The “One Big Beautiful Bill” Act – Navigating the New Energy Landscape

On July 4, 2025, President Donald Trump signed H.R. 1, titled the One Big Beautiful Bill Act (the Act). The Act significantly modifies certain energy tax provisions in the Inflation Reduction Act of 2022 (the IRA)¹ and contains variations from the versions of the legislation initially passed by the House² and initially introduced in the Senate.

The Act is expected to have a significant impact on the renewable energy industry. Developers, manufacturers, investors, tax equity and financing parties, and other industry stakeholders should revisit existing strategies to identify key drivers that might be adversely affected by the Act’s modifications — particularly those relating to wind and solar projects and foreign entities of concern — and to ensure that the tax incentives that remain available are used most efficiently. 

As described more fully below, among the changes made by the Act are the following:

• the accelerated phaseout or termination of certain energy tax credits added by the IRA including, most notably, the termination of the technology-neutral tax credits (i.e., Section 45Y Clean Electricity Production Credit (45Y production tax credit, or PTC) and Section 48E Clean Electricity Investment Credit (48E investment tax credit, or ITC)) for wind and solar projects that are placed in service after 2027, with an exception for projects on which construction begins on or before July 4, 2026
• the introduction of complex foreign entity of concern (FEOC) rules that make projects owned or controlled by, or that receive “material assistance” from, a prohibited foreign entity (PFE) ineligible for certain tax credits

Notably, as described more fully below, the Act generally does not affect energy projects that began construction by the end of 2024 and are eligible for pre-IRA tax credits pursuant to Section 48 (Section 48 ITC) and Section 45 (Section 45 PTC). In addition, the Act generally maintains the IRA’s initial phaseout schedule for the “technology-neutral” credits for most technologies other than wind and solar, enhances certain clean energy tax credits, and opens up the clean energy sector to investments by publicly traded partnerships. 

The Act generally does not affect the eligibility of projects for accelerated depreciation (in a reversal of the initial proposals by the House and Senate) and does not change the domestic content or energy community adders, although those adders would be subject to accelerated phaseout or repeal in the same manner as the base credits.³ 

The Act also retains the tax credit transferability provisions (with a new restriction on transfers to certain FEOCs) and the direct-pay option, which effectively makes applicable tax credits “refundable.”

A key factor to determine a project’s (or taxpayer’s) eligibility for most tax credits is the time a project or facility begins construction. Accordingly, the acceleration of the phaseout or termination of certain tax credits in the Act (especially those available for wind and solar projects) will require developers to reevaluate their current “beginning of construction” (BOC) strategy and will likely require them to revise and accelerate these plans to remain eligible for the relevant tax credits.  

These efforts to reevaluate and revise BOC strategies will be affected by an executive order issued by President Trump on July 7, 2025 (the Executive Order). The Executive Order directs the Secretary of the Treasury, within 45 days following the date of the Act’s enactment, to take all action the Secretary deems necessary and appropriate to strictly enforce the termination of the Section 45Y PTC and Section 48E ITC for wind and solar facilities, including the issuance of “new and revised guidance as the Secretary of the Treasury deems appropriate and consistent with applicable law to ensure that policies concerning the beginning of construction are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of the subject facility has been built.” As discussed more fully below, the Executive Order adds another layer of complexity and uncertainty to developers’ and other taxpayers’ planning, as taxpayers will need to determine in the short term which rules and guidance to follow in order to qualify their wind and solar projects for the BOC exception to the placed-in-service deadline and potentially be ready to revise these plans again once any new or revised guidance is issued.  

Changes to Existing Energy Credit Provisions

Section 45Y PTC / Section 48E — Zero Emission / Clean Electricity PTCs and ITCs

Prior Law 

For projects beginning construction after 2024, the IRA replaced the Section 45 PTC and Section 48 ITC with corresponding “technology neutral” credits: the Section 45Y PTC and the Section 48E ITC. Each of these credits was previously subject to a phaseout starting in 2034 (or later, depending on changes in greenhouse gas emissions).  

Changes Under the Act

In addition to the FEOC-related limitations described more fully below, the act modifies the application of Section 48E and Section 45Y in a number of ways.

Wind and solar facilities. The Act terminates the Section 45Y PTC and the Section 48E ITC for wind and solar facilities that are placed in service after December 31, 2027, with an exception for facilities that begin construction on or before the date that is 12 months following the date of the Act’s enactment (July 4, 2026).⁴   

Based on this BOC exception, under current guidance, and subject to any changes to such guidance issued by Treasury pursuant to the Executive Order, wind and solar projects that begin construction in 2025 would need to be placed in service before the end of 2029, and wind and solar projects that begin construction after 2025 but on or before July 4, 2026, would need to be placed in service before the end of 2030. Wind and solar projects beginning construction after July 4, 2026, would need to be placed in service before the end of 2027.  

Phaseout of other technologies. Other technologies eligible for either credit, including qualified energy storage, hydropower, and geothermal technologies, will be phased out starting in 2034, generally in accordance with the original IRA phaseout schedule.⁵   

Expanded Section 48E ITC eligibility for fuel cell property. Under the IRA, fuel cell property beginning construction after 2024, like other technologies, (i) had to be emissions-neutral to qualify for the Section 48E ITC, (ii) had to satisfy the prevailing wage and apprenticeship requirements to qualify for the 5x ITC multiplier, and (iii) was eligible for the energy community and domestic content adders. For qualified fuel cell property beginning construction after 2025, the Act provides that such projects will be eligible for a 30% Section 48E ITC without regard to greenhouse gas emissions, and the 30% ITC percentage will not be increased or adjusted by any other provision of Section 48E. Accordingly, unlike other technologies eligible for the Section 48E ITC, qualified fuel cell property beginning construction after 2025 will qualify for a 30% ITC without regard to greenhouse gas emissions and without regard to the prevailing wage and apprenticeship requirements but will not be eligible for any additional ITC adders available to those other technologies. Qualified fuel cell property on which construction begins in 2025 will remain subject to the same rules applicable to other technologies.

Nuclear facilities – Section 45Y energy community adder. The Act added a new nuclear “energy community” bonus credit under Section 45Y (equal to 10% of the credit amount otherwise available) for advanced nuclear facilities situated in a metropolitan statistical area that has (or at any time after December 31, 2009, had) 0.17% or greater direct employment related to the advancement of nuclear power. 

Domestic content rules. As noted, the Act modifies the domestic content adder provision under Section 48E to include an escalating domestic content threshold for projects beginning construction before June 16, 2025 (40%, 20% in the case of offshore wind), after June 16, 2025 and before January 1, 2026 (45%, 27.5% in the case of offshore wind), 2026 (50%, 35% in the case of offshore wind), and after 2026 (55%). This aligns the domestic content thresholds applicable under Section 48E with those applicable under Section 45Y and corrects what many believe was a drafting error in the version of Section 48E included in the IRA.

Sidley Observations

The accelerated repeal of the Section 45Y PTC and Section 48E ITC for wind and solar projects will adversely affect the wind and solar industry and will likely require significant restructuring of existing pipelines of wind and solar projects expected to be built in the next several years. The exception for projects beginning construction within 12 months following enactment of the Act provides some relief for new wind and solar development projects but will require careful review of the developers’ existing BOC strategy and will likely require the acceleration of certain activities to maintain the ability to satisfy such standard. Developers should discuss their current BOC strategy and their ability to revise and expand their current activities in the near term with their supply chain, construction, and capital partners. These efforts are expected to lead to significant activity in the next 12 months, with some developers potentially encountering supply-chain and queue challenges.

In the short term, developers’ planning efforts must address some uncertainty around the parameters of the BOC exception following the issuance of the Executive Order.  

BOC deadlines are not a new concept in the context of renewable energy credits. They have played a significant role in development activity over the past 12 years as taxpayers navigated BOC deadlines applicable to ITCs and PTCs prior to the adoption of the IRA and to exceptions to the prevailing wage and apprenticeship requirements applicable under the IRA.  

A series of IRS notices published since 2013 generally provide that a taxpayer can demonstrate BOC using one of two methods: (i) by showing that at least 5% of the total eligible project costs have been paid or incurred before the BOC deadline or (ii) by beginning “physical work of a significant nature” on the project. Under either BOC test, the taxpayer must also satisfy certain continuity requirements, which may generally be satisfied if the project is “placed in service” within four years of BOC. Similar guidance was provided with respect to the “Section 1603 grant” program adopted as part of the American Recovery and Reinvestment Act of 2009, which provided for the payment of cash grants in lieu of ITCs or PTCs for eligible property that began construction prior to certain dates. 

The implication of the language in the Executive Order is that the longstanding BOC guidance should be narrowed in the case of wind and solar projects intending to qualify for the BOC exception to the 2027 placed-in-service deadline. Importantly, the Executive Order focuses only on the Section 45Y PTC and Section 48E ITC available to wind and solar projects but not the other technologies with phaseout schedules tied to beginning of construction.⁶ It is unclear whether the narrow focus of the Executive Order was intended to suggest a different standard should apply for wind and solar relative to other technologies or whether that narrow focus was instead due to the relative immediacy of the BOC deadline for those technologies.

In any event, it seems reasonable to assume that the existing BOC guidance will be modified in some ways for purposes of the BOC exception to the placed-in-service deadline for wind and solar, but less clear is what the substance and effective date of those modifications will be. Assuming that Treasury complies with the directive in the Executive Order, new guidance will be issued by mid-August that may address this uncertainty.

It is unclear what Treasury would do to implement the Executive Order. Notably, the Act codifies the existing BOC notices for purposes of the FEOC rules discussed below.⁷ It is unclear whether Treasury could or would issue new guidance or change the existing BOC notices to add new requirements, likely stricter than the current requirements, only for purposes of determining the general eligibility of wind and solar projects for the Section 45Y PTC and Section 48E ITC, while still allowing taxpayers to rely on existing guidance in other beginning of construction contexts.  

Also uncertain is when any new or revised guidance will be effective. While Treasury does not tend to apply changes to its longstanding guidance on a retroactive basis and often provides transition periods when that guidance changes, it is unclear whether a project’s satisfaction of the existing physical work test or 5% safe harbor prior to the issuance of new or revised guidance will operate to “grandfather” that project. In light of the foregoing, developers and investors should carefully review their current BOC strategy under existing guidance and consider the impact of any potential changes to the BOC guidance on that strategy.

Section 45Q — Carbon Oxide Sequestration Credit

Prior Law 

Section 45Q entitles taxpayers who (i) own carbon capture equipment used to capture qualified carbon oxide from an industrial facility or from the atmosphere and (ii) physically or contractually sequester or use it for certain purposes as provided by Section 45Q to a credit for each metric ton of qualified carbon oxide captured and sequestered or used during the 12-year period starting on the date the equipment is first placed in service. To qualify for the credit, the carbon capture equipment must be part of a facility on which construction begins before 2033.

Historically, the credit for carbon oxide captured and disposed of in secure geological storage has been higher than the credit for carbon oxide captured and used in enhanced oil or natural gas recovery projects (EOR) or for other specified commercial uses.

Changes Under the Act 

The Act does not accelerate or change the expiration of the Section 45Q credit, which remains available for projects the construction of which begin before January 1, 2033. The Act increases the amount of the Section 45Q tax credit for captured carbon oxides used in either EOR 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. 

As discussed more fully below, Section 45Q tax credits are subject to the Act’s new FEOC limitations applicable to projects owned or controlled by PFEs but not those applicable to projects receiving “material assistance” from PFEs.

Section 45U — Zero-Emission Nuclear Power Production Credit

Prior Law 

Section 45U provides a two-tier credit, adjusted for inflation, per kWh of electricity produced at a qualified nuclear facility and sold to an unrelated party after 2023 and before 2033.

Changes Under the Act 

The Act’s sole change to Section 45U is the introduction of the FEOC provisions. As discussed more fully below, Section 45U tax credits are subject to the Act’s new FEOC limitations applicable to projects owned or controlled by PFEs but not those applicable to projects receiving “material assistance” from PFEs.

Section 45V — Clean Hydrogen Production Credit

Prior Law 

Section 45V provides a two-tier, inflation-adjusted, 10-year production tax credit for clean hydrogen produced after 2022 at a qualified facility, the construction of which begins before a specified date.

Changes Under the Act 

The Act accelerates the termination of this credit by providing that the 45V credit will not be available for projects on which construction begins after December 31, 2027. That is five years earlier than the IRA sunset date. The FEOC provisions discussed more fully below do not apply to the Section 45V Credit.

Section 45X — Advanced Manufacturing Production Credit

Prior Law 

Section 45X provides tax credits for manufacturers of eligible components produced and sold by a taxpayer to an unrelated party. The Section 45X credit amount varies depending on the eligible component. The Section 45X credit begins phasing out in 2030 and is not available for components sold after 2032.

Changes Under the Act 

The Act generally maintains the IRA phaseout schedule for the Section 45X credit, with a few exceptions. Most notably, the Act terminates the credit for wind energy components sold after 2027. In addition, the IRA phaseout schedule will now apply to the Section 45X credit for critical minerals, which was previously codified as a permanent tax credit excluded from the phaseout.

The Act further creates a new category of eligible critical minerals for “metallurgical coal.”

Another change relates to the credit amount calculation for integrated components. As noted, the Section 45X credit is generated upon the sale of an eligible component to an unrelated person. To address scenarios where manufacturers are vertically integrated companies — meaning they produce an eligible component that is then integrated, assembled, or incorporated into another eligible component — the pre-Act Section 45X(d)(4) provided that a person would be treated as having “sold” an eligible component to an “unrelated person” if the component is integrated, incorporated, or assembled into another eligible component which is sold to an unrelated person.

The Act retains the integration structure promulgated under Section 45X(d)(4) but imposes the following new restrictions on credit eligibility for vertically integrated companies:

• An eligible component (the “primary component”) to be integrated into another eligible component (the “secondary component”) must be produced within the same manufacturing facility.  
• At least 65% of the total direct material costs incurred or paid by the taxpayer to produce each secondary component must be attributable to primary components which are mined, produced, or manufactured in the U.S.  

Finally, the Act now requires that to be eligible for the Section 45X credit, manufactured battery modules must be “comprised of all other essential equipment needed for battery functionality.”  

As discussed more fully below, Section 45X tax credits are subject to the Act’s new FEOC limitations applicable to projects (i) owned or controlled by PFEs or (ii) receiving “material assistance” from PFEs.

Section 45Z — Clean Fuel Production Credit

Prior Law 

Section 45Z, added by the IRA, provides a clean fuel production tax credit for taxpayers who produce and sell qualifying transportation fuel to an unrelated party before a specified date. The credit amount is determined, in part, by reference to the fuel’s greenhouse gas emissions rate.

Changes Under the Act 

One of the few energy-related “winners” in the Act is the Section 45Z Clean Fuel Production Credit. The Act extends the period the Section 45Z credit can be claimed by two years, until December 31, 2029, but reduces the value of the credit for sustainable aviation fuel from $1.75/gallon to $1/gallon for fuel produced after 2025. The Act also limits the availability of the Section 45Z credit for fuel produced after December 31, 2025, to fuel that is exclusively derived from a feedstock that was produced or grown in the United States, Mexico, or Canada. 

The Act introduces new provisions that change how the emissions rate used in determining the credit amount is calculated. The Act generally prohibits the emissions rate for transportation fuel from being less than zero. This is noteworthy because the emissions rate is used to calculate the Section 45Z credit and a negative emissions rate would result in a higher credit amount as compared to a positive emissions rate (assuming all other aspects of the calculation are the same). Some developers took the position that the prior formulation in the Section 45Z allowed using a negative emission score, leading to value of tax credits in excess of $1/gallon. Such assumptions and projections will now need to be revised. 

The Act provides an exception to such rule for transportation fuel derived from animal manure, which may have an emissions rate that is less than zero. Additionally, with respect to any transportation fuel derived from animal manure, a distinct emissions rate shall be provided with respect to each of the specific feedstocks used to such produce such fuel (i.e., dairy manure, swine manure, poultry manure, and such other sources determined by the Secretary of the Treasury). The Act also provides that the amount of lifecycle greenhouse gas emissions shall be adjusted as necessary to exclude any emissions attributed to indirect land use change. All of the aforementioned changes are effective for transportation fuel produced after December 31, 2025.

As discussed more fully below, Section 45Z tax credits are subject to the Act’s new FEOC limitations applicable to projects owned or controlled by PFEs but not those applicable to projects receiving “material assistance” from PFEs.

Termination of Other Energy Credits

In addition to the changes to the energy credits addressed above, the Act terminates the following energy credits:

Bonus Depreciation 

Prior Law 

Under pre-Act law, eligible equipment and property, including renewable energy property, were eligible for bonus depreciation permitted by the Tax Cuts and Jobs Act. The prior 100% bonus depreciation was subject to a phaseout schedule providing that a 40% bonus depreciation was allowed for qualified property placed in service in 2025, 20% in 2026, and 0% in 2027 and thereafter. 

Changes Under the Act 

The Act makes 100% bonus depreciation permanent for eligible property placed in service beginning in the first taxable year ending after January 19, 2025. This change means taxpayers may immediately deduct the cost of qualifying property placed in service on or after January 20, 2025. For taxable year 2026, taxpayers can elect out of bonus depreciation and elect into a 40% bonus (or 60% for property with a longer production period) or otherwise use the applicable MACRS or straight-line depreciation methods. 

Sidley Observations 

Although the ability to claim 100% bonus depreciation is a significant benefit for taxpayers, this change is not expected to have a significant impact on renewable deal structures and economics. For various reasons, including an inability to benefit from 100% bonus depreciation in a single year and a risk mitigation preference to maintain a reasonable and balanced capital account balance and deficit restoration obligation amounts, developers and investors of renewable energy projects often choose to elect out of the bonus depreciation regime. 

Section 6418 — Third-Party Sales of Eligible Credits

Prior Law 

The IRA added Section 6418 to the Internal Revenue Code, which allows eligible taxpayers to transfer all or a portion of their eligible credits for cash to a taxpayer not related to the transferor taxpayer (within the meaning of Section 267(b) or 707(b)(1)).

Changes Under the Act 

The Act deviates significantly from the proposed House Act in that it does not repeal the transferability provisions for any of the energy credits.⁸ While this is good news to developers of renewable energy projects, the credits available to sell will be limited by the accelerated repeal/phaseout of credits and the FEOC rules described more fully below. The Act also provides that credits may not be transferred to “specified foreign entities” under the FEOC Rules. 

The Act extends the transferability provisions to the Section 40A biodiesel fuels credit consisting of the small agribiodiesel producer credit available under Section 40A(b)(4). That change is effective for such fuel sold or used after June 30, 2025. 

Access to Publicly Traded Partnerships

Prior Law 

Publicly traded partnerships (MLPs) are taxed as corporations unless they meet certain “qualifying income” requirements. As a result, use of the MLP structure was limited to activities that generate passive income, such as dividends or interest, or income from activities relating to oil and gas or other natural resources.  

Changes Under the Act 

The Act expands the expands the activities that can be undertaken by MLPs to include 

• transportation and storage of hydrogen
• generation and storage of electricity and capture of carbon oxides from qualifying facilities that meet minimum carbon oxide capture requirements
• electricity production from qualifying nuclear, hydropower, and geothermal facilities
• operation of certain geothermal energy property
• transportation and storage of certain biofuels, alcohol fuels, and sustainable aviation fuels 

Sidley Observations  

The Act is a welcome expansion of the industries in which MLPs can operate. The MLP structure provides a source of capital not previously available for clean energy projects that could create some tailwinds for new investment in the qualifying projects.

Foreign Entity of Concern Provisions/Restrictions

In addition to the repeals and accelerated phaseout schedules for existing energy credit provisions, the Act introduces complex restrictions relating to certain relationships with PFEs. These restrictions broaden the categories of restricted foreign entities from those covered by the Biden-era Department of Energy interpretation of FEOC applicable in the context of electric vehicles to a more expansive category of PFEs.  

In general, these restrictions are divided into two sets of rules. The first set includes restrictions related to ownership and control of a project by a “specified foreign entity” (SFE) or a “foreign-influenced entity” (FIE). The second set relates to projects for which SFEs or FIEs provide “material assistance,” which is determined using a cost-based formula assessing the portion of direct project or component costs attributable to an SFE or FIE. 

The first set of rules (relating to ownership and control) applies to most energy credits, including the Section 45Y PTC, Section 48E ITC, Section 45Q Carbon Oxide Sequestration Credit, Section 45U Zero-Emission Nuclear Power PTC, Section 45X Advanced Manufacturing PTC, and Section 45Z Clean Fuel Production Credit. The second set of rules (relating to “material assistance”) applies only to the Section 45Y PTC, the Section 48E ITC, and the Section 45X Advanced Manufacturing PTC. 

Ownership- and Control-Related Restrictions 

Starting in 2026, no tax credit is allowed if the taxpayer is a PFE, which includes both SFEs and FIEs. An SFE is generally an entity that is (i) identified by reference to an enumerated list of authorities as a threat to the security of the United States, including “foreign entities of concern,” (ii) a Chinese military company operating in the U.S., or (iii) a “foreign-controlled entity.” A domestic entity will be an SFE only if it is a “foreign-controlled entity,” which generally requires more than 50% ownership by entities with ties to North Korea, China, Russia, or Iran.⁹ 

The definition of an FIE is much broader than the definition of a foreign-controlled entity. Subject to certain narrowly drafted exceptions for publicly traded entities (or entities owned by publicly traded entities), an entity will be treated as an FIE during a taxable year if

• an SFE (including any foreign-controlled entity) has the direct authority to appoint a covered officer, which includes a board member, executive officer, or person with similar powers;
• a single SFE has an ownership interest of 25% or more;
• multiple SFEs hold, in the aggregate, ownership interests of 40% or more;
• one or more SFEs is issued 15% or more of the entity’s outstanding debt; or
• during the previous taxable year, the entity made a payment to an SFE pursuant to a contract, agreement, or other arrangement which entitles the SFE (or a related entity) to exercise “effective control” (i) in the case of the Section 45Y PTC and Section 48E ITC, over any qualified facility or energy storage technology of the taxpayer (or a related person) or (ii) in the case of the Section 45X Advanced Manufacturing PTC, with respect to any eligible component produced by the taxpayer (or a related person); the extraction, processing, or recycling of any applicable critical mineral; or the production of an eligible component which is not an applicable critical mineral.

For these purposes, “effective control” is defined generally as one or more agreements or arrangements similar to those listed below which provide one or more contractual counterparties with specific authority over key aspects of the production of eligible components, energy generation, or energy storage which are separate from any authority, ownership, or debt that would otherwise cause an entity to be a foreign-influenced entity. Until guidance is issued by Treasury, “effective control” means

• the unrestricted right of a contractual counterparty to
  
  • determine the quantity or timing of production of an eligible component produced by the taxpayer,
  • determine the amount or timing of activities related to electricity production at a qualified facility of the taxpayer or the storage of electrical energy in the taxpayer’s energy-storage technology,
  • determine which entity may purchase or use the output of a production unit that produces eligible components,
  • determine which entity may purchase or use the output of a qualified facility of the taxpayer,
  • restrict access to data critical to production or storage of energy (or restrict site access) for personnel of the taxpayer, or
  • exclusively maintain, repair, or operate plant or equipment necessary for the taxpayer’s production of eligible components or electricity and
    
    
• IP licensing arrangements relating to a qualified facility, energy-storage technology, or production of an eligible component, if
  
  • a contractual right is retained by the counterparty (i) to specify or direct one or more sources of components, subcomponents, or applicable critical minerals utilized in a qualified facility or energy storage technology or in the production of an eligible component; (ii) to direct operation of a qualified facility, energy-storage technology, or production unit that produces an eligible component; (iii) to limit the taxpayer’s use of intellectual property related to a qualified facility, energy storage technology, or eligible component production; (iv) to receive royalties (or payments under related agreements) under the licensing or similar agreement beyond the 10th year of the agreement (including extensions or modifications); or (v) to direct or otherwise require the taxpayer to enter into an agreement to provide services longer than two years (including extensions or modifications);
  • such arrangement does not provide the licensee with all technical data, information and know-how necessary to enable the licensee to produce the products subject to the arrangement without further involvement from the counterparty or another SFE; or
  • such arrangement is entered into (or modified) after the date of the Act’s enactment.

Notably, IP licensing arrangements with an SFE entered into (or modified) after the date of the Act’s enactment will be deemed to provide the SFE with “effective control” even if none of the other effective control characteristics is included in such arrangement. Based on the statutory language, and subject to the “bona fide” sale exception discussed immediately below, it appears that the adoption (or modification) of any licensing arrangement with an SFE following the date of the Act’s enactment will provide the SFE with “effective control” for these purposes.    

IP licensing agreements or arrangements constituting a bona fide purchase or sale of intellectual property will not give rise to effective control, but any purported purchase or sale that provides for reversion of ownership after a period of time will not be treated as a bona-fide sale.  

Material Assistance Restrictions

In addition to the ownership restrictions, the FEOC rules prohibit taxpayers from claiming the Section 45Y PTC or Section 48E ITC if the construction of the project begins after December 31, 2025, and the owner receives material assistance from a PFE (i.e., an SFE or an FIE). Similarly, in the case of the Section 45X PTC, taxpayers are ineligible to claim the credit in any taxable year beginning after July 4, 2025, if the eligible components were produced with material assistance from a PFE.

The Act provides a cost-based formula for assessing whether a project has received “material assistance” from a PFE. A taxpayer is treated as receiving material assistance when its “material assistance cost ratio” falls below a yearly, technology-specific threshold to be phased in over the coming taxable years. In the case of qualified facilities and energy storage technology eligible for the Section 45Y PTC or the Section 48E ITC, the applicable threshold percentage is determined based on the date on which such project begins construction. In the case of eligible components and critical minerals eligible for the Section 45X Advanced Manufacturing Credit, the applicable threshold percentage is determined by reference to the relevant technology and the year in which the eligible component is sold. (A schedule of these threshold percentages is included in the attached Schedule A).  

Key to applying these thresholds is the material assistance cost ratio. For qualified facilities and energy storage technology, the material assistance cost ratio is the percentage of the total direct costs attributable to all manufactured products (including components) incorporated into the qualified facility or energy storage technology that are not mined, produced, or manufactured by a PFE. For eligible components, the material assistance cost ratio is the percentage of the total direct material costs paid or incurred by the taxpayer for the production of such eligible component that are not mined, produced, or manufactured by a PFE. If the cost ratio of a qualified facility, energy storage system, or manufactured component is less than the applicable threshold percentage, the project/component fails the test and loses eligibility for the applicable tax credit.

Taxpayers may elect to exclude the cost of any manufactured product, eligible component, or constituent element, material, or subcomponent of an eligible component from the material assistance cost ratio calculation if such item was (1) acquired by the taxpayer (or manufactured or assembled for or by the taxpayer) pursuant to a contract entered before June 16, 2025, and (2) (a) placed in service before January 1, 2030 (or in the case of a solar or wind power-generating facility, January 1, 2028), in a facility that began construction before August 1, 2025, or (b) in the case of a constituent element, material, or subcomponent, used in a product sold before January 1, 2030.  

The Act directs Treasury to, prior to December 31, 2026, issue safe harbor tables (i) identifying the percentage of total direct costs of any manufactured product, and the percentage of total direct material costs of any eligible component, attributable to a PFE and (ii) providing all rules necessary to determine the amount of a taxpayer’s material assistance from a PFE.  

Until such tables are issued, to avoid certain complexities in determining these cost ratio percentages, taxpayers may use the Internal Revenue Service (IRS) “domestic content” safe harbor tables (in IRS Notice 2025-08) to determine the percentage of total direct costs of any listed eligible component and any manufactured product¹⁰ and rely on certifications from relevant suppliers, provided under penalties of perjury, either (i) certifying that the relevant products or components were not produced or manufactured by PFEs and that the supplier is not aware that any prior supplier in the chain of production was a PFE or (ii) specifying the direct costs or direct material costs, as applicable, that are not attributable to production or manufacturing by PFEs. Taxpayers may not rely on such certifications if they know or have reason to know that the certifications are not accurate.

As for determining the time at which each project began construction for purposes of applying the “material assistance” rules and the applicable cost threshold, the Act codifies the existing BOC guidance. Such guidance is a series of IRS notices issued starting in 2013 (Notice 2013-29 for wind projects) and includes Notice 2018-59 (for solar and other ITC eligible technologies) as well as other related IRS notices, all as in effect on January 1, 2025.¹¹ However, the Act directs Treasury to prescribe such regulations and guidance as may be necessary or appropriate to prevent circumvention of the material assistance rules, including prevention of “any evasion with respect to the requirements of this subparagraph where the facts and circumstances demonstrate that the beginning of construction of a qualified facility or energy storage technology has not in fact occurred.” Like the guidance contemplated by the Executive Order, the impact that such guidance will have on existing BOC guidance is difficult to predict.  

Special Rules — Section 48E ITC Recapture

Generally, if a “specified taxpayer” makes an “applicable payment” (i.e., payments to an SFE that entitles the SFE to exercise effective control) during the 10-year period after a facility eligible for the 48E Credit is placed in service, the 48E Credits generated in respect of that facility will be subject to 100% recapture for the year the applicable payment was made.  

However, a “specified taxpayer” covers taxpayers who claimed the 48E Credit starting in 2028.  Section 48E Credits claimed for project that will be placed in service prior to 2028 are not subject to recapture by reason of the taxpayer making an applicable payment.  

Sidley Observations 

The imposition of the new FEOC-related restrictions and the broad definitions of the related terms introduce significant complexity to the planning and analysis related to the eligibility of projects for the applicable tax credits. This, together with the relatively short transition period included in the Act, will require market participants to quickly reevaluate and potentially restructure their ownership and relevant supply chain and commercial arrangements to avoid disqualification.

That being said, with the possible exception of certain contracts or arrangements that may be deemed to provide “effective control,” in most cases determining whether a taxpayer is a SFE or FIE will be relatively straightforward based on a reasonable diligence and review process of the entity’s commercial arrangements and ownership structure. 

For example, in testing whether an entity is an FIE, the Act requires that less than 15% of the entity’s outstanding debt can be issued to one or more SFEs. Prior versions of the Act prohibited SFEs from holding a certain threshold of the entity’s debt. Shifting the test to the initial issuance of the debt, as opposed to testing who holds such debt, will allow taxpayers to determine whether such test is met upon issuance of the debt, without the need for an ongoing monitoring and restricting certain secondary sales and participation rights regarding its debt instruments.  

On the other hand, determining whether a PFE has provided “material assistance” to a specific facility, energy technology, or eligible component will be more challenging. This process is likely to require significant diligence and will potentially require suppliers to provide certain sensitive information. This may lead to the development of market diligence practices similar to those developed and used for purposes of determining the eligibility for the IRA’s “domestic content” adder whereby an accounting firm conducts diligence regarding the supplier’s manufacturing processes, supply chain, and costs, on a confidential basis, and provides a specific report to the taxpayer.

In summary, the new PFE-related restrictions may cause taxpayers and projects that would otherwise be eligible for the relevant tax credits to lose their eligibility due to ownership and supply-chain issues. Accordingly, the inclusion of the PFE-related provisions and their broad application will need to be carefully analyzed in connection with existing and future commercial arrangements. Additionally, further IRS guidance on the definition of “beginning construction” should be closely followed.  

SCHEDULE A — MATERIAL ASSISTANCE COST RATIO THRESHOLDS

¹ For a summary of the energy-related tax provisions passed in the IRA, see the August 18, 2022, Sidley Update at https://www.sidley.com/en/insights/newsupdates/2022/08/inflation-reduction-act-an-energy-transition-game-changer.

² For a summary of the energy-related tax provisions in the House bill, see the May 30, 2025, Sidley Update https://www.sidley.com/en/insights/newsupdates/2025/05/us-house-big-beautiful-bill-accelerates-repeal-of-renewable-energy-tax-credits. 

³ As discussed more fully below, the Act does fix what was viewed as an error in the IRA with respect to the “domestic content” requirement for projects eligible for the Section 48E ITC, by increasing the qualification thresholds for this requirement to match the thresholds applicable to Section 45Y PTC projects.

⁴ Energy storage technology placed in service at a wind or solar facility will not be subject to the placed-in-service requirement otherwise applicable. Accordingly, such technology will remain eligible for the Section 48E ITC, subject to the phaseout schedule generally applicable under Section 48E even if the related wind or solar project is not.

⁵ Note that the Act does not leave the IRA phaseout schedule entirely unchanged. Under the IRA, phaseout began for projects beginning construction in the later of 2034 or two years following the year in which greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of such emissions for calendar year 2022. The Act eliminates the potential extension based on greenhouse gas emissions so that phaseout for technologies other than wind or solar will begin for facilities beginning construction in 2034 in all cases. In addition, a permanent 10% minimum ITC has been eliminated.

⁶ It is also worth noting that the Executive Order does not in any way suggest that the beginning of construction guidance applicable to projects intending to qualify for the Section 48 ITC or Section 45 PTC on the basis that they began construction before January 1, 2025, will be modified. Accordingly, it seems reasonable to assume that qualification for Section 48 ITCs or Section 45 PTCs for projects that began construction before 2025 within the meaning of existing BOC guidance should not be affected by any new guidance issued in response to the Executive Order.

⁷ As noted in the discussion of the FEOC rules below, however, this “codification” was accompanied by a legislative directive to Treasury to adopt anti-abuse guidance relating to BOC matters.

⁸ The version of the Act initially passed by the House would have repealed the transferability provisions applicable to Section 45Q, Section 48 (with respect to geothermal), Section 45U, Section 45X, and Section 45Z credits, which were expected to have a material impact on the development and financing of various projects.

⁹ More specifically, a “foreign-controlled entity” is defined as (i) the government of a “covered nation” (i.e., North Korea, China, Russia, or Iran), (ii) an agency or instrumentality of a government described in clause (i), (iii) a covered nation’s citizens or nationals who are not citizens, nationals, or permanent residents of the United States; (iii) entities or qualified business units incorporated under the laws of, or having their principal place of business in, a covered nation, and (iv) entities (other than certain publicly traded entities) “controlled” by the persons identified in clauses (i) through (iv). “Control” means ownership (by vote or value) of more than 50% of the stock in the case of a corporation, more than 50% of the profits interests or capital interests in the case of a partnership, and more than 50% of the beneficial interests in any other entity.

¹⁰ Notice 2025-08 generally specifies the percentage of the cost of an “applicable project component” (e.g., a wind turbine) attributable to various “manufactured project component” (e.g., blades, rotor hubs) that can be relied on in applying the domestic content rules. 

¹¹ See Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice 2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B. 814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025; updated, clarified, and modified by Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43, 2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954; clarified and modified by Notice 2021-5, 2021-3 I.R.B. 479; clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17.

¹² The Section 45X credit is terminated for wind energy components after 2027.

¹³ The Act directs Treasury to issue threshold percentages for applicable critical minerals by December 31, 2027, that are equal to or exceed the threshold percentages set forth in the Act.