What the One Big Beautiful Bill Means for Solar & Clean Energy Credits

After a robust negotiation in the U.S. House of Representatives, a vote-a-rama in the U.S. Senate, and a filibustering speech in the U.S. House of Representatives, the One Big Beautiful Bill (OBBB) has been approved by both houses of Congress. Below we discuss what the passage of the bill will mean for solar and clean energy tax credits, and how businesses and individuals can navigate the significant changes.

Key Solar and Clean Energy Provisions of the OBBB

Phase-out timeline for wind & solar credits (PTC & ITC): Developers must begin construction of their projects within 12 months of the enactment of the OBBB to qualify for federal credits under Section 45Y (Production Tax Credit) and Section 48E (Investment Tax Credit) under the pre-existing rules (including 4-year Continuity Safe Harbor). The OBBB requires projects that begin construction after such 12-month period to be placed in service on or before December 31, 2027, to remain eligible for the applicable credits.

Prohibited Foreign Entities create sourcing and ownership restrictions: Projects that are owned by or that use “material assistance” from Prohibited Foreign Entities (PFEs) could lose credit eligibility. PFEs consist of specified foreign entities (such as some foreign governments, foreign military companies, and foreign nationals) and foreign-influenced entities (which includes any company (i) if a specified foreign entity has authority to appoint certain officers, (ii) if a single specified foreign entity owns at least 25% of the equity, (iii) if multiple specified foreign entities own at least 40% of the equity, or (iv) if one or more specified foreign entities own at least 15% of the debt of the company).

The final vision for what constitutes “material assistance” from a PFE is not settled. Safe harbor tables will be published in 2026, which will address percentages that constitute “material assistance.” Until such tables are published, taxpayers can rely on tables in IRS Notice 2025-08 to determine the percentage of costs applicable to eligible components and manufactured products, and can rely on certifications from suppliers of eligible components and manufactured products with regard to PFEs. This safe harbor would not apply if the taxpayer has actual knowledge, however, that the certification is inaccurate.

Retained transferability: The OBBB preserves the ability to transfer or sell tax credits, a valuable feature that is unique to federal energy tax credits. The version of the OBBB that was approved in the House in May sought to eliminate transferability of tax credits, but the final version retained transferability but with restrictions on transfers to PFEs.

Other clean credits were largely preserved: Credits for battery storage, hydro, geothermal, nuclear, carbon capture, and clean fuel production remain available. There were adjustments to phase-out timelines, but those timelines are considerably longer than the phase-out timelines applicable to solar and wind projects.

Residential and EV credits repealed: The residential clean energy credit (Section 25D) will be disallowed for any expenditures made after December 31, 2025. This is a sharp change, as existing law would only disallow the residential clean energy credit for property placed in service after December 31, 2034. The clean vehicle credit (Section 30D) is similarly eliminated soon, with the credit being disallowed for any vehicle acquired after September 20, 2025. Existing law would have allowed the credit for vehicles purchased on or before December 31, 2032.

New tax compliance obligations and risks: The period for the IRS to disallow energy credits due to “material assistance” from PFEs has been extended to six years after the return is filed, thereby extending the compliance period for project owners and tax credit purchasers. Additionally, the threshold for determination of a substantial understatement of income tax (for energy credits under Section 45X, 45Y, and 48E being disallowed) was reduced to 1%. Previously, a taxpayer would need to understate their income by 10% before this penalty would apply.

MORE ANALYSIS ON THE OBBB: Business Taxation | Estate Planning & Medicare

Next Stop for the OBBB

The OBBB will be sent to the President’s desk for signing. The President has been vocal of his desire to sign this bill by July 4, 2025.

How to Prepare for the OBBB

With all of the changes affecting the economics and operations of renewable energy development and ownership, there are some actions that can be taken immediately to address this new legislation.

Safe harbor for beginning construction: While developers are familiar with the safe harbors for beginning construction, there is often a preference to rely on certain specific safe harbors. The 5% Test (which requires 5% of the cost of the facility to be incurred) is easy to prove to lenders and auditors, but it will require significant capital if this safe harbor is used for multiple portfolios of projects. Capital may be harder to access for some project developers and acquirers after the OBBB is signed, as uncertainty around tax credit eligibility will limit the availability of debt and tax equity investment.

Likewise, the Physical Work Test (which requires physical work of a significant nature) may be more fact intensive to prove to lenders and auditors, and may require mobilization for projects that are not yet permitted. However, off-site physical work of a substantial nature will still qualify for the safe harbor under the Physical Work Test. The off-site physical work can be substantial even if it involves acquisition of components that are below 5% of the total cost, and permits are not required for much of the work that qualifies. The IRS will scrutinize more heavily the documentation of off-site physical work if the project is audited, so it is prudent to keep copies of all documentation. Indeed, the Physical Work Test is generally open to greater scrutiny by the IRS, and both tests require continuous progress to be made once construction has started, so supporting documentation should be thorough and extensive.

Supply chain compliance risks: From the creation of the Domestic Content adder, we have seen significant incentives to source equipment domestically. We have also seen the economics of projects shift for those that have located reliable vendors that can deliver eligible equipment. With the introduction of restrictions on “material assistance” from PFEs, developers who have already established relationships with vendors and who regularly obtain certifications will have an advantage. It is prudent to build these connections now and work on sourcing equipment from reliable vendors who are willing to provide standard certifications. Additionally, we expect supply chain delays and increased equipment costs as demand increases. It would be prudent to consider acquiring extra equipment and warehousing it, if you anticipate having a large pipeline of ITC eligible projects; particularly if you can spread the warehousing costs out among several portfolios of projects.

Review existing agreements: Many developers, contractors, project acquirers, and tax equity investors have long-established relationships with their counterparties. Those who are actively negotiating contracts currently must revise those contracts to allocate risks associated with changes of law contained in the OBBB. Likewise, it is prudent to review previously-executed contracts to confirm if any new rights or obligations have been created; there should be a thorough review of change of law or force majeure provisions in those contracts.

The OBBB will likely change the terms of: (i) acquisition agreements (between developers and project acquirers), which typically include purchase price adjustments for variables that affect costs or revenue; (ii) joint venture agreements or investment agreements (between sponsors and tax equity investors), which typically include provisions for recapture risk, indemnification, and insurance; and (iii) EPC agreements (between contractors and project owners), which typically include timelines, budgets, and liquidated damages provisions that are sized to match the economic harm project owners face if the project is not delivered timely. It is prudent to closely scrutinize the terms of these agreements, even the standard terms that do not typically change from one project to the next, as the OBBB has created significant risk for all parties involved.

——————————————————————–

This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

This Insight does not constitute written tax advice as described in 31 C.F.R. §10, et seq. and is not intended or written by us to be used and/or relied on as written tax advice for any purpose including, without limitation, the marketing of any transaction addressed herein. Any U.S. federal tax advice rendered by DarrowEverett LLP shall be conspicuously labeled as such, shall include a discussion of all relevant facts and circumstances, as well as of any representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) upon which we rely, applicable to transactions discussed therein in compliance with 31 C.F.R. §10.37, shall relate the applicable law and authorities to the facts, and shall set forth any applicable limits on the use of such advice.