One Big Beautiful Bill Act Modifies Qualification Requirements for Renewable Energy Tax Credits
On July 4, 2025, the final version of a much-anticipated “One Big Beautiful Bill Act” ("BBB") was signed into law by the President. As a budget reconciliation bill, the BBB makes a number of significant changes to the Internal Revenue Code impacting the qualifications and availability of tax credits to renewable energy and energy storage projects, including the Clean Electricity Production Credit available under Section 45Y of the Code (the “PTC”) and the Clean Electricity Investment available under Section 48E of the Code (the “ITC”), among other energy tax credits for residential and commercial projects. The concern that surrounded the BBB was generated in large part by earlier versions of the bill passed in the House of Representatives on May 22, 2025, and by changes accepted by the Senate Finance Committee on June 16, 2025, which collectively threatened a sudden end or quick ramp-down of several clean energy tax credits first implemented or expanded by the Inflation Reduction Act of 2022 (“IRA”). As a result of late amendments to the final version, however, the BBB is neither a complete departure from the incentives created by the IRA, nor the full embrace of renewable energy that the IRA provisions represented. Instead, the BBB primarily targets incentives available to Wind and Solar projects, including the ITC and PTC, by imposing shorter deadlines for project qualification, expanded domestic content requirements, and additional and significant rules regarding the participation of “foreign entities of concern” (“FEOC”) in both the financing of projects and the supply of equipment and equipment components. And, while certain changes are not as dire as first anticipated, the quicker phase-out periods and broader restrictions on foreign content are destined to have significant and immediate impacts on the availability of energy tax credits for a large number of planned future projects, as well as those already started. At a minimum, developers will need to take a hard look at construction schedules, supply agreement, corporate structures, and existing finance models to confirm their continued viability. Additional guidance from the Treasury Department on these issues is expected, as further discussed below.
Accelerated Phase Out of Tax Credits for Wind and Solar Projects
Beyond the financial impacts to future projects, the most immediate consequences of the BBB to existing projects will result from the accelerated phase-out of the ITC and PTC for Wind and Solar facilities already in the pipeline and whose economics may depend on these tax credits. Under the IRA, the technology-neutral ITC and PTC were made available to all zero or less-than-zero emissions generation facilities, including Wind and Solar, that began construction through 2034, with the tax credits capable of meeting between 30% and 70% of project costs. Under the BBB, developers of Wind and Solar projects will no longer have until 2034 to achieve commercial operation, with the scope of the impacts depending largely upon the maturity of the project. Importantly, these timeline changes affect only Wind and Solar projects, with other qualifying technologies, including nuclear, geothermal, and hydrogen, remaining subject to the original statutory timelines established in the IRA, including phase downs beginning as late as 2033 and ending in 2036. The BBB does not alter the qualifications for or availability of pre-2025 tax credits.
For Wind and Solar projects currently in the planning phase or beyond, the BBB establishes a very narrow window for preserving a project’s eligibility for both of the ITC and PTC, distinguishing between projects that begin construction within twelve (12) months of the bill’s enactment (i.e. before July 4, 2026), and those that begin construction after that date. Accordingly, for facilities that are able to begin construction before the 12-month deadline, existing rules would continue to apply. Such projects, however, would then be subject to IRS requirements for demonstrating continuous progress or meeting a four-year safe harbor window to achieve commercial operation after start of construction, effectively imposing a potential outer limit of 2030 for project completion. For facilities that begin construction after the 12-month period, the facility will have the additional requirement that it be placed into service on or before December 31, 2027, in order to qualify for the PTC or ITC, as applicable. These shortened timelines for achieving commercial operation are expected to create significant hurdles for numerous projects that already face delays from overburdened supply chains and, most significantly, interconnection issues related to necessary transmission system upgrades.
One anticipated consequence of the shortened timelines is for existing and relatively mature projects to determine whether their existing construction schedules may be accelerated to meet the “commenced construction” obligations within the next 12 months. As relevant to the ITC and PTC, the requirements for establishing the start of construction under federal tax law are currently contained in several Internal Revenue Service (“IRS”) Notices, which may be changed by the agency without additional legislative approval. The two primary methods are known as the Physical Work Test, which establishes that a project has commenced construction when it has engaged in “physical work of a significant nature,” which may include work performed both on-site and off-site so long as the work is essential to the project and not of a general nature. The Physical Work Test does not rely on the cost of the work performed. The second method for demonstration the start of construction is the Five Percent Safe Harbor, which established that construction has started when the project spends at least five percent or more of the facility's total cost to advance the project. Because this category may include equipment and other costs incurred under a binding contract, it is considered an easier threshold to demonstrate. Both tests are also subject to a Continuity Requirement, which requires that the project demonstrate continuous progress toward completion, which is demonstrated through the individual facts and circumstances or, as noted above, by meeting the Continuity Safe Harbor provisions and achieving an in service by the end of the fourth calendar year after commencement of construction.
Executive Order on Beginning Construction
Developers must also be aware that on July 7, 2025, following the passage of the BBB, the White House issued an Executive Order directing the Treasury Department to review existing guidance on “Beginning of Construction,” with a stated deadline of August 18, 2025. The Executive Order specifically targets anticipated efforts to artificially accelerate construction or otherwise artificially seek to establish eligibility for the use of safe harbors.
Increased Restrictions on FEOC
In addition to an accelerated phase-out of the ITC and PTC for Wind and Solar projects, the BBB implements a number of additional restrictions and requirements on the participation of foreign entities in projects that seek to qualify for the available tax credits. These include prohibitions on granting the ITC or PTC to projects that receive “material assistance from a prohibited foreign entity,” where “material assistance from a prohibited foreign entity” is determined by the “material assistance cost ratio” designated for each year in which construction begins. The term “material assistance cost ratio” is defined as the percentage of direct costs of all manufactured products incorporated into a facility that relate to components manufactured by a person other than a prohibited foreign entity.
For purposes of this restriction, a “prohibited foreign entity” ("PFE") is defined as either a “specified foreign entity” ("SFE"), such as a designated foreign terrorist organization, as defined in 15 USC § 4651(8)(A), (B), (D), or (E); or a “foreign-influenced entity” ("FIE"), which is defined generally as any entity in which an SFE has an ability to control or direct the activities of the project company. This may include a direct ownership by a single SFE greater than 25%, or multiple SFE’s greater than 40%, an ability to appoint officers or otherwise have “effective control” over the entity through contractual agreements, including relevant debt instruments. Notably, the BBB requires the Treasury Department to issue specific guidance to implement this rule, but provides an interim definition that includes, among other things, contractual rights providing “specific authority” over key aspects of the relevant project, such as: an ability to determine timing of activities related to the production of electricity or who may purchase such electricity; an ability to restrict access to critical data, property, or personnel; a right to specify or direct sources of components, subcomponents, or critical minerals; or an exclusive right to repair or operate equipment necessary to the production of electricity. The material assistance rules apply to any project construction that begins after December 31, 2025.
Other Changes
In addition, the BBB also contains other changes to the IRC that will limit important tax credits for residential and roof-top solar, including eliminating the ITC and PTC for lease arrangements that qualified for clean energy credits under Section 25D of the Code and phasing out certain manufacturing credits on wind turbine components under Section 45X of the Code.
Hodgson Russ Takeaways
The changes implemented by the BBB may be classified into two categories: those specifically directed at tax credits for Wind and Solar facilities, and those directed at foreign influence in corporate governance and project components. The former will require project developers to examine permit timelines, construction agreements, interconnection applications, and similar schedules to determine whether their individual projects might begin construction within the next 12 months to maintain the status quo, or otherwise achieve commercial operation by the end of 2027. Such reviews should include change-of-law and amendment provisions in existing contracts that might allow for the acceleration of construction or other remedies. Project developers will also have to continue to monitor whether the White House’s Executive Order materially changes construction requirements for use of existing safe harbor provisions. The latter changes, which relate to all technologies, will have a much larger impact on existing supply chains, component and equipment selections, and financing arrangements that will be specific to each individual company and project.
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