Amendments to IRA Tax Credits in the House Budget Bill

On May 22, 2025, the House of Representatives passed (by a vote of 215-214-1) its version of the budget reconciliation bill (H.R. 1, the "One Big Beautiful Bill Act") containing numerous tax reform provisions. Below are our summaries of the proposed amendments to certain tax credits under the Inflation Reduction Act of 2022 ("IRA") as well as our initial observations. The bill now advances to the Senate for consideration and markup, and we will continue to monitor any developments and updates.

Overview of Changes from the Ways and Means Committee Draft Bill:

The focus of the updates from the draft bill presented by the Ways and Means Committee are as follows:

• Termination of Tech-Neutral Credits Without Phaseout: Tech-neutral PTCs and ITCs under sections 45Y and 48E would terminate for projects that (i) begin construction after 60 days from enactment or (ii) are placed in service after Dec. 31, 2028.
  • The prior draft bill included a modified phase out of the credit rates starting in 2029 and running through 2032, with credits being terminated after 2032, based on when a project is placed in service.
  • The bill does not alter the existing guidance on how to begin construction of a project for tax purposes, and the date of enactment would be the date the bill is signed by the President.
  • Advanced nuclear facilities and expansions of nuclear facilities seeking credits under sections 45Y or 48E would be required to begin construction before Jan. 1, 2029.
• Material Assistance from a Prohibited Foreign Entity: This restriction would apply to projects seeking tax credits under sections 45Y or 48E that begin construction after Dec. 31, 2025.
  • The prior draft bill provided a 1-year grace period to begin construction before the material assistance rules applied.

Observation: If the bill is enacted into law before November 1, 2025, then this material assistance restriction would not affect projects seeking credits under sections 45Y or 48E, because such projects would have to begin construction within 60 days of enactment to be eligible for such credits.

• Transferability: Tax credits under sections 45Y and 48E would remain transferable for the duration of the credit period for projects that meet the Dec. 31, 2028 deadline to be placed in service.
  • The prior draft bill preserved transferability for projects that began construction up to 2 years after enactment.

Observation: The preservation of transferability is undermined by the accelerated expiration of the credits themselves.

• Special Rule for Residential Solar: No credit would be allowed under sections 45Y or 48E for residential solar water heating property, solar electric property, or small wind energy property if (i) the taxpayer/owner rents or leases such property to a third party and (ii) the third party would qualify for the 25D credit with respect to such property if the third party were the owner of such property.

Observation: This does not seem to include residential PPAs because in such cases the owner is not leasing the equipment to the consumer (but only for systems that begin construction within 60 days of enactment and are placed in service by Dec. 31, 2028). We see no logical basis for treating PPAs differently than leases, so this treatment may be aligned by the Senate, if this special rule for residential property is otherwise maintained.

Observation: This also does not seem to include residential battery storage technology for which a credit is allowable under section 25(d)(6).

Observation: After the bill's amendment, the Section 25D credit would not be allowed for property placed in service after December 31, 2025. Thus, the lessee technically would not qualify for Section 25D credits after the bill's amendment, which means condition (ii) could not be satisfied. This is probably not the intended consequence and either the Senate or the House may modify the bill to fix this glitch.

• Residential projects that can demonstrate that they began construction in 2024 would qualify for the ITC under Section 48, as noted below.
• Accelerated Termination of Section 45U PTC for Existing Nuclear Facilities: This credit would terminate for electricity produced and sold after Dec. 31, 2031, and such credits would remain transferable for the duration of the credit period.

The amendments to the bill did not affect the provisions in the draft bill presented by the Ways and Means Committee with respect to tax credits available under sections 45Q, 45V, 45X, 45Z, and 48, which are summarized below.

Projects seeking tax credits under sections 45 and 48 (which must have begun construction by Dec. 31, 2024) are unaffected by the bill. To be eligible for tax credits under sections 45 or 48, a project must have begun construction before Jan. 1, 2025, and generally be placed in service within 4 years (or 10 years in the case of offshore wind). The quantum of PTC or ITC available for a given project under sections 45 or 48, as applicable, is the same (for a project that qualifies thereunder) as it would be for the same project under sections 45Y or48E. Application of the prevailing wage and apprenticeship requirements to achieve a 5x credit rate, potential bonus credit amounts for energy community and domestic content, and eligibility for direct pay under Section 6417 would not be affected by the bill

Reference Guide for Amendments to IRA Tax Credits in the House Budget Bill:

Overall, the proposed amendments fall into 3 general categories:

• Expiration of certain credits as early as December 31, 2025, while other credits would either expire in 2028 or follow a modified phaseout schedule starting in 2029.
• Foreign entity of concern (“FEOC”) restrictions would apply to all IRA tax credits.
• Repeal of transferability after 2 years from enactment for credits under 45Q, 45X, and 45Z.

Observation: Safe harboring of credit rate would be based on timing of placement in service, whereas safe harboring of transferability would be based on timing of beginning construction.

§45Y – Clean Electricity Production Credit & §48E – Clean Electricity Investment Credit

• The credits would expire for projects that (i) begin construction after 60 days from enactment, or (ii) are placed in service after Dec. 31, 2028. However, for advanced nuclear facilities and expansions of nuclear facilities, the deadline to begin construction would be Dec. 31, 2028, with no placed in service deadline. In other words, to claim credits a project would need to (i) begin construction within 60 days of enactment and (ii) be placed in service by Dec. 31, 2028.
• FEOC restrictions would disallow credit to:
  • Taxpayers who are a "specified foreign entity" for tax years beginning after enactment;
  • Facilities beginning construction after Dec. 31, 2025, that include "material assistance from a prohibited foreign entity"; and
  • Taxpayers who are a "foreign-influenced entity" or make an "applicable payment" to a "prohibited foreign entity" in tax years beginning 2 years after enactment.
• 100% of ITCs claimed under Section 48E with respect to a property would be recaptured if a "specified taxpayer" (i.e., one who is allowed an ITC for any tax year beginning 2 years after enactment) makes an "applicable payment" within 10 years after the property is placed in service.
• Transferability would continue for the duration of the credit period.
• No credit would be allowed for residential solar water heating property, solar electric property, or small wind energy property if (i) the taxpayer/owner rents or leases such property to a third party and (ii) the third party would qualify for the 25D credit with respect to such property if the third party were the owner of such property.

Observation: The placed in service deadline represents a policy change from the general continuity safe harbor period of 4 years (10 years for offshore wind) provided under current IRS guidance on beginning construction.

§45Q – Carbon Oxide Sequestration Credit

• FEOC restrictions would disallow credit to:
  • Taxpayers who are a "specified foreign entity" for tax years beginning after enactment; and
  • Taxpayers who are a "foreign-influenced entity" in tax years beginning 2 years after enactment.
• Transferability would be repealed for facilities that begin construction after 2 years from enactment.

§45U – Clean Electricity Production (For Existing Nuclear Facilities)

• The credit would terminate for electricity produced and sold after Dec. 31, 2031.
• FEOC restrictions would disallow credit to:
  • Taxpayers who are a "specified foreign entity" for tax years beginning after enactment; and
  • Taxpayers who are a "foreign-influenced entity" in tax years beginning 2 years after enactment.
• Transferability would be continue for the duration of the credit period.

§45V – Clean Hydrogen Production Credit

• This credit would be terminated for facilities that begin construction after December 31, 2025.

§45X – Advanced Manufacturing Production Credit

• The credit rate would phase out as follows based on the date the eligible components are sold:
  • On or before December 31, 2029: 100%;
  • During 2030: 75%;
  • During 2031: 50%; and
  • After December 31, 2031: 0%;
• Wind energy components sold after December 31, 2027, would not be credit eligible.
• FEOC restrictions would disallow credit to:
  • Taxpayers who are a "specified foreign entity" for tax years beginning after enactment;
  • Taxpayers who are a "foreign-influenced entity" or make an "applicable payment" to a "prohibited foreign entity" with respect to any eligible component category in tax years beginning 2 years after enactment; and
  • Eligible components produced in tax years beginning 2 years after enactment that (i) include any "material assistance from a prohibited foreign entity" or (ii) are produced subject to a licensing agreements with prohibited foreign entity valued in excess of $1 million.
• Transferability would be repealed for components sold after 2027.

§45Z – Clean Fuel Production Credit

• The credit period would be extended until December 31, 2031 (based on when the fuel is sold).
• Fuel sold after December 31, 2025, would be required to be exclusively derived from feedstock produced or grown in the United States, Mexico, or Canada.
• Lifecycle greenhouse gas emissions would exclude any emissions attributed to indirect land use charge, and distinct emissions rates would be provided for transportation fuels derived from animal manure, including dairy, swine, and poultry.
• FEOC restrictions would disallow credit to:
  • Taxpayers who are a "specified foreign entity" for tax years beginning after enactment; and
  • Taxpayers who are a "foreign-influenced entity" in tax years beginning 2 years after enactment.
• Transferability would be repealed for fuel produced after 2027.

§48 – Energy Credit

• The credit rate for ground or groundwater thermal systems would phase out as follows based on when such property begins construction:
  • Before January 1, 2030, 6%;
  • During 2030: 5.2%;
  • During 2031: 4.4%;
  • After December 31, 2031: 0%.
• FEOC restrictions would disallow credit to:
  • Taxpayers who are a "specified foreign entity" for tax years beginning after enactment;
  • Taxpayers who are a "foreign-influenced entity" in tax years beginning 2 years after enactment.
• Transferability would be repealed for property that begins construction after 2 years from enactment.

Observation: Credit-eligible asset classes under Sections 48, 45Y, 48E, and 45Q, application of the prevailing wage and apprenticeship requirements, potential bonus credit amounts for energy community and domestic content, and eligibility for direct pay under Section 6417 would be unchanged.

Observation: Additional FEOC requirements would apply to credits under Sections 45Y,48E, and 45X that would not apply to credits under Sections 45U, 45Q, 45Z, and 48.

FEOC Restrictions:

• A "prohibited foreign entity" is either (i) a specified foreign entity or (ii) a foreign-influenced entity.
• "Specified foreign entities" include:
  • entities designated as a foreign terrorist organization by the Secretary of State;
  • entities included on the specially designated nationals and blocked persons list maintained by the Treasury Department's Office of Foreign Assets Control;
  • entities alleged by the Attorney General to have engaged in conduct for which a conviction was obtained under certain laws;
  • entities determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to U.S national security or foreign policy;
  • Chinese military company operating in the United States;
  • entities Listed Under the Uyghur Forced Labor Prevention Act; or
  • certain battery producing entities.
• Specified foreign entities include "foreign controlled entities" such as (i) the government of a covered nation (e.g.,, China, Russia, Iran, or North Korea), (ii) a citizen or resident of a covered nation without U.S. status as a lawful permanent resident, (iii) an entity organized under the laws of, or having its principal place of business in, a covered nation, or (iv) an entity controlled by any of the above, including subsidiaries, measured by more than 50% ownership of stock in a corporation, profits interests or capital interests in a partnership, or other beneficial interest in the entity.
• An entity is "foreign-influenced entity" if:
  • (i) During the taxable year:
    • A specified foreign entity has direct or indirect authority to appoint a board member, executive officer, or similar individual;
    • A single specified foreign entity owns at least 10% of the entity;
    • One or more specified foreign entities own in the aggregate at least 25% of the entity; or
    • At least 25% of the entity's debt is held in the aggregate by one or more specified foreign entities; or
  • (ii) During the prior taxable year, the entity knowingly makes (or had reason to know) a payment of dividends, interest, compensation for services, rents or royalties, guarantees, or any other fixed, determinable, annual, or periodic payments to:
    • a specified foreign entity in an amount ≥10% of the total of such payments; or
    • more than 1 specified foreign entity in an amount ≥25% of the total of such payments (each, an "applicable payment")
• Construction or production of any property includes "material assistance from a prohibited foreign entity" if, with respect to such property:
  • Any component, subcomponent, or applicable critical mineral included in such property is extracted, processed, recycled, manufactured, or assembled by a prohibited foreign entity; and
  • Any design of such property is based on any copyright or patent held by, or any know-how or trade secret provided by, a prohibited foreign entity.
• Material assistance does not include any subcomponent (or collection of subcomponents) or any material that is (i) not uniquely designed for use in construction of a 45Y/48E facility or 45X component, (ii) not exclusively or predominantly produced by prohibited foreign entities, and (iii) not acquired directly from a prohibited foreign entity.

Observation: The imposition of FEOC rules to tax credit qualification would introduce an additional layer of complexity. The statute would further authorize the Treasury Department to issue regulations under these rules.

_{1 All references are to the applicable section of the Internal Revenue of 1986, as amended. 
2 Section 25C (energy efficient home improvement credit); Section 25D (residential clean energy credit); Section 25E (previously-owned clean vehicles); Section 30C (alternative fuel vehicle refueling property credit); Section 30D (clean vehicle credit); Section 45L (new energy efficient home credit); Section 45W (credit for qualified commercial clean vehicles); Section 45V (credit for production of clean hydrogen).
3 Section 45Y (clean electricity production credit); Section 48E (clean electricity investment credit).
4 Section 45U (zero-emission nuclear power production credit).
5 Section 45X (advanced manufacturing production credit).
6 Section 45Z (clean fuel production credit).
7 Section 48 (energy credit).
8 Section 45Q (credit for carbon oxide sequestration).
9 Available at https://www.state.gov/foreign-terrorist-organizations/.
10 Available at: https://sanctionslist.ofac.treas.gov/Home/SdnList.
11 The Espionage Act (18 U.S.C. §§792 et seq.); 18 U.S.C. §951 (agents of foreign governments); 18 U.S.C. §1030 (computer-related crimes); the Economic Espionage Act (18 U.S.C. §§1831–1839); the Arms Export Control Act (22 U.S.C. §2751 et seq.) Sections 224–227 or 236 of the Atomic Energy Act (42 U.S.C. §§2274–2278; 2284); the Export Control Reform Act of 2018 (50 U.S.C. §4801 et seq.); and the International Emergency Economic Powers Act (50 U.S.C. §1701 et seq.).
12 Available at https://media.defense.gov/2025/Jan/07/2003625471/-1/-1/1/ENTITIES-IDENTIFIED-AS-CHINESE-MILITARY-COMPANIES-OPERATING-IN-THE-UNITED-STATES.PDF.
13 See Public Law 117–78, §2(d)(2)(B)(i), (ii), (iv), or (v).
14 An entity specified under section 154(b) of Public Law 118-31, including Contemporary Amperex Technology Co., Ltd. (CATL), BYD Company, Limited, Envision Energy, Limited, EVE Energy Company, Limited, Gotion High Tech Company, Limited, Hithium Energy Storage Technology Company, Limited, and any successor entity to those listed above.}

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