uncertainty and suspense may feel like a spy thriller, but once the FEOC guidance arrives, the market is likely to grow more comfortable with the limitations and deals can move forward on a more predictable plotline. Tax insurance will also play a pivotal role, and we will be watching closely to see how that market responds.

We will continue to monitor developments and provide updates in Brass Tax as the landscape evolves.

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