U.S. House's "Big Beautiful Bill" Accelerates Repeal of Renewable Energy Tax Credits and Introduces New Restrictions

On May 22, 2025, the U.S. House of Representatives passed the One Big Beautiful Bill Act (Act). The Act includes an accelerated repeal schedule of significant renewable energy tax credits and more restrictive amendments than those initially introduced in the House Ways and Means Committee’s proposed bill (Bill), which was approved by the Ways and Means Committee on May 14, 2025.

As described more fully below, among the changes proposed to the Inflation Reduction Act of 2022 (the IRA)¹, the Act includes the following:

• repeal of the technology-neutral tax credits (i.e., Section 45Y Clean Electricity Production Credit (45Y PTC) and Section 48E Clean Electricity Investment Credit (48E ITC)) for projects (i) on which construction begins more than 60 days following the date of the Act’s enactment or (ii) that are placed in service after 2028 (without regard to when construction begins)

• acceleration, or provision for, the phaseout of most other energy credits

• repeal of the credit transferability provision starting (i) two years after enactment of the Act, for the 45Q Carbon Oxide Sequestration Credit, or (ii) in 2028, for the Section 45X Advanced Manufacturing Production Credit and the Section 45Z tax credits Clean Fuel Production Credit

• introduction of restrictions and limitations for claiming energy credits by adding foreign entity of concern (FEOC) related provisions starting in 2026

Key Takeaways

If enacted, the Act will significantly affect the renewable energy industry and adversely affect the ability to develop and finance various renewable energy projects.

The new FEOC-related restrictions may cause taxpayers and projects that would otherwise be eligible for such tax credits to lose their eligibility due to ownership and supply-chain issues. Accordingly, the inclusion of the FEOC-related provisions and their broad application will need to be carefully analyzed and discussed in connection with existing and future commercial arrangements.

The Act generally does not affect energy projects that began construction by the end of 2024 and are eligible for tax credits pursuant to Section 48 (Section 48 ITC) and Section 45 (Section 45 PTC). The Act also does not directly 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. There are no direct changes to the direct-pay option, which effectively makes applicable tax credits “refundable” tax credits.

The Act now moves to the Senate for continuing debates and negotiations. Numerous Senate Republicans stated that they will have additional changes to the Act and voiced objections to the accelerated phaseout of certain energy credits.

Changes to Existing Energy Credit Provisions

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

Current 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 is currently subject to a phaseout starting in 2034 (or later, depending on changes in greenhouse gas emissions).

Proposed Changes. The Act proposes to terminate the Section 45Y PTC and Section 48E ITC for any qualified facility that (i) begins construction more than 60 days after the date of the enactment of the Act or (ii) that is placed in service after December 31, 2028. Advanced nuclear facilities and expansions of nuclear facilities that begin construction before January 1, 2029, remain eligible for the Section 45Y PTC or the Section 48E ITC. This differs from the proposal in the Bill that provided an accelerated phaseout of the credits tied to the year in which the project is placed in service (rather than the year in which construction begins).

Key Takeaways. The proposed elimination of the phaseout schedule and the repeal of these credits for projects that either did not begin construction by the end of the 60-day period following the enactment of the Act or will not be placed in service before 2029 is significant and will adversely affect wind, solar, battery storage, and other renewable energy projects.

Under current law, the full credit amount would be available for projects that begin construction prior to 2034 (or later, depending on changes in greenhouse gas emissions). Under existing Internal Revenue Service “beginning-of-construction” guidance, a project satisfying the “physical work test” or “5% safe harbor” in a particular year will be treated as beginning construction in that year so long as it is placed in service during the four years following that year. Accordingly, under current law, projects beginning construction in 2033 would be eligible for the full credit amount so long as they are placed in service before 2038.

If the Act is enacted in its current form, taxpayers that have not yet begun construction on projects intended to qualify for the Section 45Y PTC or the Section 48E ITC will need to evaluate their current construction schedules and consider strategies for satisfying the beginning of construction requirement during the 60-day period following the Act’s enactment. In this regard, while it seems reasonable to assume that the same beginning-of-construction rules that have historically applied in the context of renewable energy projects (i.e., the “physical work test” and the “5% safe harbor”) will apply for these purposes, this is a point that may require confirmation from the Department of the Treasury.

Section 45Q — Carbon Oxide Sequestration Credit

Current 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. Taxpayers may claim the Section 45Q credit if construction on a qualified facility begins before January 1, 2033.

Proposed Changes. The Act does not accelerate the expiration of the Section 45Q credit, nor does the Act introduce a phaseout concept applicable to the credit. However, the proposal to repeal the transferability of the tax credits, pursuant to Section 6418, and the new foreign entity of concern provisions (both explained in greater detail in separate sections below) apply to the credit.

Section 45U — Zero Emission Nuclear Power Production Credit

Current Law. The IRA added Section 45U, which 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.

Proposed Changes. The Act proposes an accelerated phaseout schedule for the Section 45U Zero Emission Nuclear Power PTC based on the year in which the project is placed in service, as follows:

Section 45V — Clean Hydrogen Production Credit

Current Law. The IRA added Section 45V, which provides a two-tier, inflation-adjusted, 10-year PTC for clean hydrogen produced after 2022 at a qualified facility, the construction of which begins before 2033.

Proposed Changes. The Act proposes to terminate the Section 45V Clean Hydrogen Production Credit effective for projects on which construction commences after December 31, 2025, which is seven years earlier than the sunset date under the IRA.

Section 45X — Advanced Manufacturing Production Credit

Current Law. The IRA added Section 45X, which provides tax credits for manufacturers of eligible components that are 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.

Proposed Changes. The Act proposes to terminate the Section 45X credits for wind energy components sold after December 31, 2027. The Act further proposes an accelerated phaseout schedule for all other eligible components, as follows:

Section 45Z — Clean Fuel Production Credit

Current Law. The IRA added Section 45Z, which provides a clean fuel production tax credit for taxpayers who produce and sell qualifying transportation fuel to an unrelated party before January 1, 2028, with the credit amount determined, in part, by reference to the fuel’s greenhouse gas emissions rate. Among other requirements, the fuel must be produced in the United States for the taxpayer to be eligible for the Section 45Z credit.

Proposed Changes. In contrast to most of the other energy credits, the Act proposes to extend the period this credit can be claimed by four years, until December 31, 2031, but proposes changes to the eligibility requirements and calculation of the credit.

The Act proposes to limit the availability of the Section 45Z credit for fuel sold 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 rather than solely requiring that the fuel be produced in the United States.

The Act also makes two changes to how the emissions rate used in determining the credit amount is calculated. First, the Act provides that the amount of lifecycle greenhouse gas emissions shall be adjusted as necessary to exclude any emissions attributed to indirect land use change. Second, 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).

Termination of Other Energy Credits

Proposed Changes. In addition to the proposed changes to the energy credits addressed above, the Act proposes to terminate the following energy credits:

Section 6418 — Third Party Sales of Eligible Credits

Current Law. The IRA added Section 6418 to the Code, which allows eligible taxpayers to transfer all or a portion of their eligible credits for cash, to a taxpayer that is not related to the transferor taxpayer (within the meaning of Section 267(b) or 707(b)(1)). The third-party sale provisions provide an alternative for renewable energy developers to monetize their tax credits without accessing the tax equity markets. Section 6418 and the related Treasury Regulations provided various requirements that must be satisfied in order for eligible credits to be sold and eligible credits may not be transferred more than once.

Proposed Changes. The Act proposes to repeal the transferability provisions with respect to various credits. The chart below lists the affected credits and the effective date of the repeal of their transferability.

Key Takeaways. The proposed repeal of the transferability of the various tax credits is likely to have a material impact on the development and financing of various projects. This alternative method of monetizing the various tax credits had a positive impact on the market since the enactment of the IRA and assisted developers with financing their projects. During taxable year 2024, it is estimated that tax credits in excess of $25 billion were sold pursuant to these rules. Repealing this monetization alternative will require developers and sponsors to rely mainly on the tax equity financing, which was a market historically capped at approximately $20 billion. This may adversely affect the number of projects developed.

There are no changes to the transferability rules for projects eligible for the Section 45Y PTC or Section 48E ITC (contrary to the suggested repeal of these transferability rules as initially proposed in the Bill). However, this should not provide significant comfort to developers of wind, solar, battery storage, and other technologies generally eligible for such tax credits due to the general accelerated repeal of these credits, as discussed above.

Newly Proposed Energy Credit 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 “prohibited foreign entities” (PFEs). These restrictions broaden the category of restricted foreign entities from the Department of Energy’s interpretation of FEOC to the more expansive category of PFEs.

These rules apply to most energy credits, including (as applicable) the Section 45Y PTC, Section 48E ITC, Section 45Q Carbon Oxide Sequestration Credit, Section 45U Zero-Emission Nuclear Power PTC, and Section 45X Advanced Manufacturing PTC.

In general, these restrictions are divided into two sets of restrictions. The first set includes restrictions related to projects owned by a “specified foreign entity” (SFE) or entities controlled or influenced by SFEs. The second set includes restrictions related to projects in which SFEs or entities controlled or influenced by SFEs provide material assistance in connection with the design, construction, or operation of the project.

Ownership-Related Restrictions

Starting in 2026, no tax credit is allowed if a project is owned by an SFE. An SFE is generally an entity that is either (i) identified by reference to an enumerated list of authorities as a threat to the security of the United States or (ii) 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, and Iran.⁴

The ownership rules become more restrictive starting two years after enactment of the Act. At that time, no credit will be allowed if the entity that owns the project is a “foreign-controlled entity” or is a “foreign-influenced entity.”

The definition of a “foreign-influenced entity” is much broader than the definition of a foreign-controlled entity. An entity will be treated as a “foreign-influenced entity” during a taxable year if

- an SFE (including foreign-controlled entities and entities otherwise identified as SFEs) has the direct or indirect authority to appoint a board member, executive officer, or person with similar powers

- a single SFE has an ownership interest of 10% or more

- multiple SFEs hold, in the aggregate, ownership interests of 25% or more

- one or more SFEs hold 25% or more of the entity’s outstanding debt

- payments of certain fixed, determinable, annual, or periodic payments (e.g., dividends, interests, royalites, rents, service fees) (FDAP Payments) knowingly made to a single SFE exceed 10% of the amount of such payments for the prior taxable year

- FDAP payments knowingly made to one or more SFEs exceed 25% of the amount of such payments for the prior taxable year

Project/Facility-Level Restrictions

In addition to the ownership restrictions, a project will not be eligible for the Section 45Y PTC, Section 48E ITC, or Section 45X credit if the construction of the project (or production of components in the case of Section 45X) begins following December 31, 2025 (or two years in the case of the Section 45X credit), and such construction (or production of components) includes “material assistance” from a prohibited foreign entity (i.e., an SFE or foreign-influenced entity).

The term “material assistance” means, with respect to any property,

(i) any component, subcomponent, or applicable critical mineral (as defined in Section 45X(c)(6)) included in such property that is extracted, processed, recycled, manufactured, or assembled by a prohibited foreign entity

(ii) any design of such property based on any copyright or patent held by a prohibited foreign entity or any knowhow or trade secret provided by a prohibited foreign entity

“Material assistance” does not include any assembly part, subcomponent, or constituent material provided that such part or material is not (i) exclusively or predominantly produced by PFE, (ii) acquired directly from a PFE, and (iii) uniquely designed for use in construction of a Section 48E ITC or Section 45Y PTC facility or a Section 45X eligible component.⁵

In addition to the foregoing, for any taxable year beginning after the date that is two years following the date of enactment of the Act, the existence of FDAP Payments made to one or more PFEs during that taxable year would also lead to the ineligibility for such tax credits, if such payments are made

- to a single PFE in an amount equal to or greater than 5% of the total of such payments made during that taxable year or

- to multiple PFEs in an amount equal to or greater than 15% of the total of such payments made during that taxable year.

In the case of Section 48E ITC, the violation of these FDAP Payments rules during the 10-year period following the date the applicable project was placed in service will trigger a 100% recapture of the Section 48E ITC previously claimed.

Section 45X Related Restrictions

In addition to the general ownership and components related restrictions above, there are certain other operational restrictions that could prevent manufacturers from claiming the Section 45X tax credits.

Starting two years after the enactment of the Act, no Section 45X credits will be allowed if the production of certain applicable components is made with “material assistance” from a PFE. In addition to the definition above, “material assistance” for purposes of Section 45X will also be found if

- any design of the component is based on any copyright or patent held by a PFE, or any knowhow or trade secret provided by a PFE, or

- such component is produced subject to a licensing agreement with a PFE with value exceeding $1 million.

Key Takeaways

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 related commercial arrangements to mitigate the related risks if the Act will be enacted without changes.

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The Act will now be reviewed and negotiated in the Senate, and further revisions to some of these rules are likely. We will continue to monitor this process and provide updates.

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

² The Section 30D credit may be available for vehicles placed in service during 2026 if the number of covered vehicles manufactured by the applicable manufacturer, which are sold in the U.S., is not greater than 200,000.

³ If construction on a qualified new energy-efficient home began before May 12, 2025, such home must be acquired before December 31, 2026, for a taxpayer to be eligible for the credit.

⁴ 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) a covered nation’s citizens, nationals, or residents who are not citizens or permanent residents of the United States; (iii) entities or qualified business units incorporated under the laws of, or having its principal place of business in, a covered nation, and (iv) entities “controlled” by the persons identified in clauses (i) — (iii). “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.

⁵ For purposes of Section 45X credit, such subcomponents also cannot be listed in Section 45X as the type of equipment or mineral eligible for the Section 45X credits.