On July 4, 2025, President Donald Trump signed the One Big, Beautiful Bill Act into law, which scales back renewable energy tax provisions. The final bill did, however, contain more favorable renewable energy tax provisions compared to earlier versions of the bill.
The bill as enacted contains a placed-in-service deadline for solar and wind projects of Dec.31, 2027, but only to the extent that they do not begin construction for tax purposes prior to July 4, 2026. This key exception allows solar and wind developers to safe harbor projects in 2025 and 2026 that will be placed in service in 2028, 2029 and 2030. Prior to enactment, credits for wind and solar projects began phasing out for projects beginning construction in the later of 2033 or the year in which the U.S.’s carbon emissions reach 25% of 2022 levels, allowing placed-in-service dates until at least 2037.
Under the new law, all other technologies, claiming the Clean Energy Production Tax Credit under 45Y or Clean Energy Investment Tax Credit under Section 48E (including battery energy storage systems) are able to begin construction up until the end of 2033 and still qualify for a full credit, although the foreign entity of concern (FEOC) restrictions, described below, apply to projects beginning construction on Jan. 1, 2026 and later.
The Clean Fuel Production Credit in Section 45Z of the Code was extended through Dec. 31, 2029. Under prior law, the Section 45Z credit would have been eliminated on Jan. 1, 2028. However, there were adverse changes to Section 45Z credit — negative emission rates (which allowed for increased credit rates above the statutory $1.00 pre-inflation adjusted amount) are now only available for projects utilizing manure feedstock, producers must use feedstock from the U.S., Mexico or Canada to qualify for fuel sold in 2026 or later, and sustainable aviation fuel is now only allowed up to a $1.00 credit, down from $1.75.
The Clean Hydrogen Production Credit in Section 45V was scaled back, and projects must now begin construction prior to Dec. 31, 2027 to receive the 10-year production credit, allowing placed-in-service dates up until the end of 2031. Under prior law, these projects would have had until Dec. 31, 2032 to begin construction.
The bill also enacts cumbersome FEOC restrictions, which are primarily designed to steer the U.S. energy supply chain away from China. Restrictions related to components manufactured by prohibited foreign entities apply to projects beginning construction after Dec. 31, 2025 (which would have a placed-in-service deadline of Dec. 31, 2029), while developers must ensure their entities do not become foreign-influenced entities for any projects placed in service after Dec. 31, 2025. However, this foreign-influenced entity restriction does not apply to projects claiming credits under Section 45 or 48, which must have begun construction prior to Jan. 1, 2025.
The bill also enacts a new elective 100% depreciation deduction for “qualified production property,” which is generally a manufacturing facility producing components (other than food and beverage manufacturing which occurs at the point of sale) in the U.S. that begins construction between Jan. 16, 2025 and Jan. 1, 2029 and is placed in service prior to Jan. 1, 2031, which is designed to spur domestic manufacturing and gives hope that the renewable energy supply chain can catch up to provide domestically sourced components to utilize the domestic content adder and comply with FEOC restrictions. Under prior law, such manufacturing facilities would generally have to recover their cost basis over a 39-year depreciation schedule.
The bill adds no new limits on transferability when compared to prior law, which were contemplated by earlier versions of the bill, other than that credits cannot be transferred to prohibited foreign entities.
While the bill provides that projects with planned placed-in-service dates in 2028, 2029 and 2030 can be safe harbored until July 4, 2026, clients should still consider beginning construction for projects with placed-in-service dates of 2028 or 2029 as soon as possible, since forthcoming IRS guidance that could affect the beginning of construction regime or related continuity safe harbor is possible.
A table summarizing the treatment of various credits under the final bill is below.
| Credit | Final Bill |
|---|---|
| Section 45Y, Clean Energy Production Tax Credit (PTC) | All technologies other than wind and solar must begin construction in 2033 or earlier to receive full credit; three-year phaseout thereafter (2034 — 75% of credit; 2035 — 50% of credit; 2036 — 0% of credit). Wind and solar technologies must begin construction prior to July 4, 2026 or be subject to a Dec. 31, 2027 placed-in-service date. Wind and solar projects beginning construction prior to July 4, 2026 are subject to the standard continuity requirements, described below, which allow for 2028, 2029 and 2030 placed-in-service dates. Projects beginning construction after Dec. 31, 2025 are subject to the material assistance from prohibited foreign entities rules. New 10% energy community adder for advanced nuclear facilities based on nuclear power employment with no related unemployment requirement. Credit disallowed for residential solar heating property and small wind property leased to a third party. |
| Section 48E, Clean Energy Investment Tax Credit (ITC) | All technologies other than wind and solar must begin construction in 2033 or earlier to receive full credit; three-year phaseout thereafter (2034 — 75% of credit; 2035 — 50% of credit; 2036 — 0% of credit). Wind and solar technologies must begin construction prior to July 4, 2026 or be subject to a Dec. 31, 2027, placed-in-service date. Wind and solar projects beginning construction prior to July 4, 2026 are subject to the standard continuity requirements, which allow for 2028, 2029 and 2030 placed-in-service dates. Projects beginning construction after Dec. 31, 2025 are subject to the material assistance from prohibited foreign entities rules. Domestic content rules changed to more closely mirror Section 45Y. Credit disallowed for residential solar heating property and small wind property leased to a third party. |
| Section 48 ITC for Solar | Permanent ITC of up to 30%, (2% base + 2% energy community + 2% domestic content) x 5 for PWA, for solar eliminated. Under prior law, this would have extended permanently after the credit under Section 48E expired. |
| Section 45U, Zero-Emission Nuclear Power PTC | Not modified; credit allowed through Dec. 31, 2032. |
| Section 45X, Advanced Manufacturing PTC | Phaseout extended by one year, such that eligible components qualify for 100% of the credit if sold in 2030 or earlier; 75% of credit if sold in 2031; 50% if sold in 2032; 25% if sold in 2033; and 0% if sold in 2033. Credit eliminated for wind energy components sold after Dec. 31, 2027. New permanent credit for the production of metallurgical coal equal to 2.5% of production costs. Subject to material assistance from prohibited foreign entities rules beginning in 2026. |
| Section 45V, Clean Hydrogen PTC | Eliminated for projects beginning construction after Dec. 31, 2027. |
| Section 30C, Alternative Fuel Vehicle Refueling Property Credit | Eliminated for projects placed in service after June 30, 2026. |
| Section 25E, Previously Owned Clean Vehicle Credit | Eliminated after Sept. 30, 2025. |
| Section 30D, Clean Vehicle Credit | Eliminated after Sept. 30, 2025. |
| Section 45W, Qualified Commercial Clean Vehicles Credit | Eliminated after Sept. 30, 2025. |
| Section 25C, Energy Efficient Home Improvement Credit | Eliminated for projects placed in service after Dec. 31, 2025. |
| Section 25D, Residential Clean Energy Credit | Eliminated for expenditures after Dec. 31, 2025. |
| Section 45L(h), New Energy Efficient Home Credit | Eliminated for homes acquired after June 30, 2026. |
| Section 45Z, Clean Fuel PTC | Extended to fuel sold before 2030. Increased rates for sustainable aviation fuel eliminated. Negative emissions rates eliminated, except for manure feedstocks. Beginning in 2026, feedstock must be produced in the U.S., Canada or Mexico for fuel sold. |
| Section 45Q, Carbon Oxide Sequestration Credit | Credit amount for utilization or use in oil and gas recovery increased to match that for sequestration (i.e., both are now at a $85 per metric ton rate, prior to inflation adjustments). |
Beginning Construction
Despite the rules in the bill, McGuireWoods suggests that developers consider beginning construction on wind, solar and hydrogen projects with a placed-in-service date of 2028 or 2029 as soon as possible.
Generally, the IRS recognizes two tests for a project to begin construction for tax purposes, the physical work test and the 5% safe harbor. Only one test must be satisfied to establish the beginning of construction. Once construction has begun, a taxpayer must make continuous efforts towards completion. Under a continuity safe harbor endorsed by the IRS, projects that begin construction in 2025 would have until the end of 2029 to be placed in service, and projects that begin construction in 2026 would have until the end of 2030 to be placed in service.
Under the physical work test, a taxpayer must perform physical work of a substantial nature on equipment that is an integral part of the facility. Off-site work must be performed pursuant to a binding written contract on components not normally held in the supplier’s inventory of the supplier that are critical to the project’s production of energy. For on-site work, work such as foundations uniquely designed to support electricity-generating equipment or other physical work of a substantial nature can establish the beginning of construction.
Under the 5% safe harbor, a taxpayer must, pursuant to a binding written contract, pay or incur at least 5% of the total cost of the facility and, for accrual-based taxpayers, take delivery of such components or expect to take delivery within 3.5 months of the execution of the binding written contract.
FEOC Rules
The bill adopts a regime designed to stop credits claimed under 45Y, 48E, 45X, 45Q, 45Z and 45U from being claimed by or sold to certain prohibited foreign entities. For Section 45Y, 48E and 45X, this applies to credits claimed beginning Jan. 1, 2026. Additionally, (i) for Section 45Q, it applies beginning Jan. 1, 2026, and (ii) for Section 45Z and 45U, it applies beginning Jan. 1, 2026, in each case by determining if an entity is a prohibited foreign entity without regards to (b) and (c) under “foreign-influenced entity,” below (i.e., the provisions relating to payments under certain contracts).
Prohibited Foreign Entity: A specified foreign entity or a foreign-influenced entity.
Specified Foreign Entity: Foreign entities of concern, as described in the William M. (Mac) Thornberry National Defense Authorization Act of FY 2021, include Chinese military companies operating in the United States, any entity on a list required by the strategy to enforce prohibition on imported goods made through forced labor in the Xinjiang Uyghur autonomous region, an entity listed as ineligible for Department of Defense battery acquisition in the National Defense Authorization Act of FY 2024 or a foreign-controlled entity.
Foreign-Controlled Entity: Foreign-controlled entities include the government of a covered nation (the Democratic People’s Republic of North Korea, the Republic of China, the Russian Federation and the Islamic Republic of Iran); a person who is a citizen, national or resident of a covered nation, provided the person is not a U.S. citizen or lawful permanent resident; an entity or qualified business unit incorporated or organized under the laws of or having its principal place of business in a covered nation; or an entity controlled by any of the listed foreign-controlled entities.
Foreign-Influenced Entity: Foreign-influenced entities are entities:
- with respect to which, during the taxable year, (a) a specified foreign entity has the direct or indirect authority to appoint a covered officer, (b) a single specified foreign entity owns at least 25% of such entity, (c) one or more specified foreign entities own in the aggregate at least 40% of such entity, or (d) at least 40% of the debt of such entity is held in the aggregate by one or more specified foreign entities;
- which, during the previous taxable year, made a payment to a specified foreign entity pursuant to a contract, agreement or other arrangement which entitles such specified foreign entity to exercise control over a qualified facility or energy storage technology, including (a) determining the timing or production of electricity or an eligible component, (b) determining which entity may purchase or use the output of a project, (c) restrict access to data critical to the production of storage or energy or (d) repair or maintain the facility or energy storage technology on an exclusive basis; or
- which is party to a licensing agreement with a specified foreign entity that entitles such specified foreign entity to exercise effective control over a qualified facility or energy storage technology or is longer than 10 years — exceptions exist for licensing agreements entered into prior to July 4, 2026 and bona fide purchases of intellectual property.
Material Assistance From a Prohibited Foreign Entity: Material assistance from a prohibited foreign entity is determined with respect to the “material cost ratio” of a qualified facility, energy storage technology or product line that produces eligible components. Generally, the material cost ratio for Sections 48E and 45Y is the portion of the cost of manufactured products, for 45X, is the cost of materials used to produce an eligible component, which come from sources other than prohibited foreign entities. The bill requires the IRS to issue safe harbor tables with respect to the cost of manufactured products and materials by Dec. 31, 2026, and states that until then, taxpayers may use the existing tables in IRS Notice 2025-08 to determine the cost of manufactured products and materials.
Additionally, the bill introduces new certification rules, but until the IRS issues guidance on these, taxpayers may rely on certifications from manufacturers or suppliers regarding the material cost ratio, provided that they do not rely on certifications they have reason to know are false. Existing contracts are exempt from the material assistance rules, provided that they were entered into prior to June 16, 2025, and relate to property that will be placed in service prior to Jan. 1, 2030.
A table summarizing the material cost ratios applicable under Sections 45Y, 48E and 45X is below:
| Credit and Category | Material Cost Ratio |
|---|---|
| Sections 45Y and 48E — Qualified Facilities | Beginning construction in 2026: 40% Beginning construction in 2027: 45% Beginning construction in 2028: 50% Beginning construction in 2029: 55% Beginning construction in 2030 or later: 60% |
| Section 48E – Energy Storage Technology | Beginning construction in 2026: 55% Beginning construction in 2027: 60% Beginning construction in 2028: 65% Beginning construction in 2029: 70% Beginning construction in 2030 or later: 75% |
| Section 45X — Solar Components | Sold in 2026: 50% Sold in 2027: 60% Sold in 2028: 70% Sold in 2029: 80% Sold in 2030 or later: 85% |
| Section 45X — Wind Components | Sold in 2026: 85% Sold in 2027: 90% |
| Section 45X — Inverters | Sold in 2026: 50% Sold in 2027: 55% Sold in 2028: 60% Sold in 2029: 65% Sold in 2030 or later: 70% |
| Section 45X — Batteries | Sold in 2026: 60% Sold in 2027: 65% Sold in 2028: 70% Sold in 2029: 80% Sold in 2030 or later: 85% |
| Section 45X — Critical Minerals | Sold in 2029 or earlier: 0% Sold in 2030: 25% Sold in 2031: 30% Sold in 2032: 40% Sold in 2033 or later: 50% |
Changes to Depreciation
The bill eliminates (a) 5-year Modified Accelerated Cost Recovery System depreciation for solar projects that do not qualify for a credit under Sections 48E or 45Y and (b) the energy-efficient commercial building deduction under Section 179D for projects beginning construction after June 30, 2026. Solar projects may still be able to utilize 100% bonus depreciation under Section 168(k).
The bill enacts a new Section 168(n), which provides a 100% depreciation for qualified production property. Such property must (i) be used by the taxpayer as an integral part of a qualified production activity, (ii) be used in the U.S. or a U.S. territory, (iii) commence its original use with the taxpayer, (iv) begin construction between Jan. 19, 2025 and Jan. 1, 2029 and (v) be placed in service prior to Jan. 1, 2031 (which may be extended in the case of an act of God). The taxpayer also must make a valid election to immediately deduct the property. For the purposes of (i), the use of a lessee will not be attributed to a lessor taxpayer, so the election cannot be made with respect to leased property. Cost segregation studies will be needed, as only property directly related to the qualified production activity is included in the basis, and activities attributable to certain uses (office space, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to manufacturing) are not included.
A qualified production activity includes the manufacturing, production or refining of a qualified product, which must include “substantial transformation” of the property comprising the qualified product. A qualified product generally means any tangible personal property that is not food or beverage prepared in the same building as a retail establishment in which such property is sold.
The 100% depreciation deduction for qualified production property is subject to a 10-year recapture period if such property ceases to be used for the production of qualified property or if it is disposed of by the taxpayer.
Master Limited Partnerships
The bill causes hydrogen storage, carbon capture, advanced nuclear, hydro-power and geothermal activities to constitute “qualifying income” under the master limited partnership tax regime. This provision creates an interesting regime that could pass tax credits through to master limited partnership investors and provide a method of raising capital for capital-intensive technologies. Additionally, this provision appears to be a boost to the oil and gas industry, which already uses the master limited partnership structure and could benefit from the inclusion of Section 45Q.