Jul 10, 2025
Key Tax Credit Policy Updates Explained
Key Tax Credit Policy Updates Explained: Breaking Down the "One Big Beautiful Bill Act"
The "One Big Beautiful Bill Act" (OBBB), signed into law on July 4, 2025, has significantly altered the landscape for clean energy tax credits established by the Inflation Reduction Act (IRA). While the core framework of the IRA remains, the OBBB introduces critical changes, including accelerated deadlines, new restrictions, and a complex web of rules targeting foreign influence. For developers, investors, and manufacturers, understanding these updates is essential for navigating the path forward.
This comprehensive breakdown will guide you through the most significant policy changes, from the new timelines for wind and solar to the intricate Foreign Entity of Concern (FEOC) rules and their broad implications.
A New Timeline for Wind and Solar: The "Placed-in-Service" Cliff
The most immediate and impactful change in the OBBB is the new set of deadlines for wind and solar projects seeking to qualify for the technology-neutral Production Tax Credit (§45Y) and Investment Tax Credit (§48E). The bill creates a two-tiered system that replaces the straightforward "begin construction" standard for these technologies.
- The 12-Month Safe Harbor Window: Wind and solar projects that "begin construction" by July 4, 2026 (within 12 months of the OBBB's enactment) will still benefit from the traditional four-year continuity safe harbor. This allows them to be placed in service as late as the end of 2030. This provides a crucial, but limited, window for projects already in development to lock in the more flexible timeline.
- The 2027 "Placed-in-Service" Cliff: For projects that miss the July 4, 2026, "begin construction" deadline, a much stricter rule applies. They must be placed in service by December 31, 2027, to qualify for the credits. Given that utility-scale projects often have development cycles of several years, this effectively creates a "cliff" that will make it challenging for new projects to qualify.
In contrast, other technologies like geothermal, hydropower, and energy storage were spared from this accelerated timeline. They retain the original "begin construction" standard with a phase-out schedule that extends to 2035, giving them a significant long-term advantage.
The FEOC Maze: A New Era of Supply Chain Scrutiny
Perhaps the most complex and far-reaching change introduced by the OBBB is the new set of Foreign Entity of Concern (FEOC) restrictions. These rules are designed to limit the involvement of entities with ties to China, Russia, North Korea, and Iran in the U.S. clean energy supply chain. The FEOC rules create a multi-layered compliance challenge for developers and manufacturers, with separate tests at both the project and taxpayer level.
Understanding the Key Terms:
- Prohibited Foreign Entity (PFE): This is a broad category that includes companies with significant ownership or control by a foreign government or entity of concern.
- Specified Foreign Entity (SFE): A more specific designation that includes entities explicitly named in the legislation (such as CATL and BYD) and those with majority ownership by a foreign government or national of a country of concern.
- Foreign-Influenced Entity (FIE): This casts a wider net, capturing companies with lower levels of foreign ownership (e.g., 25% by a single SFE or 40% by multiple SFEs) or those subject to "effective control" through contracts or licensing agreements.
The Three-Step FEOC Analysis:
1. Material Assistance Test (Project-Level): Projects beginning construction after December 31, 2025, will be ineligible for tax credits if they receive "material assistance" from a PFE. This is determined by a formula that calculates the percentage of a project's manufactured components that are sourced from non-PFE entities. The required percentage of "clean" components increases over time, creating a significant hurdle for projects with complex global supply chains.
2. Taxpayer Status Test (Entity-Level): Starting in 2026, any taxpayer that is classified as an SFE or FIE will be ineligible to claim or sell tax credits. This requires an annual assessment of a company's ownership structure, debt, and governance.
3. "Effective Control" Test (Contractual): Even if a company passes the first two tests, it can still be tripped up by contractual arrangements that give an SFE "effective control" over a project. This includes provisions related to operational decisions, intellectual property rights, and long-term service agreements.
The FEOC rules come with steep penalties, including a six-year statute of limitations for the IRS to challenge compliance and a 20% penalty for miscalculations. For projects claiming an ITC, a violation of the FEOC rules within 10 years of being placed in service could trigger a full recapture of the credit, a draconian measure that will likely make these ITCs more difficult to sell in the transfer market.
Updates to Key Tax Credits
The OBBB also includes a number of changes to other key tax credits, creating a mixed bag of extensions, reductions, and new requirements:
| Credit | Key Impact Under OBBB | Critical Dates & Deadlines | Foreign Entity of Concern Rules |
| § 48E Clean Electricity Investment Tax Credit (ITC) for Solar & Wind | Replaces the flexible "begin construction" standard with a strict "placed-in-service" deadline for solar and wind projects, creating a significant development cliff. | Projects must either have begun construction by July 4, 2026, to benefit from a four-year completion window, or be placed in service by December 31, 2027. | Fully applicable. This includes project-level supply chain and material assistance tests, taxpayer-level ownership tests, and a 10-year ITC recapture provision for violations. |
| § 48E Clean Electricity Investment Tax Credit (ITC) for Energy Storage & Geothermal | These technologies retain a more favorable and longer qualification timeline compared to the stricter deadlines imposed on solar and wind projects. The credit remains available for standalone storage. | Projects must begin construction by December 31, 2033, to qualify for the full credit. The credit will then phase down to 75% in 2034 and 50% in 2035. | Fully applicable. Energy storage projects are subject to stricter material assistance thresholds than power generation projects. |
| § 45X Advanced Manufacturing Production Credit | The eligibility for this credit is significantly curtailed, particularly for wind components and critical minerals. However, metallurgical coal has been added as a newly eligible component. | Eligibility for wind components is eliminated after 2027. The credit for critical minerals will be phased down between 2031 and 2033. | Fully applicable. Manufacturers are required to analyze their supply chains to ensure they meet increasing thresholds for non-FEOC sourced inputs to be eligible to claim the credit. |
| § 45V Clean Hydrogen Production Tax Credit (PTC) | The timeline for projects to qualify for the clean hydrogen production credit has been considerably shortened. | The deadline for projects to begin construction has been moved up five years to December 31, 2027. | Taxpayer-level restrictions apply. Entities classified as a Specified Foreign Entity (SFE) or Foreign-Influenced Entity (FIE) are ineligible to claim this credit. |
| § 45Z Clean Fuel Production Credit | The credit for producing clean transportation fuels has been extended, but with the introduction of new sourcing restrictions. | The credit is extended for two years, now expiring on December 31, 2029. Starting in 2026, fuel feedstocks must be sourced from North America. | Taxpayer-level restrictions (SFE/FIE status) will apply starting in 2026. |
| § 30C Alternative Fuel Vehicle Refueling Property Credit | This credit, which incentivized the installation of electric vehicle charging equipment, has been eliminated six years earlier than under previous law. | The credit is eliminated for any property placed in service after June 30, 2026. | FEOC rules were not a primary feature of this credit's structure. |
| § 45W Commercial Clean Vehicle Credit | The credit for businesses acquiring clean vehicles has been eliminated under the new legislation. | The credit is eliminated for vehicles acquired post September 30, 2025 | N/A |
| Transferability of Credits | The ability for developers to sell their tax credits to other entities has been preserved and, in some ways, expanded. However, a significant new diligence requirement has been introduced for buyers. | The new rules are effective immediately upon the bill's enactment on July 4, 2025. | Tax credit buyers are now subject to FEOC restrictions. Any entity classified as an SFE or FIE is ineligible to purchase tax credits in the transfer market. |
Strategic Implications for the Clean Energy Industry
The OBBB represents a significant new development for climate incentives. The punitive stance toward wind and solar, combined with the complex FEOC rules, will require a fundamental rethinking of project development and supply chain management.
Key Takeaways for Stakeholders:
- Increased Compliance Burden: Taking advantage of tax credits requires ever greater diligence in documentation to ensure compliance.
- Urgency for Wind and Solar Developers: The race is on to meet the July 4, 2026, "begin construction" deadline.
- Supply Chain Overhaul: FEOC rules necessitate analysis of every supplier and sub-supplier.
- Opportunities for Other Technologies: The favorable treatment of geothermal, energy storage, and other technologies creates new opportunities for investment and growth in these sectors.
The OBBB has ushered in a new, more challenging chapter for the U.S. clean energy transition. Success in this new environment will require a proactive, strategic, and deeply informed approach to navigating the complexities of the updated tax code. Giraffe is here to help! Reach out at info@giraffe.financial.