On July 4, President Donald Trump signed into law P.L. 119-21, the “One Big Beautiful Bill Act” (OBBBA), which, among other notable changes to the US tax system, rolls back several renewable energy incentives enacted under the Inflation Reduction Act of 2022 (IRA) and creates new restrictions on renewable energy incentives for taxpayers with certain foreign entity connections, which are detailed below.

Modification of Zero-Emission Nuclear Power Production Credit (Section 45U)[1]

OBBBA retains the zero-emission nuclear power production credit for existing nuclear facilities through December 31, 2032. OBBBA, as discussed below, also enacted new “foreign entity of concern” (FEOC) rules, which may limit taxpayers’ access to the credit in certain circumstances.

Termination and Restrictions on Clean Electricity Production Credit (Section 45Y) and Clean Electricity Investment Credit (Section 48E)

OBBBA terminates the clean electricity production credit and the clean electricity investment credit for wind and solar energy property placed in service after December 31, 2027. However, such placed-in-service requirement does not apply to property that begins construction within one year after the enactment of OBBBA (i.e., by July 4, 2026). The credit for technologies other than wind and solar begins to phase out in 2034 as follows: 75% credit for facilities beginning construction during 2034, 50% credit for facilities beginning construction during 2035, and 0% credit for facilities beginning construction after December 31, 2035. Additionally, as discussed below, OBBBA’s FEOC limitations apply to restrict access to the credit in certain circumstances.

Phase-Out and Restrictions on Advanced Manufacturing Production Credit (Section 45X)

OBBBA terminates the advanced manufacturing production credit for wind components produced and sold after December 31, 2027. Additionally, effective for eligible components sold after December 31, 2026, a person will not be treated as having sold an eligible component that is integrated (a primary component) into another eligible component (a secondary component) unless 65% of the direct material cost to produce the secondary component within the same manufacturing facility is attributable to primary components mined, produced, or manufactured in the United States. Additionally, as discussed below, the credit is subject to OBBBA’s FEOC limitations.

Extension and Modification of Clean Fuel Production Credit (Section 45Z)

OBBBA extends the period for which the clean fuel production credit can be claimed by two years, until December 31, 2029. However, with respect to fuel produced after December 31, 2025, OBBBA (1) reduces the credit for sustainable aviation fuel from $1.75/gallon to $1/gallon, (2) limits the credit to fuel that is exclusively derived from a feedstock that was produced or grown in the United States, Mexico, or Canada, and (3) modifies the calculation of the emissions rate, which is used in determining the credit amount. Additionally, as discussed below, the credit is subject to OBBBA’s FEOC limitations. 

Restrictions on Carbon Oxide Sequestration Credit (Section 45Q)

While OBBBA does not modify the expiration of the carbon oxide sequestration credit, OBBBA increases the amount of the Section 45Q tax credit for captured carbon oxides used in either enhanced oil or natural gas recovery projects or for other specified commercial purposes from a current rate of $60 per metric ton to $85 per metric ton, the same amount available for captured carbon oxides disposed of in secure geological storage. The increased credit amounts apply to facilities or equipment that are placed in service after July 4, 2025. Additionally, as discussed below, the credit is subject to OBBBA’s FEOC limitations.

Phase-Out of Clean Hydrogen Production Credit (Section 45V)

OBBBA phases out Section 45V early. Under OBBBA, clean hydrogen facilities must begin construction by December 31, 2027, as opposed to December 31, 2032, as previously contemplated under the IRA. However, OBBBA does not apply the FEOC limitations to Section 45V.

Termination of Various Other Credits

OBBBA terminates early various other clean energy tax credits. For vehicles acquired after September 30, 2025, OBBBA terminates Section 30D (Clean Vehicle Credit), Section 25E (Previously Owned Clean Vehicles), and Section 45W (Qualified Commercial Clean Vehicles). Further, for property placed in service and expenditures made, respectively, after December 31, 2025, OBBBA terminates Section 25C (Energy Efficient Home Improvement Credit) and Section 25D (Residential Clean Energy Credit). Additionally, for property placed in service, property beginning construction, and property acquired, respectively, after June 30, 2026, OBBBA terminates Section 30C (Charging/Alternative Fuel Refueling Property), Section 179D (Energy Efficient Commercial Buildings), and Section 45L (New Energy Efficient Homes).

The various changes above may create additional pressure for taxpayers intending to claim energy incentives to accelerate expenditures or begin construction on projects much sooner than originally planned.

Foreign Entity of Concern Rules

OBBBA imposes greater FEOC restrictions on the production of renewable energy in the United States. Under OBBBA, FEOC rules disqualify certain energy projects from access to certain energy tax credits if the project is either owned or controlled by a disqualified foreign entity or person tied to China, Russia, North Korea, or Iran (each a Covered Nation) or if the project receives certain material assistance or supply chain inputs from such foreign entities or persons. Thus, understanding an energy producer’s supply chain and contractual ties to FEOCs is critical to ensuring eligibility for certain energy tax credits.

Key Definitions Under the FEOC Rules

At the heart of the FEOC rules is the concept of the “prohibited foreign entity” (PFE). A PFE is defined as either a “specified foreign entity” (SFE) or a “foreign-influenced entity” (FIE).

Specified Foreign Entity (SFE) 

SFEs are defined as any of the following: (1) foreign terrorist organizations designated by the US Secretary of State, (2) specially designated nationals and blocked persons on the US Department of Treasury’s OFAC list, (3) Chinese military companies operating in the United States, (4) entities on the Uyghur Forced Labor Prevention Act list, (5) certain Chinese battery manufacturers identified in the National Defense Authorization Act for FY 2024, (6) the governments of a Covered Nation (or any instrumentality thereof), (7) any entity incorporated (or maintaining a qualified business unit or principal place of business) in a Covered Nation, or (8) a citizen or national of a Covered Nation. In addition, any entity (whether a US entity or otherwise) that is “controlled” (generally meaning more than 50% owned, directly or indirectly) by a legal entity incorporated in a Covered Nation, a national or citizen of a Covered Nation, or a Covered Nation (or instrumentality thereof), is an SFE.

Foreign-Influenced Entity (FIE)

FIEs generally are entities that are determined to be under too much control or influence from an SFE. OBBBA uses two approaches to defining FIEs.

FIE – Statutory Test First, OBBBA statutorily lays out several contractual relationships that will render an entity a FIE: (1) an SFE owns at least 25% of the entity (by vote or value), (2) multiple SFEs together own at least 40% of the entity (by vote or value), (3) at least 15% of the entity’s original issued debt is held by one or more SFEs, or (4) an SFE has the authority —directly or indirectly — to appoint a covered officer, such as a board member or officer.

FIE – Effective Control Test Second, OBBBA introduces a much broader “effective control” test, which provides that if the entity makes a payment to an SFE under a contract or arrangement that gives the SFE (or a related entity) “effective control” over a qualified facility, energy storage technology, or eligible component — including the extraction, processing, or recycling of critical minerals — then such entity is a FIE. OBBBA requires the Internal Revenue Service (IRS) to publish guidance on the definition and application of the “effective control” test, and until such point, certain statutory rules apply for purposes of determining effective control.

Material Assistance From a PFE

Material assistance from a PFE is another critical factor that can jeopardize a project’s eligibility for energy tax credits. OBBBA establishes a cost ratio mechanism to measure material assistance with respect to each project: the material assistance cost ratio (MACR). As noted in the chart below, the material assistance rules apply only to clean electricity production credits, clean electricity investment credits, and advanced manufacturing production credits. 

For the clean electricity production credit (Section 45Y) and the clean electricity investment credit (Section 48E), the MACR is calculated by taking the total direct costs of all manufactured products and subcomponents incorporated into the facility, subtracting the costs attributable to PFEs, and dividing by the total direct costs. If the MACR is less than certain statutorily set thresholds, the project is deemed to have received material assistance from a PFE. For the advanced manufacturing production credit (Section 45X), only the direct material costs for eligible components are counted for purposes of calculating the MACR, which is calculated in the same manner noted above.

Projects must meet or exceed certain statutorily set MACR thresholds, which vary depending on the technology and the year in which construction begins. For example, some facilities must meet a 40% threshold in 2026, with the requirement rising to 60% or more in later years. The Treasury is required to issue safe harbor tables by December 31, 2026, to help clarify these MACR threshold requirements. Until such point, IRS Notice 2025-08 and supplier certifications can be used by taxpayers to demonstrate compliance with MACR percentage thresholds.

Summary of Tax Credits Limited by FEOC Rules

If a taxpayer meets the definition of a PFE due to its ownership structure or contracts with certain foreign entities, or receives material assistance from a PFE, depending upon the type of tax credit at issue, the taxpayer may not be eligible to claim the credit. The following chart provides an overview of how the FEOC rules limit access to the tax credits discussed above. 

As a result of the FEOC rules, any renewable energy project or manufacturing of eligible components will require an extensive FEOC analysis to determine tax credit eligibility. Moreover, strategics, private equity funds, or tax credit syndicators purchasing tax credits under Section 6418 will now need to conduct extensive diligence of the tax credit seller’s capital and organizational structure, and supply-chain structure, to ensure FEOC compliance is satisfied, and credits are properly transferable.

Further Guidance Needed on FEOC Rules

Although Congress attempted to refine the FEOC rules as OBBBA was enacted, there remain significant areas where Treasury and the IRS are expected to provide further guidance. For example, the scope of what constitutes “effective control” in the context of payments to FIEs is not fully defined, and the statute directs the Treasury and the IRS to issue rules to prevent entities from circumventing the restrictions through contracts or other arrangements. Additionally, the material assistance rules require the development of safe harbor tables by December 31, 2026, to clarify the percentage of costs attributable to PFEs. Until then, taxpayers must rely on interim guidance and supplier certifications, which may not address all practical scenarios.

Beginning of Construction Guidance

For many of the energy tax credits discussed in this alert, eligibility to claim such credits will turn on the precise moment a project is considered to have “begun construction.” The IRS, through a series of notices, has long applied two primary tests to determine when a project has begun construction: the five percent safe harbor and the physical work test. Although the details of those tests fall outside the scope of this update, it is important to note that in 2022 the Service confirmed that the analytical framework set out in those notices remains valid when evaluating projects for energy tax credit purposes. In certain parts of OBBBA, Congress formally incorporated the existing IRS beginning of construction notices, but only for the limited purpose of administering the statute’s FEOC provisions.

However, on July 7, 2025, the Trump Administration issued an Executive Order directing the Treasury Department to publish guidance on the “beginning of construction” rules, which would prevent developers from relying on perceived “loopholes” in the current beginning of construction guidance. Because this Executive Order could materially alter how and how quickly projects qualify for the array of federal energy credits discussed herein, sponsors, investors, and other stakeholders should re-examine their beginning of construction strategies and documentation in real time.

[1] All references to “Section” in this alert refer to a section of the Internal Revenue Code of 1986, as amended (the Code).