One Big Beautiful Bill Signed into Law – Impact on IRA Tax Credits

OBBBA made changes to various tax provisions – including tax rates, modification of treatment of state and local taxes, individual tax breaks, establishment of “Trump Accounts,” extension of bonus depreciation, and revisions to international tax regimes (see coverage of some of these other changes here). OBBBA also made sweeping changes to tax benefits and incentives previously expanded or introduced as part of the Inflation Reduction Act of 2022 (“IRA”).

Though passage of the OBBBA followed months of negotiations, rumors, horse trading, and release of various iterations – each seemingly slightly worse for the clean energy industry – the final version is thematically not *that* different than the version first released by the House in May.¹ Thankfully, an excise tax that would have impacted solar and wind projects after 2027, included in an interim Senate version of the bill, was stripped out of the final version passed by Congress.

While the OBBBA is undoubtedly big, it is far from beautiful for the clean energy industry.

Notably, OBBBA terminates consumer tax credits for renewable energy (under Section 25D) and energy efficiency improvements (under Sections 25C, 45L, and 179D) and eliminates electric vehicle credits previously available for new and used electric vehicles and commercial fleets.²

It also brings in termination dates for technology neutral tax credits (Sections 45Y and 48E) – under OBBBA these credits will start to phase down after 2032 for most technologies, with a major exception for wind and solar facilities, which are denied tax credits if they are placed in service after 2027, unless they began construction prior to July 4, 2026.³

There are a few positives to be found – the Section 45Z clean fuel production tax credit was extended through the end of 2029 (a real win for the renewable natural gas industry), the Section 45Q carbon capture and sequestration credit rate for utilization and for use as a tertiary injectant was increased, and 100% bonus depreciation was made permanent. In addition, fuel cell facilities that begin construction after December 31, 2025, were added as qualifying technologies for the technology neutral tax credits.

Perhaps the most impactful changes are the “prohibited foreign entity” limitations which are littered throughout the OBBBA.⁴ As discussed further in our prior coverage, these limitations include disallowance of certain credits if the taxpayer is one of these entities, controlled by one of these entities, makes certain payments to one of these entities, or receives “material assistance” from one of these entities. There would also be a potential 100% recapture of the clean electricity credit under Section 48E if a taxpayer makes an “applicable payment” to one of these entities within ten years after originally claiming the credit (essentially creating a 10-year period of recapture risk for the technology neutral investment tax credit). These limitations have almost an immediate impact – generally, being effective January 1, 2026, for calendar year taxpayers – and will impose a significant risk, compliance, and diligence burden on taxpayers. The clean energy industry will need to work together to quickly develop strategies for sharing information and documenting compliance.

For better or worse, taxpayers should expect further guidance implementing these changes out of the Department of Treasury and, potentially, the Executive Branch. OBBBA directs and permits Treasury to issue guidance on a number of areas – including with respect to prohibited foreign entity limitations and Section 45Z emissions rates for animal manure – but this guidance may not be released for some time. As such, taxpayers will need to rely on the statutory language included in the OBBBA in the near term.⁵

Republican leadership in the House of Representatives and the Senate have also expressed a desire for further legislation later this year, either in a bipartisan bill or another budget reconciliation bill. As such, while the focus may now turn to the regulatory guidance needed to implement the OBBBA, taxpayers should stay alert for further legislative changes later this year.

If you have any questions or would like to discuss the OBBBA, please reach out to your V&E contacts.

¹ We’ve covered some (but not all) of these releases here, here, here and here.

² Though earlier versions of OBBBA prohibited taxpayers from claiming tax credits for certain energy property that the taxpayer rented or leased to a third party, the final version of the OBBBA only included this limitation on rented or leased solar water heating property and qualified small wind energy property.

³ These credits were previously scheduled to phase down after the later of 2032 and the calendar year in which annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the amount of such greenhouse gas emissions in 2022.

⁴ Notably, the clean hydrogen production tax credit (Section 45V) does not have a prohibited foreign entity restriction; however, the Section 45V credit termination date was accelerated for projects that do not begin construction before January 1, 2028.

⁵ It has been reported that certain House of Representatives members conditioned their approval of the OBBBA on assurances from the Executive Branch regarding the implementation of certain “high-risk” provisions in the OBBBA, including the beginning of construction safe harbors and prohibited foreign entity guidance, among others. Whether this happens remains to be seen.

Additionally, the OBBBA codified the “beginning of construction rules,” in effect as of January 1, 2025, as it pertains to the “prohibited foreign entity” restrictions. While it may be unlikely that different rules would apply in other contexts, it is possible that the beginning of construction rules outside of the “prohibited foreign entity” restrictions will be clarified or tightened further.