Updates to IRA Tax Benefits Found in Senate Finance Committee Draft of 2025 Reconciliation Bill

From here, the draft Reconciliation Bill is expected to be modified by the Senate to the extent necessary to comply with the “Byrd Rule” for the reconciliation process and, more importantly, to ensure sufficient support for passage by the Senate with a simple majority before going back to the House. To avoid unnecessary repeated votes in the House and Senate, the Senate hopes also to include any additional changes required for majority support in the House. As such, we expect further negotiations and revisions to the Reconciliation Bill in the coming weeks. We continue to encourage the clean energy industry to promptly engage with their legislators and make their views on this proposed legislation and the resulting economic impact clear to Congress and the Trump administration.

A fulsome summary of the current Senate version of the Reconciliation Bill is beyond the scope of this alert, but we have highlighted some of the notable changes with respect to IRA tax benefits as compared to the House of Representatives version of the Reconciliation Bill (previously covered here and here) below.

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

Improvements as compared to the House

Perhaps most notable, the SFC draft revises the phase down for technology neutral tax credits (Sections 45Y and 48E) by striking the 2028 “placed in service” cliff and retaining a “beginning of construction” threshold and beginning the phase down in 2032 — with a major exception for wind and solar projects, which will start phasing down for any facility beginning construction in the next calendar year.¹

Section 45Q, the credit for carbon oxide sequestration, fared well with the incorporation of credit value parity for CO₂ that is captured and utilized for a commercial purpose or disposed of in enhanced oil recovery or natural gas recovery projects (i.e., $85 per metric ton as compared to the current $60 per metric ton, if certain prevailing wage and apprenticeship requirements are met).

Mixed Bag – “Prohibited Foreign Entities” / “FEOCs”

The SFC proposal makes a number of updates and clarifying changes to the House’s “prohibited foreign entity” rules (i.e., rules which limit ownership, control, and involvement of “FEOC” type entities). But it’s unclear whether these changes have gone far enough to make these rules better for the industry, more administrable.²

For example, the threshold percentages for ownership and debt are increased, and updated rules on how to determine ownership, control, and relatedness appear to make the restrictions more workable, but complicated concepts in respect of attribution and circumstances in which public entities may be swept up are introduced. There are improvements to the circumstances in which a payment made to a specified foreign entity results in complete denial of the credit — essentially limited to payments which result in “effective control” by the specified foreign entity (as opposed to any payment in excess of a fairly low percentage as found in the House draft). On the whole, while an improvement, these provisions are sure to create lots of work for energy industry tax lawyers, administrative headaches for everyone involved, and inadvertent denial of credits to U.S. taxpayers.³

The effective dates for these restrictions are moved in as compared to the House and appear to apply with respect to any credits which would otherwise be claimed in any taxable year following enactment (regardless of the type of “prohibited foreign entity” that the taxpayer is determined to be).

The SFC proposal retains denial of the credit if the underlying facility (or component for Section 45X manufacturing production tax credits (“PTCs”)) includes “material assistance from a prohibited foreign entity.” It revised the definition of material assistance, however, by tying it to a cost ratio — essentially, if more than a threshold amount of costs of a facility are related to components acquired from a prohibited foreign entity, the credit is denied entirely.⁴ This allows at least some components to be sourced from a prohibited foreign entity and provides more of a runway for taxpayers to adjust their supply chain.

Furthermore, the SFC proposal prohibits “specified foreign entities” from purchasing certain IRA tax benefits under Section 6418.

For the technology neutral investment tax credit (Section 48E), the SFC draft keeps a provision requiring recapture of 100 percent of the investment tax credit in the event the taxpayer makes certain “applicable payments” to a “specified foreign entity” at any time during the 10-year period following placement in service of the relevant facility. It appears that this provision is meant to apply to projects which are placed in service in a taxable year beginning after the date which is 2 years after enactment — but the drafting leaves something to be desired. The potential for recapture also creates significant risk for financing parties and may have a chilling effect on investments. This is one area in particular that would benefit from improvement in the final legislation.

Worsening as compared to the House

With respect to the Section 45Z clean fuel production credit, although the SFC draft retains the extension through 2031 found in the House draft, for fuel produced after December 31, 2025, the SFC’s text reduces the amount of otherwise available credit if any foreign feedstocks are used but retains the welcomed exclusion of indirect land use changes in future emission rate tables. In addition, negative emission rates are not allowed in calculating the credit, except for certain animal-manure derived renewable natural gas when and if Treasury publishes guidance providing for such negative emissions rate. Other notable additions include the reduction of credit value for sustainable aviation fuel (from $1.75 to $1.00 per gallon if certain prevailing wage and apprenticeship requirements are met) and the definitional change of transportation fuel, which would disqualify any transportation fuel produced from a fuel for which a Section 45Z clean fuel production credit is allowed.

In an unexpected change, the legislation denies 5-year MACRS depreciation to certain energy facilities claiming a credit under Section 45Y or 48E that are placed in service after enactment of the legislation.

The SFC draft also includes new provisions for penalties and extended statute of limitations targeted at renewable energy credits. In particular, the substantial underpayment penalty in Section 6662 would now apply if an applicable credit was overstated by only 1% (as opposed to 10%), suppliers that make misstatements about material assistance to foreign entities would now be subject to specified penalties, and there would be an extended statute of limitation of 6 years for findings of “material assistance” (described above).

Additionally, the SFC draft corrects a technical error previously found in the technology neutral investment tax credit (Section 48E) related to the domestic content bonus credit’s adjusted percentage for manufactured products, which now increases from 40 percent for facilities that begin construction prior to June 16, 2025, to 45 percent if construction begins on or after June 16, 2025 and before January 1, 2026. Thereafter, such percentage increases ratably to 55 percent, which mirrors the technology neutral production credit.

Mostly Status Quo as compared to the House

Consistent with the House draft, although the SFC draft gives a bit more runway, tax credits for residential solar, energy efficiency, electric vehicles, and charging equipment would be terminated in the near term. Similarly, the hydrogen tax credit under Section 45V would terminate for facilities which begin construction after December 31, 2025.

For the Section 45X manufacturing PTC, the proposed credit phase out remains mostly unchanged (including denial of the Section 45X manufacturing PTC for wind energy components after 2027). One important change is removal of the unlimited life of the credit for critical minerals, with the SFC draft starting its phase out in 2030.

Under the SFC draft, the Section 45U zero-emission nuclear power production credit is no longer subject to a phase-out (it now expires after 2032) but includes various prohibitions on feedstock produced in a “covered nation” or by a “covered entity” for any taxable year beginning after December 31, 2027.

¹ It is worth emphasizing that storage projects will be able to claim technology neutral investment tax credits at the full credit rate so long as construction begins no later than December 31, 2033 (even if co-located with a wind or solar project).  

² These restrictions are littered throughout the legislation and can be found in the technology neutral credits, Section 45Z clean fuel production credit, Section 45Q carbon capture credit, Section 45U nuclear credit, Section 45X manufacturing PTC.

³ One clear improvement is that the draft clarifies that familial relationships do not create attribution.

⁴ This ratio is calculated by subtracting the costs attributable to manufactured products that are incorporated into the qualified facility and mined, produced or manufactured by a prohibited foreign entity from the total costs of the project attributable to manufactured products. This amount is then divided by the total costs of all manufactured products. The ratio for projects claiming credits under Section 45Y or 48E starts at 40 percent for projects beginning construction during 2026, then scales up each year by 5 percent until it reaches 60 percent for any project beginning construction after December 31, 2029. Eligible components made under Section 45X are subject to different ratios depending on the eligible component.

The legislation also provides that, for purposes of calculating the material assistance cost ratio, taxpayers can use the safe harbor tables provided in respect of the “domestic content bonus” in IRS Notice 2023-38. This ratio safe harbor will apply until 60 days after the date that the Department of the Treasury (“Treasury”) releases updated tables for this safe harbor.