The Act contains sweeping changes to various tax incentives for renewable energy and to other tax credits, and the Executive Order implies that the Treasury may fundamentally revise well-understood beginning-of-construction guidance and provide guidance on the prohibited foreign entity provisions of the Act (discussed subsequently) within 45 days.

• The Act applies sweeping “prohibited foreign entity” rules to most major credits. These rules may require lenders, tax or preferred equity investors, and tax credit buyers to diligence a broader array of project contracts. It could also require that certain credit claimants disclose more about their organization structure and debt holders. These rules essentially apply a modified and expanded version of the foreign entity of concern (FEOC) rules that applied to certain credits (e.g., 30D). The Department of Energy’s guidance as to when an entity is owned by, controlled by, or subject to the jurisdiction or direction of a covered nation is evoked by these rules, but never actually applied in full.
• The Act provides that properties that begin construction after 2025 cannot qualify for most major credits if they include “material assistance” from a prohibited foreign entity. These rules evoke the current domestic content guidance and require that a certain percentage of the direct costs of the relevant property does not derive from materials from a prohibited foreign entity.
• The Act phases out or terminates many credits much earlier than had been provided. In particular, the various credits for electric vehicles terminate quickly, and wind and solar facilities also have special restrictions.

The Executive Order is intended to “build upon and strengthen the repeal of, and modifications to, wind solar, and other ‘green’ energy tax credits in the One Big Beautiful Bill Act.” Thus, the Executive Order directs the Treasury to take:

• all appropriate action to strictly enforce the termination of credits under section 45Y (clean electricity production credit) and section 48E (clean electricity investment credit) with respect to wind and solar facilities, including issuing new and revised guidance to ensure that policies concerning “beginning of construction” are not circumvented, including 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 built¹
• prompt action to implement the prohibited foreign entity restrictions in the Act.

The major changes from the Act are described in more detail as follows.

Imposition of prohibited foreign entity rules (Sections 45U, 45X, 45Y, 45Z, 48E)

These rules restrict the credits to taxpayers that are not certain types of entities that are not disfavored by the United States. An entity might be disfavored via too much equity or debt ownership by one or more other disfavored entities. These rules also prevent disfavored entities from having any sort of material contractual control right over qualified facilities, energy storage technology, or eligible components.

Broader representations will be required by and from tax or preferred equity investors to be comfortable that the credits are available. It is possible, but less likely, that these investors will have to provide evidence to establish their status. A project or eligible component would also fail to qualify for a credit if certain disfavored entities are counterparties to the contracts that give them material influence over some aspect of the project or eligible component. Thus, certain contracts will also be subject to enhanced diligence.

A “prohibited foreign entity” under the Act is either a “specified foreign entity” or a “foreign-influenced entity.” For an entity’s first taxable year after enactment, the determination of whether such entity is a prohibited foreign entity (without regard as to whether such entity is a controlled foreign entity) occurs on the first day of that year. Otherwise, the determination occurs on the last day of such entity’s taxable year.

Specified foreign entities

The categories of specified foreign entities are as follows:

• Foreign entity of concern (FEOC): These include certain foreign entities of concern (such as a foreign terrorist organization), excluding an entity controlled by, or subject to the jurisdiction of, a covered nation (which thereby excludes the DOE’s guidance on this term).
• Certain Chinese military companies operating in the United States.
• Certain other Chinese entities: These entities include entities on a list of entities in the Xinjiang Uyghur Autonomous Region that mine, produce, or manufacture wholly or in part any goods, wares, articles and merchandise with forced labor.²
• Certain specific entities: These entities include (i) Contemporary Amperex Technology Company, Limited (also known as CATL), (ii) BYD Company, Limited, (iii) Envision Energy, Limited, (iv) EVE Energy Company, Limited, (v) Gotion High tech Company, Limited, (vi) Hithium Energy Storage Technology company, Limited, and (vii) any successor to an entity specified in (i) through (vi).
• Foreign-controlled entities: These entities are: (i) the government (including any government below the national level) of a covered nation (i.e., North Korea, China, Russia, or Iran); (ii) an agency or instrumentality of such a government; (iii) a citizen or national of a covered nation that is not also an individual and citizen, national, or lawful permanent resident of the United States; (iv) an entity or qualified business unit (e.g., branch) incorporated or organized under the laws of, or having its principle place of business in, a covered nation; or (v) an entity (including subsidiary entities) “controlled” by one of the foregoing entities. “Control” is, applying certain constructive ownership rules, more than 50% ownership (by vote or value in the case of a corporation, of capital or profits in the case of a partnership, or of the beneficial interests for all other entities).

Publicly traded entities are excepted from being classified as a specified foreign entity under the controlled foreign entity rules, subject to certain exceptions.

Foreign-influenced entities

Two sets of rules govern whether an entity is a foreign-influenced entity: (i) rules evaluating the level of influence through executive control or through equity or debt ownership (ownership rules); and (ii) rules evaluating the level of influence through the entity’s contracts and other arrangements (payment rules).

• Ownership rules: An entity is a foreign-influenced entity if, during the taxable year: (i) a specified foreign entity can directly appoint a covered officer (e.g., a board member or member of the c-suite) of such entity; (ii) a single specified foreign entity owns, directly or constructively, at least 25% of such entity; (iii) one or more specified foreign entities own, directly or constructively, at least 40% of the entity; or (iv) at least 15% of all the debt of such entity has been issued to one or more specified foreign entities. Publicly traded entities are excepted from these provisions, including entities owned directly or indirectly, applying certain constructive ownership rules, at least 80% by a publicly traded entity. This rule is subject to certain exceptions.
• Payment rules: An entity is a foreign-influenced entity if, during the previous taxable year, such entity made a payment to a specified foreign entity pursuant to a contract, agreement, or other arrangement which entitles the specified foreign entity (or other entity related to such specified foreign entity) to exercise “effective control” over (i) any qualified facility or energy storage technology of the taxpayer (or a related person thereto) or (ii) any eligible component produced by (including any applicable critical mineral extracted, processed, or recycled by) the taxpayer or person related thereto.

Observation:

• To fall under these rules, (i) there must be a payment (of any amount), meaning that, for example, an existing contract where no payment has been made because certain conditions have not been met would not trigger these rules, and (ii) such payment must be made to a specified foreign entity. However, the prohibited contractual (or similar) rights can accrue to a related party to such specified foreign entity. The fact that only payments to specified foreign entities trigger these rules is helpful, but query whether the Secretary will expand this rule to include payments to related parties to specified foreign entities using its anti-abuse authority.

There are three rules for “effective control”: (i) one before guidance is issued by the Secretary; (ii) a general rule which the Secretary must interpret when issuing such guidance; and (iii) a special rule for licensing arrangements that applies regardless of the state of guidance.

Effective control before guidance is issued by the Secretary: Effective control is the unrestricted contractual right of a contractual counterparty (or related person thereto) to: (i) determine the quantity or timing of production of an eligible component produced by the taxpayer (or related party thereto); (ii) determine the amount or timing of activities related to the production of electricity undertaken at a qualified facility or the storage of electrical energy in the energy storage technology of the taxpayer (or a related party thereto); (iii) determine which entity may purchase or use the output of a production unit of the taxpayer (or related party thereto) that produces eligible components; (iv) determine which entity may purchase or use the output of a qualified facility of the taxpayer (or related party thereto); (v) restrict access, except as to personnel or agents of the contractual counterparty, to (x) data critical to production or storage of energy undertaken at a qualified facility of the taxpayer (or related party) or (y) the site of production or any part of a qualified facility or energy storage technology of the taxpayer (or a related party); or (vi) on an exclusive basis, maintain, repair, or operate any plant or equipment which is necessary to the production by the taxpayer of eligible components or electricity.

Observation:

• This provision could require a great deal of additional diligence with service providers, suppliers, and offtakers, and new representations in these contracts, such as operations and maintenance agreements. These counterparties will have to ascertain and represent that they are not specified foreign entities. If a counterparty is or could be a specified or foreign entity, the contract in question will need to be reviewed to determine whether it provides too much influence over a project or product to a specified foreign entity (or related party). This diligence could be required for lenders, tax or preferred equity investors, or credit transferees. Tax insurance may be necessary.
• What is an “unrestricted contractual right?” The vast majority of contracts have restrictions or conditions. Presumably, guidance will indicate that ordinary restrictions (e.g., an operator can be removed in the case of gross negligence) will not affect the determination of whether a contract implicates these payment rules.

Effective control in general (i.e., directions for guidance): Effective control is one or more arrangements or agreements similar to those described in the pre-guidance category and in the licensing agreement category (described subsequently) that provide one or more contractual counterparties (or related persons) of a taxpayer (or related party) with specific authority over key aspects of the production of eligible components, energy generation in a qualified facility, or energy storage, which are not included in the measures of control described in the ownership rules.

Observation:

• The grant of authority includes anti-abuse authority to “prevent entities from evading, circumventing, or abusing the application of the restrictions described in subparagraph (C) and subclauses (II) and (III) of this clause through a contract, agreement, or other arrangement.” Subparagraph (C) contains the rules for foreign-controlled entities. It seems unlikely that this is the correct reference, because this clause governs the foreign-influenced entity payment rules, but it is unclear what the correct reference is. The other two references are correct—they govern the rules before guidance and the special license agreement rules.

Special rule for licensing agreements: This rule applies to any licensing agreement for the provision of intellectual property (or other contract, agreement, or other arrangement entered into with a contractual counterparty (or related party) which is related to such licensing agreement) with respect to a qualified facility, energy storage technology, or the production of an eligible component. This will likely be most relevant to manufacturing processes with respect to eligible components.

There is an exception for a bona fide purchase or sale of IP. A bona fide purchase or sale does not include an arrangement in which the ownership of the IP reverts to the contractual counterparty (or related party) after a period of time.

“Effective control” means, with respect to these contracts, that any (a) of the following contractual rights are retained by the contractual counterparty (or related party) or (b) other features of the contract are present: (i) the right to specify or otherwise direct one or more sources of components, subcomponents, or applicable critical minerals utilized in a qualified facility, energy storage technology, or in the production of an eligible component; (ii) the right to direct the operation of any qualified facility, any energy storage technology, or any production unit that produces an eligible component; (iii) the right to limit the taxpayer’s (or related party’s) utilization of intellectual property related to the operation of a qualified facility or energy storage technology, or in the production of an eligible component; (iv) the right to receive royalties under the licensing agreement or any similar agreement (or payments under any related agreement) beyond the tenth year of the agreement (including modifications and extensions); (v) the right to direct or otherwise require the taxpayer (or any related party) to enter into an agreement for the provision of services for a duration of longer than two years (including modifications and extensions); (vi) the contract in question does not provide the licensee with all the technical data, information, and know-how necessary to enable the licensee to produce the eligible component or components subject to the contract, agreement, or other arrangement without further involvement from the contractual counterparty or a specified foreign entity; or (vii) the contract, agreement, or other arrangement was entered into (or modified) on or after July 4, 2025.

Observation:

• The last rule is apparently a “per se” rule. Thus, if (i) there is any licensing agreement whatsoever (or any other arrangement that is related to such licensing agreement) that is “with respect to” a qualified facility, energy storage technology, or the production of an eligible component, (ii) such licensing agreement was entered into or modified on or after July 4, 2025, (iii) there is a payment made pursuant to such licensing agreement in a prior taxable year, and (iv) the payment was made to a specified foreign entity, then the payor is a foreign-influenced entity. Merely entering into such a licensing agreement after July 4, 2025 is fatal, regardless of whether the agreement otherwise affords the counterparty one of the other listed rights.
• It is not clear when a licensing agreement is “with respect to” a qualified facility, energy storage technology, or eligible component.
• This rule applies “in addition” to the rules that apply prior to the issuance of guidance. Nevertheless, it is difficult to imagine the Treasury restricting or refining the impact of these provisions when it issues guidance. The Act seems particularly concerned with licensing arrangements. The grant of guidance includes a specific grant to establish rules to prevent entities from “evading, circumventing, or abusing the application of the restrictions against impermissible technology licensing arrangements with specified foreign entities, such as through temporary transfers of intellectual property, retention by a specified foreign entity of a reversionary interest in transferred property, or otherwise.”

Imposition of material assistance rules (Sections 45X, 45Y and 48E)

Property includes “material assistance” from a prohibited foreign entity if its “material assistance cost ratio” is less than an annually escalating “threshold percentage.” For purposes of sections 45Y and 48E, the material assistance cost ratio is the quotient (expressed as a percentage) of (i) (x) the total direct costs to the taxpayer attributable to all manufactured products (including components) which are incorporated into the qualified facility or energy storage technology upon completion of construction, minus (y) the total direct costs of the taxpayer attributable to all such manufactured products (including components) incorporated in the qualified facility or energy storage technology that are mined, produced, or manufactured by a prohibited foreign entity, over (ii) the amount in (i)(x). For section 45X, the amounts in the equation are the total direct material costs incurred by the taxpayer for the production of the eligible component, less the total direct material costs that are paid or incurred by the taxpayer for the production of such eligible component that are mined, produced, or manufactured by a prohibited foreign entity.

The constructive ownership rules apply to all ownership determinations with respect to the material assistance rules.

Observation:

• It is not clear how the constructive ownership rules would apply to the material assistance rules, which generally relate to the asset level, and not the entity level.

Establishing direct costs:

The Act requires the Secretary to publish certain safe harbor tables (and any other necessary guidance) no later than December 31, 2026 to identify the direct costs of manufactured products and eligible components. For qualified facilities and energy storage technologies, the construction of which begins before 60 days after the date the Secretary issues safe harbor tables, a taxpayer may rely on safe harbors provided in the notice 2025-08 (the 2025 domestic content notice), as long as the applicable supplier provides a certification (i) as to its total direct costs or total direct material costs of such product or component that was not produced or manufactured by a prohibited foreign entity or (ii) that such product or component was not produced or manufactured by a prohibited foreign entity.

Observation:

• Presumably, the taxpayer must provide this certification regardless of whether it relies on the 2025 domestic or establishes its direct costs pursuant to the principles of notice 2023-38 (the original domestic content notice). The Act is not clear in this regard.

If the taxpayer knows or has reason to know that a manufactured product or eligible component was produced or manufactured by a prohibited foreign entity, the taxpayer must treat all direct material costs as attributable to a prohibited foreign entity.

Rules for supplier certifications: If a taxpayer knows or has reason to know that a certification is false, the taxpayer may not rely on such certification. The certification must be signed by the supplier under penalties of perjury and must include a representation that the supplier does not know, or have reason to know, that any entity further up the supplier’s chain of production is a prohibited foreign entity. The certification must include direct costs for purposes or that the relevant property was not produced or manufactured by a prohibited foreign entity.

Observation:

• The certification requirement, and all the rules with respect to thereto including the penalty rules described subsequently, apparently only apply before the Secretary issues safe harbor guidance specific to the material assistance rules. It may be possible for the Secretary to create a similar certification requirement when issuing the required safe harbor tables and apply the statute of limitations and penalty rules to such certification.

Supplier certification penalty: The Act introduces a new penalty on suppliers that provide a certification that (i) they know or reasonably should know would be used in connection with a material assistance determination, (ii) they know or reasonably should know that such certification is inaccurate or false with respect to whether applicable property was manufactured by a prohibited foreign entity, or the total direct costs or total direct material costs of property that was not manufactured by a prohibited foreign entity, and (iii) the inaccuracy or falsity of which results in an understatement of income tax in the lesser of (x) 5% of the amount of tax required to be paid or (y) USD100,000. The penalty is the greater of (a) 10% of the amount of the underpayment attributable to inaccuracy or falsity or (b) USD5,000. The penalty may be abated if the supplier can show reasonable cause. This penalty applies to certifications provided after December 31, 2025.

Exception for pre-existing contracts:

A taxpayer may elect to exclude from the ratio manufactured products, eligible components, or constituent elements, materials, or subcomponents of eligible components, which are acquired by, or manufactured or assembled by or for, the taxpayer pursuant to a binding written contract entered into before June 16, 2025 and (i) placed in service before January 1, 2030 (or before January 1, 2028 for wind and solar facilities) in a facility, the construction of which begins before August 1, 2025, or (ii) in the case of a constituent element, material, or subcomponent, used in a product sold before January 1, 2030.

Observation:

• The exception for existing contracts applies to items which are placed in service in a “facility” (excluding wind and solar facilities). The term “facility” is not defined. Presumably, this is intended to refer to the defined terms “qualified facility” and “energy storage technology.” Whether guidance is needed to implement this exception properly and define “facility” to mean “qualified facility” and “energy storage technology” is not clear.
• The material assistance exception for existing contracts with respect to wind and solar facilities does not harmonize with the exception to the wind and solar 2028 credit cut-off for facilities which begin construction before July 5, 2026. Thus, to obtain the benefit of the existing contract exception for wind and solar facilities, any facility that begins construction after December 31, 2025 must be placed in service before January 1, 2028.

Grant of authority:

The Act provides the Secretary with broad anti-abuse authority to prevent a taxpayer from (i) stockpiling manufactured products, eligible components, or constituent elements under the pre-existing contract rule, or (ii) evading any requirements of the material assistance cost ratio rules through beginning construction by a certain date, when the facts and circumstances demonstrate the construction has not in fact begun.

Observation:

• Given that “beginning of construction” is a well-understood term, and that the Act defines “beginning of construction” explicitly with reference to existing IRS guidance, it is unclear what abuses (ii) is meant to target. Query whether the Executive Order is reflecting the same concerns.

The Secretary is provided leeway to define certain terms beyond their definitions in existing statutes, including “eligible component” (which is defined with reference to section 45X) and “manufactured product” (which is defined with reference to the domestic content requirement under section 45Y). The Secretary may also provide rules to address facilities that produce more than one eligible component for purposes of the material assistance rules with respect to section 45X.

Statute of limitations and penalty provisions generally applicable to the material assistance rules:

The statute of limitations for deficiencies attributable to errors with respect to material assistance determinations is increased from the default of three years to six years.

Observation:

• Although penalties could apply for overstating credits, such overstatement generally did not cause an extended statute of limitations. Now, misstating tax credits, if done through a mistake related to the material assistance provisions, can cause an extended statute of limitations.

Currently, there is a 20% accuracy-related penalty that applies if the understatement of income tax exceeds, for non-corporations, the greater of (i) 10% of the tax determined to be due and (ii) USD5,000 and, for corporations, the lesser of (x) 10% of the tax determined to be due (or, if greater, USD10,000) and (y) USD10 million. This penalty can be abated if the taxpayer’s reporting position was supported by substantial authority, or the taxpayer adequately disclosed the facts supporting such a position and there was a reasonable basis for such facts. The penalty is assessed as of the due date of the tax return, and interest on the underpayment also applies to the penalty (interest accrues and compounds daily). The Act provides that the accuracy-related penalty is assessed substituting “1%” for “10%” in the above determination if the understatement of income tax is due to a disallowance of the credits under section 45X, 45Y, or 48E due to overstating the material assistance cost ratio.

Phase Out in 2034, Imposition of Requirements to Prohibited Foreign Entities, Restrictions for Wind and Solar, and More Modifications (Sections 45Y and 48E)

There is also a special ten-year recapture rule, a denial for certain residential facilities that are leased, an update to the energy community bonus for advanced nuclear facilities, and an update to the greenhouse gas emissions computation provision. The Act also fixes the domestic content glitch in section 48E.

Under section 45Y, taxpayers are eligible to claim a credit for electricity produced and sold by a facility that meets the definition of a “qualified facility”, specifically one that achieves net negative greenhouse gas emissions. The credit is generally valued at 0.3 cents per kilowatt-hour (kWh), but this amount increases to 1.5 cents per kilowatt-hour (kWh) if the taxpayer satisfies prevailing wage and apprenticeship requirements. The credit is available for a ten-year period following the date the qualified facility is placed in service and can be increased by certain bonuses to the credit.

Similarly, under section 48E, a taxpayer can claim a credit equal to a percentage of the basis of a “qualified facility” or “energy storage technology” that the taxpayer placed in service. The percentage is generally equal to 6%, unless the taxpayer satisfies certain prevailing wage and apprenticeship requirements, in which case the credit is multiplied by five, and can be increased by satisfaction of certain bonuses. The credit is subject to certain recapture rules.

Phase out:

Currently, the sections 45Y and 48E credits begin phasing out for facilities and energy storage technology that begin construction during the later of two years after (i) 2032 and (ii) the year in which greenhouse gas emissions hit a certain rate. The Act causes the section 45Y and section 48E credits to begin phasing out for facilities that begin construction two years after 2032, except in the case of wind and solar facilities.

The Act phases certain wind and solar facilities (but not storage) out for facilities that (i) begin construction 12 months after July 4, 2025 and (ii) are placed in service after December 31, 2027.

Observation:

• The Executive Order targets this provision. Whether “new and revised” beginning of construction guidance will be narrowly tailored to address only wind and solar facilities qualifying for the sections 48E and 45Y credit is unclear.

Material assistance from a prohibited foreign entity:

This requirement generally applies to qualified facilities, interconnection property, and energy storage technology for which construction begins after December 31, 2025. Thus, these facilities and energy storage technologies will need to have their supply chains scrutinized to ensure that they do not fall below the applicable threshold percentages.

Prohibited foreign entity:

These rules preclude a prohibited foreign entity from recognizing the credit, beginning in any taxable year beginning after the date of enactment. There is no way to begin construction in order to delay this requirement.

Observation:

• This provision applies to facilities that were placed in service and claimed the section 45Y credit before the Act was enacted. There is no grandfathering rule.

10-year recapture period for section 48E in certain cases:

Generally, the section 48E credit can be recaptured over a five-year period (with the percentage of the credit recaptured decreasing annually). Under this new rule, the section 48E credit is recaptured if the taxpayer violates a payment rule that would classify it as a foreign-influenced entity. This rule applies for any taxable year in which a taxpayer has been allowed a section 48E credit beginning after July 4, 2027. This recapture period begins on the date a property is placed in service and ends ten years thereafter.

Observation:

• The recapture percentage is 100%, unlike the five-year abating recapture percentage otherwise provided in section 50(a).

Qualified fuel cell property:

The Act creates a new provision in section 48E for qualified fuel cell property, which is defined with reference to the existing rules under section 48 (without regard to the beginning of construction deadline of January 1, 2025 therein). The greenhouse gas emissions limitation does not apply to this type of facility. The investment tax credit (ITC) is a flat 30% and may not be increased by any bonuses. This credit is available for property, the construction of which begins after December 31, 2025.

Observation:

• Because the percentage is a flat rate, that means that qualified fuel cell facilities do not need to satisfy, or be exempt from, the prevailing wage and apprenticeship requirements for purposes of obtaining the full credit.

Rules for residential wind or solar used to heat water:

No credit is allowed for residential (i) wind facilities or (ii) solar facilities that generate electricity to heat water, in either case that are leased or rented to a lessee that is an individual using the residence with such a facility. This rule applies to facilities placed in service in taxable years beginning after July 4, 2025.

Emissions update:

The Act directs the Secretary to consider certain pre-existing studies to determine net greenhouse gas emissions. It applies for taxable years beginning after July 4, 2025.

Advanced nuclear facility energy community:

For any advanced nuclear facility, the definition of “energy community” for purposes of the energy community bonus is expanded to include metropolitan statistical areas with certain nuclear-specific characteristics. This bonus is not available if the section 48E ITC is claimed. It becomes applicable for taxable years beginning after July 4, 2025.

Section 48E Domestic content glitch:

The Act fixes a “glitch” in section 48E whereby the requirement that a certain percentage of the costs of manufactured products be attributable to productions that are manufactured, mined, or produced in the United States did not escalate annually, which did not match the requirements for the bonus in section 45Y. The adjusted percentages are generally increased to match those in section 45Y. The percentages are for facilities (excluding offshore wind facilities) or energy storage technology, the construction of which begins before (i) June 16, 2025, 40%; (ii) January 1, 2026, 45%; (iii) January 1, 2027, 50%; and thereafter; (iv) 55%.

Limited and early phase out, and restrictions of prohibited foreign entities (Section 45X)

The so-called “stacking rule” is modified, a credit for metallurgical coal is introduced, and the definition of “battery module” is modified.

Under section 45X, taxpayers can claim credits for producing and selling solar energy components, wind energy components, inverters, qualifying battery components, and critical minerals (each as defined in section 45X).

Stacking (i.e., sale of integrated eligible components):

Section 45X permitted a credit where an eligible component was sold to a related person, that integrated such eligible component into another eligible component, and sold the integrated component to an unrelated person. Under the Act, stacking is permitted if (i) the eligible component in which the initial eligible component is integrated is manufactured in the same manufacturing facility as the initial eligible component is manufactured, (ii) the integrated eligible component is sold to an unrelated person, and (iii) at least 65% of the direct material costs of the integrated component that are paid or incurred by the taxpayer to produce the integrated component are attributable to initial eligible components that are mined, produced, or manufactured in the United States. This applies to eligible components sold after December 31, 2026.

Phase-out:

Critical minerals (excluding metallurgical coal) produced after December 31, 2030 begin to phase out. The percentage is 75% beginning in 2031 and steps down by 25% each year, with no credit beginning in 2034. Prior to the Act, critical minerals were not subject to a phase-out. There is no credit allowed for metallurgical coal produced after December 31, 2029. There is no credit allowed for wind energy components produced and sold after December 31, 2027.

Material assistance:

The material assistance provisions apply for taxable years beginning after July 4, 2025. The pre-existing contract rule grandfathers components only if they are sold before January 1, 2027.

Prohibited foreign entity:

These rules apply to taxpayers in taxable years beginning after July 4, 2025. Like with the technology neutral credits, an entity is only a foreign-influenced entity in respect of the payment rules if the contracts are in respect of the eligible component in question.

Metallurgical coal:

“Metallurgical coal” is added as an applicable critical mineral for taxable years beginning after July 4, 2025. It must be suitable for use in the production of steel, regardless of whether such production occurs outside of the United States. The credit is for 2.5% of the costs (whereas other critical minerals qualify for 10%).

Updated definition of “battery module”:

The Act updates the definition of “battery module” (which is a type of eligible component) to mean that it must be “comprised of all other essential equipment needed for battery functionality such as current collector assemblies, voltage sense harnesses, and/or any other essential energy collection equipment.” This applies for taxable years beginning after July 4, 2026.

Certain credits may not be transferred to specified foreign entities

The prohibition on transfer applies to credits under sections 45Q, 45U, 45X, 45Y, 45Z, and 48E. This applies for taxable years beginning after July 4, 2025.

Extension of clean fuel production credit and other modifications (Section 45Z)

Negative emissions rates are prohibited and the potential double benefit for fuel derived from fuel which received the section 45Z credit is eliminated.

Taxpayers can claim a credit for producing certain transportation fuels, including both nonaviation and sustainable aviation fuels, provided these fuels meet specific greenhouse gas emission standards and the taxpayer sells the fuels to an unrelated person for certain uses.

Domestic feedstocks only:

The Act completely denies the credit for fuel from a non-US, non-Mexican, or non-Canadian feedstock.

The changes apply to transportation fuel produced after December 31, 2025.

Extension:

The credit had terminated for transportation fuel sold after December 31, 2027, and now terminates for fuel sold after December 31, 2029.

Prohibited foreign entity:

The rule precluding specified foreign entities applies in taxable years beginning July 4, 2025. The rule for foreign-influenced entities applies in taxable years beginning two years after July 4, 2025, and, for purposes of this section, these payment rules are ignored in defining a foreign-influenced entity.

Sustainable aviation fuel:

The excise tax credit under section 6426(k) for sustainable aviation fuel is disallowed to the extent that a credit under section 45Z is allowable (without regards to the requirement that fuel be produced in a qualified facility or sold to an unrelated person for use in the production of a fuel mixture, use in a trade or business, or to sell at retail for the fuel tanks of retail purchasers). The provisions apply to fuel sold or used on or after July 4, 2025 and to fuel sold or used before July 4, 2025 if claims under section 6426(k) have not been paid or allowed as of such date. Sustainable aviation fuel had benefited from an increased credit. The increased rate for sustainable aviation fuel is eliminated from section 45Z for fuel produced after December 31, 2025. The excise tax credit terminates for fuel sold or used after September 30, 2025.

Negative emissions prohibited:

The determination of the emissions rate, which helps determine the amount of the credit, may not be less than zero. This provision applies for emissions rates published for transportation fuel produced after December 31, 2025.

Certain emissions:

The Act adds provisions that (i) exclude indirect land use emissions from the calculation of the lifecycle greenhouse gas emissions and (ii) require the Secretary to provide distinct emissions rates for animal manures, and this emissions rate may be less than zero. This provision applies to emissions rates published for transportation fuel produced after December 31, 2025.

Elimination of double credit:

A qualifying fuel can no longer be produced from a fuel which already received the section 45Z credit.

Related person amendment:

A taxpayer must sell fuel to an unrelated person to qualify for the section 45Z credit. A rule allows a corporation to sell fuel to a member of its consolidated group if the buyer on-sells the fuel to an unrelated person. This related person rule now allows the Secretary to draft regulations to address sales of fuels to controlled groups of entities that are similar to corporations in consolidated groups, including rules for a related person for which the taxpayer has a reason to believe will sell the fuel to an unrelated person.

Elimination of the limited 2%/10% ITC and modifications to geothermal heat pump property (Section 48)

Otherwise, the Act does not generally address § 48, meaning that it and projects safe harbored thereunder are generally unaffected. Section 48 provides an ITC for certain delineated “energy properties” of either 2% or 6%, each of which could have been multiplied by five for energy projects satisfying the prevailing wage and apprenticeship requirements, and increased by certain bonuses. Except for certain geothermal heat pump property, the 30% ITC generally terminated for properties, the construction of which began after January 1, 2025.

The 2% ITC is eliminated:

There had been 2% ITC (which, like the 6% ITC, could be multiplied by five for satisfying or being exempt from the prevailing wage and apprenticeship requirements) for certain solar and geothermal energy property. This ITC, including potential bonus increases, is eliminated. It is eliminated for property, the construction of which begins on or after June 16, 2025.

Geothermal heat pump property:

There is a rule specific to geothermal heat pump property (which remains eligible for the ITC under section 48 for property beginning construction before January 1, 2025), which provides that the ownership of such property will be determined without regards to whether the property is readily usable by a person other than the lessee or service recipient for purposes of section 50 (the recapture provision) and section 168 (the provision allowing accelerated depreciation). This rule applies for taxable years beginning after the date of enactment of this act.

Observation:

• The function of this provision appears intended to ignore ownership issues applicable to this property. But it is strange that it is described as a “conforming amendment” to the denial of the technology neutral ITC under § 48E for certain residential facilities that are leased to the persons using the residences.

Early termination of the clean hydrogen production credit (Section 45V)

The Act terminates the credit under section 45V for facilities, the construction of which begins before January 1, 2028. The amount of the credit is calculated as a percentage of USD0.60 per kilogram, with the exact percentage (ranging from 20% to 100%) based on how much greenhouse gas is emitted during production. This credit can be claimed for up to ten years after the facility is placed in service. Previously, the credit was available for facilities, the construction of which began before January 1, 2033.

Disqualification of energy property (Section 48)

The Act strikes the provision classifying property “described in section 48(a)(3),” which is the list of types of energy property qualifying for the ITC under section 48 as five-year property (except that section 168 expands the provision for solar property in section 48(a)(3)(A)(i) to include wind property). This provision applies retroactively to property, the construction of which begins after December 31, 2024.

Observation:

• Most property described in section 48(a)(3)(A) is defined to include a requirement that such property begins construction before January 1, 2025 and property that does not contain such requirement would generally qualify for the technology-neutral credit. The Act also terminates the 2%/10% ITC, which is a limited ITC that would have been available for solar and geothermal property for which the technology-neutral credits are not claimed. Such property is described in section 48(a)(3)(A) and it is possible that striking the provision qualifying such property from five-year MACRS is tied to ending the limited ITC. This provision could also force the property for which the 30% ITC otherwise remains into section 48E (i.e., certain geothermal property), and subject it to the prohibited foreign entity and the material assistance rules.

Modification of the carbon capture and sequestration credit (Section 45Q)

Taxpayers are eligible for a credit per metric ton of qualified carbon oxide captured and either disposed of in secure geological storage or utilized in certain ways. These credits are available for 12 years after the equipment is placed in service, can be increased fivefold if prevailing wage and apprenticeship requirements are met, and are indexed for inflation after December 31, 2026. The credit applies to facilities that begin construction before January 1, 2033.

Prohibited foreign entities:

These rules apply for taxable years beginning after July 4, 2025, but the payment rules are ignored for purposes of defining a “foreign-influenced entity.”

Parity for different uses and utilizations of qualified carbon oxide:

The paragraph permitting the USD12 credit is struck and all permitted forms of utilization qualify for the USD17 credit. This applies for facilities or equipment placed in service after July 4, 2025.

Imminent expiration of the electric vehicle credits (Sections 30D, 45W, 30C, and 25E)

The Act expires electric vehicle credits under section 30D, section 45W, section 30C, and section 25E.

Section 30D:

The section 30D credit for clean vehicles terminates for vehicles acquired after September 30, 2025. Taxpayers previously could claim a tax credit up to USD7,500 for new clean vehicles that were placed in service during the taxable year, with the amount based on battery mineral and component sourcing (and FEOC limitations in particular), subject to income and vehicle price limits. The section 30D credit had terminated for vehicles placed in service after December 31, 2032.

Section 45W:

The section 45W credit for qualified commercial clean vehicles also terminates for vehicles acquired after September 30, 2025. Previously, the credit of upwards of USD40,000 per vehicle was available for a portion of the basis of clean commercial vehicles a taxpayer placed in service. This credit had terminated for vehicles acquired after December 31, 2032.

Section 30C:

The section 30C credit for alternative fuel vehicle refueling property terminates for property that is placed in service after June 30, 2026. Taxpayers are eligible for a tax credit equal to 30% of the cost of advanced refueling property, up to USD100,000. This credit had expired for property placed in service after December 31, 2032.

Section 25E:

The section 25E credit for previously owned clean vehicles terminates for vehicles acquired after September 30, 2025. Taxpayers had been eligible for a tax credit when purchasing a previously owned clean vehicle of the lesser of USD4,000 or 30% of the sale price. Receiving this credit is subject to income thresholds: USD75,000 for single filers, USD112,500 for head of household filers, and USD150,000 for joint filers. This credit had expired for vehicles acquired after December 31, 2032.

Extension, modification, and limitations of certain credits (Sections 45U, 48D, 42, 45D, and 40A)

The Act extends, modifies, and limits credits under sections 45U, 48D, 42, 45D, and 40A.

Section 45U:

The Act prohibits the section 45U zero-emission nuclear power production credit for taxpayers that are specified foreign entities and foreign-influenced entities by virtue of the control rules. The prohibition on specified foreign entities begins in tax years beginning after July 4, 2025 and the prohibition on foreign-influenced entities that are classified as such by virtue of the control rules begins in tax years beginning following two years after July 4, 2025. There is no prohibition on foreign-influenced entities that are such because of the payment rules. The credit is available to existing nuclear power plants for electricity they produce. The base value of the credit is 0.3 cents per kilowatt-hour (kWh), but this increases to 1.5 cents per kilowatt-hour if the taxpayer meets prevailing wage and apprenticeship requirements or exceptions during the construction, repair, or alteration of the qualified facility. The credit amount is reduced as the market price of electricity rises above a USD25 per megawatt-hour (MWh) index.

Section 48D:

The Act enhances the advanced manufacturing investment credit under section 48D, which applies to property integral to facilities, the primary purpose of which is the manufacturing of semiconductors or semiconductor manufacturing equipment, from 25% to 35%. The Act does not eliminate the prohibition on FEOCs and does modify the FEOC provision to refer to prohibited foreign entities. The credit still terminates for property, the construction of which begins after December 31, 2026. The enhancement applies to property placed in service after December 31, 2025.

Section 42:

The low-income housing tax credit under section 42, which is for a certain percentage of the basis of a qualified low-income building, is also enhanced, and the state housing credit ceiling is permanently increased by a factor of 1.125 beginning after December 31, 2025. The rule excepting buildings financed by tax-exempt bonds from the volume cap is expanded to exempt buildings where at least 25% of the aggregate basis of such building and the land on which the building is located is financed by one or more tax-exempt bonds that are part of the same issue after December 31, 2025 and provide financing for not less than 5% of the aggregate basis of the building and the land on which such building is located.

Section 45D:

The new markets tax credit under section 45D, which is a credit for certain investments in community development entities, is permanently extended. The limitation is USD5 billion per year. Excess limitation may be carried forward for five years. These changes begin in 2026.

Section 40A:

Section 40A provides a credit for certain biodiesel and biodiesel mixtures, as well as agri-biodiesel. The section 40A credit for biodiesel and renewable diesel used as fuel is extended and modified for small agri-biodiesel producers. The credit is increased from USD0.10 to USD0.20. The feedstocks for such agri-biodiesel must be exclusively produced in Canada, Mexico, or the United States. The changes allow both the section 45Z and the section 40A credit to be claimed for agri-biodiesel. The small agri-biodiesel producer credit is extended to apply to sale or use before January 1, 2027, whereas it had terminated after December 31, 2024. The Act allows this credit to be transferred, whereas before section 40A, credits were not included in transferability. These changes apply to fuel sold or used after June 30, 2025.

Observation:

• The prohibitions on transferring credits to specified foreign entities apparently do not apply to credits under section 40A.

Expiration of other credits within a year or less

These credits include credits under sections 25C (energy efficient home credit, expiring for property placed in service after December 31, 2025), 25D (residential clean energy credit, expiring for expenditures made after December 31, 2025), and 45L (new energy efficient home credit, expiring for homes acquired after June 30, 2026). The Act also terminates the deduction for energy efficient commercial buildings under section 179D, effective for property, the construction of which begins after June 30, 2026. The Act prevents the advanced manufacturing credit under section 48C from continuing with respect to unused allocations, effective on July 4, 2025.

Observation:

• The Act apparently contains a typo in the section 25C termination provision and amends section 25C(h) instead of the termination section in 25C(i), leaving the current termination section intact. Section 25C(h) generally provides that otherwise qualifying property placed in service after December 31, 2024 must be produced by “qualified manufacturers,” which must assign certain product identification numbers to the qualifying property, and that the taxpayer must include these product identification numbers on its tax return.

Footnotes

1. All references to “section” refer to sections of the Internal Revenue Code of 1986, as may be amended or supplemented from time to time.

2. This list is available here.