The budget bill as passed by the House promises an overhaul of the clean energy tax credits introduced and expanded in the Inflation Reduction Act. The contours of the changes are subject to revision — and that process has already begun — as the bill heads into the next phases of its probable passage. But while the bill spells immediate difficulties for many of the credits, the longer-term implications might be even more challenging for the energy industry because the House bill could be a prelude to putting the clean energy credits on the “permanent extenders” treadmill.
The Joint Committee on Taxation estimated that the Ways and Means Committee’s proposed changes to the clean energy credits would total almost $561 billion over the 10-year budget window (JCX-22-25 R). The JCT also showed a loss of $2 billion from the addition of income from hydrogen storage and carbon capture as qualifying income of certain publicly traded partnerships. Before the IRA, the tax equity market saw approximately $20 billion in transactions per year; after the IRA, the estimates are roughly $100 billion. If enacted without changes, the proposed budget bill would shrink the transfer market considerably.
The bad news for the energy industry is that the House bill includes extensive new restrictions for prohibited foreign entities for nearly all of the credits, repeals transferability for projects that begin construction after the second anniversary of enactment, and terminates the sections 48E and 45Y tech-neutral investment and production credits much earlier. The good news is that some of the credits would survive the House’s scalpel and none of the changes are retroactive. The only credits that would be completely repealed are the section 25C energy-efficient home improvement credit, the section 25D residential clean energy credit, the section 25E used electric vehicle credit, the section 30C EV charging credit, the section 30D clean vehicle credit (subject to a phaseout), the section 45L new energy-efficient home credit, and the section 45W commercial clean vehicle credit. Although many negotiations remain to be conducted in the Senate, the bill likely represents the worst-case scenario for the industry.
That means some credits are all but gone. The Rules Committee’s final changes to the tech-neutral credits, made hours before the bill passed the House, rendered those credits unavailable except for projects that begin construction within 60 days of the date of the bill’s enactment or are placed in service before December 31, 2028. The bill that initially emerged from Ways and Means proposed a phasedown starting in 2029.
Shutting Out China (and Russia, North Korea, and Iran)
While some changes to the foreign-entity-of-concern rules might have been expected, the breadth of the proposals surprised the industry. Unlike the IRA and the CHIPS Act, which included foreign-entity-of-concern rules only in section 30D’s individual EV credit and section 48D’s advanced manufacturing investment credit, the proposed foreign-entity-of-concern rules would apply to all of the energy tax credits. “The language is incredibly broad and would render the credits useless to a very large portion of the critical U.S. taxpayer base,” said Matt Donnelly of Gibson, Dunn & Crutcher LLP. A more recent revision incorporated by the Rules Committee and passed by the House narrowed the constructive ownership rules that apply in the foreign-entity-of-concern context but left the other rules largely unchanged.
New definitions would be included in section 7701(a)(51) with general applicability to the energy tax credits. They would take effect for tax years beginning after the date of enactment, leaving little time for taxpayers to adapt. A prohibited foreign entity is defined as either a specified foreign entity or a foreign-influenced entity. A specified foreign entity is defined as certain types of foreign entities of concern specified under the fiscal 2021 National Defense Authorization Act, a Chinese military company operating in the United States in accordance with that act, certain entities included on lists required by other laws, entities specified by the fiscal 2024 National Defense Authorization Act, or a foreign-controlled entity.
A foreign-controlled entity is the government of North Korea, China, Russia, or Iran; any citizen, national, or resident of one of those countries that is not a citizen or lawful permanent resident of the United States; an entity or qualified business unit incorporated under the laws of, or having its principal place of business in, one of those countries; or an entity, including subsidiaries, controlled by one of the above governments, individuals, or entities. Control means more than 50 percent by vote or value of the stock in a corporation, more than 50 percent of the profits or capital interests in a partnership, or more than 50 percent of the beneficial interests in any other type of entity. The section 318 rules on constructive ownership of stock apply, but an amendment by the Rules Committee removes the rules in section 318(a)(3) regarding attribution to partnerships and corporations in this context.
A foreign-influenced entity is defined based on its status during the tax year or the previous tax year. There are multiple ways to become a foreign-influenced entity during the tax year: if a specified foreign entity has direct or indirect authority to appoint a covered officer of the entity, a single specified foreign entity owns at least 10 percent of the entity, one or more specified foreign entities own at least 25 percent in the aggregate of the entity, or at least 25 percent of the debt of the entity is held in the aggregate by one or more specified foreign entities. In addition, if during the previous tax year the entity knowingly pays dividends, interest, compensation for services, rents, royalties, guarantees, or any other fixed, determinable, annual, or periodic amount to a specified foreign entity equal to or greater than 10 percent of the total of such payments made by the entity during the tax year, or makes FDAP payments to more than one specified foreign entity of at least 25 percent of the total of such payments made during the tax year, the entity is a foreign-influenced entity.
Section 7701(a)(52) adds a prohibition on material assistance from a prohibited foreign entity. Material assistance occurs if any component, subcomponent, or applicable critical mineral included in property is extracted, processed, recycled, manufactured, or assembled by a prohibited foreign entity. If the design of property is based on any copyright or patent held by a prohibited foreign entity or any know-how or trade secret provided by one, that too is material assistance. There is an exception for an assembly part or constituent material that is not acquired directly from a prohibited foreign entity. Assembly parts subject to the exception cannot be uniquely designed for use in constructing a qualified facility under sections 45Y and 48E or an eligible component in section 45X or exclusively or predominantly produced by prohibited foreign entities, and there are similar rules for constituent materials.
The definition of control for purposes of the foreign-controlled entity concept applies the broad constructive ownership rules from section 318, and the Ways and Means version of the bill created a big problem for companies with international operations, Donnelly said. Those rules attribute ownership not only from a subsidiary to a parent company, but also from a parent down to the subs. Applying all of these rules for energy credits may treat even brother-sister subsidiaries as owning other subsidiaries in the group. “For many multinational enterprises, if there is a Chinese sub, that could render all of the others foreign-controlled entities,” Donnelly said. The drafters of the Ways and Means version could have intended to include only the upward attribution aspects of the section 318 rules in order to capture situations in which companies in China, North Korea, Russia, or Iran have management and ownership control over the subsidiary; clarifying that is the object of the Rules Committee change, which was included in the bill that passed the House.
Transferability Repeal
Is it time to eulogize the IRA’s novel experiment in transferability? The House bill says yes, but there are more than a few indications that Congress rather likes the idea of making credits transferable. (Prior analysis: Tax Notes Federal, Apr. 21, 2025, p. 439.) The bill repeals transferability for projects that begin construction after the second anniversary of the date of enactment, which offers some lead time for taxpayers to adjust. But even with a transition period, the change is likely to greatly affect the clean energy industry, which has become reliant on transferability, said David Burton of Norton Rose Fulbright US LLP. “It has worked very well and had a big impact,” he added. Smaller developers might be the most affected, and larger developers that previously engaged in tax equity transactions, the least affected. “For smaller developers with a weaker balance sheet, the tax equity market might not be terribly interested,” Burton said. However, it’s possible that some buyers of tax credits might be more inclined toward tax equity as a result of their experience with purchases. Burton said that although some credit buyers who weren’t previously tax equity investors eventually entered those transactions, or at least considered it, they’re likely to remain a minority, even if the repeal passes.
Andy Moon of Reunion, a tax credit transfer platform, said that although the House bill published May 22 would significantly shorten the window of availability for clean energy tax credits, market participants are confident that tax credit transfers will be respected in 2025. For projects that meet the safe harbor requirements, transfers could still be made for the next couple of years, even under the House bill. That assurance will likely accelerate credit transfers through the end of this year, Moon said. “I think there has been some holding back due to a fear of retroactive repeal,” he said. “I expect to see a wave of buyers looking for tax credits in the second half of the year, which will drive prices up similar to what we saw in 2024.” Corporate tax credit buyers and the clean energy industry will now turn their attention to the Senate to advocate for a longer-term tax credit program to incentivize clean energy.
From Phasedown to Repeal
In a surprising last-minute change before the full House voted May 22, the Rules Committee added provisions to repeal the technology-neutral investment and production tax credits in sections 48E and 45Y, setting the stage for a debate in the Senate about those credits’ future. In contrast, the Ways and Means proposal included a phasedown of the tech-neutral investment and production tax credits starting in 2029 that offered a transition period to the industry. It also gave politicians some lead time, coming as it did immediately after the 2028 election. The Ways and Means proposal likely represented a compromise in the House, because it came bundled with a switch from the long-used beginning-of-construction timing to a placed-in-service standard. The latter could pose difficulties for developers, because when a project is planned to be placed in service and when it is actually placed in service may differ due to circumstances beyond their control, Burton said. The switch would increase risk and decrease certainty about what level of credits a taxpayer qualifies for, he added.
Short End of the Stick
The commercial clean vehicle credit in section 45W is slated for a full repeal for vehicles acquired after December 31, 2025, with the only exception being vehicles placed in service before January 1, 2033, that are acquired under a written binding agreement entered before May 12, 2025. Josh Green of the American Fleet Leadership Coalition said that the proposal to eliminate section 45W ignores many of the benefits companies are already seeing from the credit and could harm U.S. competitiveness, national security, and energy dominance. Green, who is also CEO of Inspiration Mobility Group, noted that ending the credit this year jeopardizes investments that businesses have already committed to, because the owners of commercial fleets plan their purchases years in advance. “There are a variety of ways to improve the credit and make it more targeted while still reducing the overall fiscal impact,” Green said. Those might include domestic content rules with a runway for implementation and proration of the credit in accordance with the percentage of domestic content included, or a sunset date further off than the end of the year. In addition to the impact of the proposed bill, section 45W has another source of uncertainty: The proposed regulations for section 45W (REG-123525-23) were only released in January and haven’t been finalized yet.
Wind energy is also poised to take a blow by being removed from the section 45X advanced manufacturing production credit after 2027, while every other technology gets to stay in until 2031. This change appears to be a nod to the Trump administration’s deprioritization of wind power.
Everything Old Is New Again?
Ironically, if the changes in the House proposal are enacted, the result could be a greater interest in traditional tax equity transactions, which were available long before the IRA and have remained unchanged. And the likelihood that clean energy credits wind up being year-end extenders like their pre-IRA predecessors is probably also higher if Congress ultimately goes with the earlier sunset dates.
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