15 May 2025 Proposed tax bill would phase out or repeal many energy credits in Inflation Reduction Act
The tax reconciliation bill (the Bill) that was approved by the House Ways and Means Committee on May 14, 2025, would repeal, phase out or modify most of the renewable energy credits created under the Inflation Reduction Act (IRA). In addition, the Bill would phase out the transferability of the energy tax credits after two years.
The IRA created provisions that allow certain credits to be transferred (see Tax Alerts 2022-1169, 2024-0933). Under IRC Section 6418, an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit to an unrelated transferee taxpayer. The transfer, however, must be paid in cash, not be included in the recipient's income and not be deductible by the payor. Further, the transfer must be a one-time transfer (i.e., the transferee cannot make a subsequent election to further transfer any portion of the transferred credit). The Bill would generally repeal transferability provisions for credits two years after the date of its enactment. The clean vehicle credits under IRC Sections 30D, 25E and 45W provide a dollar-for-dollar reduction of federal income taxes for new and used clean vehicles placed in service by a taxpayer during the tax year before January 1, 2033. To claim the IRC Section 30D credit, (1) the original use of the vehicle must commence with the taxpayer, (2) the taxpayer cannot acquire the clean vehicle for resale, (3) the clean vehicle must be made by a qualified manufacturer, (4) the final assembly of the clean vehicle must occur in North America and certain other requirements in IRC Section 30D(d)(1) must be met. The IRC Section 30D credit can reach $7,500, so long as the sourcing requirements are satisfied for each of the critical minerals contained in the clean vehicle's battery and its components. IRC Section 25E allows taxpayers who acquire a used clean vehicle (i.e., at least two years old), to claim a federal tax credit during the tax year the vehicle is placed in service. The credit equals the lesser of (1) $4,000, or (2) 30% of the sales price. The credit can be used once every three years for clean vehicles sold for $25,000 or less and is based on the taxpayer's adjusted gross income. The IRC Section 45W credit for qualified commercial clean vehicles applies to vehicles acquired before January 1, 2033. The credit is the lesser of (1) 30% of the basis of a vehicle not powered by a gasoline or diesel internal combustion engine or (2) the incremental cost of such vehicle (i.e., the excess of the purchase price of the vehicle over the price of a comparable vehicle). The IRC Section 45W credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for other vehicles. The Bill generally would repeal the credit under IRC Sections 30D, 25E and 45W for vehicles placed in service after December 31, 2025. The credit under IRC Section 30D would continue through December 31, 2026, for manufacturers that have sold 200,000 or less plug-in electric vehicles or clean vehicles after 2009 and before 2026. The repeal would be effective for vehicles placed in service after December 31, 2025, subject to limited exceptions. The Bill would eliminate the tax credits for the purchase of new and used clean vehicles available to individuals, businesses and other taxpayers. While incentives may still be available at the state and local level, these credits have historically been used to lower the total cost of purchasing clean vehicles. Taxpayers transitioning to electric vehicles should closely monitor the status of electric vehicle credits as the provisions move through the reconciliation process and consider the timing and potential acceleration of their transition plans in light of the possible repeal. The IRC Section 30C alternative fuel refueling property credit allows a credit of up to 30% of the cost of any qualified alternative fuel vehicle refueling property placed in service in low-income and non-urban areas before January 1, 2033. Depreciable alternative fuel vehicle refueling property qualifies for a 30% credit if certain wage and apprenticeship requirements are met. Otherwise, depreciable alternative fuel vehicle refueling property is limited to a 6% credit. The credit for depreciable alternative fuel vehicle refueling property cannot exceed $100,000. For any non-depreciable alternative fuel vehicle refueling property, the limit is $1,000. The credit limitation applies per any single item of qualified alternative fuel vehicle refueling property. Similar to the clean vehicle credits, the credit under IRC Section 30C lowers the costs of electric vehicle-charging infrastructure for individuals, businesses and other taxpayers. A full repeal of the IRC Section 30C credit based on the placed-in-service date of eligible property as opposed to when property began construction would significantly impact ongoing and planned projects that may not be completed before the end of 2025. Taxpayers currently undertaking IRC Section 30C eligible projects should carefully examine their construction timelines to determine if the credit would be available based on when their assets will be placed in service should the repeal be adopted. The IRC Section 45Y clean energy production tax credit (PTC) is available for clean electricity produced at a qualified facility that (1) is placed in service after December 31, 2024, (2) is used to generate electricity and (3) has a zero greenhouse-gas-emissions rate (see Tax Alert 2025-0343 for discussion of related final regulations). The amount of greenhouse gases emitted does not include qualified carbon dioxide that the taxpayer captures and either (1) disposes in secure geological storage or (2) "utilizes" under IRC Section 45Q(f)(5). Additionally, similar rules apply to reduce the credit where tax-exempt bonds were used to finance the facility. The IRC Section 48E technology-neutral ITC is available for any qualified electric generating facility and any energy storage technology that is placed in service after December 31, 2024, and for which the greenhouse-gas-emissions rate is not greater than zero. Qualified property is generally tangible personal property or other tangible property and is subject to certain limitations and restrictions. The IRC Section 48E ITC generally provides a 6% base rate, which can increase to 30% if the prevailing wage and apprenticeship requirements are met. Under both IRC Sections 45Y and 48E, taxpayers are eligible for a 10% bonus if certain domestic content requirements are met, or the qualified facility or qualified energy storage technology is located in an energy community (although the bonus rate can be reduced to 2% if certain labor requirements are not also met). An additional 10% or 20% bonus credit may be available for certain solar and wind facilities located in low-income communities. The credits under IRC Sections 45Y and 48E begin to phase out for qualified facilities in the first calendar year after the later of (1) 2032 or (2) the calendar year in which the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the US are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2022. The ITC under IRC Section 48 is generally available for eligible projects that begin construction before January 1, 2025, except for geothermal heat pumps, which remain eligible under IRC Section 48 until January 1, 2035. The IRC Section 48 ITC is subject to the two-tiered credit structure similar to IRC Section 48E and can also be supplemented by bonus credits for clean energy facilities located in designated energy communities and for meeting domestic content requirements. Eligibility for the IRC Section 48 ITC depends, among other criteria, on the type of energy property used in the clean energy projects and when construction began.
Transferability would not be allowed for qualified facilities and energy storage technologies where construction begins two years after the date of enactment. Specific to IRC Section 48E, the Bill would change the amount of direct current capacity for the low-income community bonus program for each year beginning on January 1, 2025, and ending on December 31, 2031, and zero thereafter. Excess capacity limitation could not be carried over to any year after December 31, 2031. Facilities that were awarded bonus credits would have to be placed in service by the earlier of four years after the dates they have been allocated electricity generation capacity or December 31, 2031. The Bill would also modify the phase-out for IRC Section 48 ITCs for geothermal heat pump property setting the base credit as follows:
Foreign entity of concern (FEOC) limitations: For a "specified foreign entity" (defined in new IRC Section 7701(a)(51)(B)), the credit would generally be repealed for tax years beginning after the date of enactment. Credits would not be available if construction begins one year after the date of enactment and there is "material assistance from a prohibited foreign entity" (defined in new IRC Section 7701(a)(52)). "Material assistance" means prohibited foreign entities would affect the procurement of components and subcomponents. For a "foreign-influenced" entity (defined in new IRC Section 7701(a)(51)(D)), no credit would be available in tax years starting two years after the date of enactment. Early phase-out of clean energy ITCs and PTCs under IRC Sections 48E and 45Y present a major challenge for large scale renewable energy projects. The proposed phase-out language would apply based on when projects are placed in service instead of when they began construction, which is the standard under current law and has historically been determinative for when credits phase out. Most projects that are currently under construction have either factored tax credits into their economics or received financing based on the expectation of receiving tax credits, so the focus on the "placed in service" date will present significant challenges for project financing and likely increase costs. While many expected the definition FEOC and its requirements to be expanded, the proposed restrictions would significantly impact the viability and costs of new projects. Taxpayers with planned investments in clean energy technologies will need to evaluate their supply chain in light of the "material assistance" requirements and may need to find alternative suppliers, which could lead to delays or forgone investments. The IRC Section 45Q credit is available to certain taxpayers for the capture and sequestration of carbon dioxide. The 12-year credit term begins on the first day of the first tax year in which an IRC Section 45Q tax credit is claimed if certain conditions are met. This applies to carbon capture equipment that is originally placed in service at a qualified facility on or after the date the Bipartisan Budget Act of 2018 was enacted if (1) no taxpayer has claimed a credit under IRC Section 45Q for the equipment for any prior year, (2) the facility where the equipment is placed in service is located in an area affected by a federally-declared disaster after the capture equipment was originally placed in service and (3) the disaster resulted in the facility or equipment ceasing to operate after it was originally placed in service. The Bill would repeal transferability for carbon capture and sequestration projects that begin construction after the date that is two years after the date of enactment. FEOC limitation: For a "specified foreign entity" (defined in new IRC Section 7701(a)(51)(B)), the credit would generally be repealed for tax years beginning after the date of enactment. In addition, a "foreign-influenced" entity (defined in new IRC Section 7701(a)(51)(D)) could not claim a credit in tax years starting two years after the date of enactment. Although the proposed provisions only make minor modifications to IRC Section 45Q, the termination of transferability could significantly impact developers' ability to realize immediate value from the generation of tax credits, especially for large carbon capture projects. The FEOC limitations would also impact joint ventures in the carbon capture space where the venture partner is a foreign entity or foreign-influenced entity, which may impact current projects. While the modifications would be limited, taxpayers should consider how the proposed provisions would impact their project economics and structure where they have engaged partners in the deployment of carbon capture assets. The zero-emission nuclear power production credit under IRC Section 45U is available for taxpayers that produce electricity at a qualified nuclear power facility and sell it to an unrelated person. A qualified nuclear power facility means any nuclear facility that (1) is owned by the taxpayer and uses nuclear energy to produce electricity, (2) is not an advanced nuclear power facility as defined in IRC Section 45J(d)(1), and (3) is placed in service before August 16, 2022. The credit does not apply to tax years beginning after December 31, 2032. The Bill contains a similar phase-out structure as the one used for IRC Sections 45Y and 48E credits for electricity produced and sold by the taxpayer. FEOC limitation: For a "specified foreign entity" (defined in new IRC Section 7701(a)(51)(B)), the credit would generally be repealed for tax years beginning after the date of enactment. In addition, a "foreign-influenced" entity (defined in new IRC Section 7701(a)(51)(D)) could not claim a credit in tax years starting two years after the date of enactment. IRC Section 45V provides a tax credit to produce qualified clean hydrogen for 10 years beginning on the date the facility is placed in service. The credit ranges from $0.12 to $3.00 per kg of clean hydrogen produced depending on the emissions rate of the hydrogen and whether the prevailing wage and apprenticeship requirements are met. Taxpayers could also elect to treat clean hydrogen production facilities as energy property under IRC Section 48. The Bill would terminate the credit for facilities whose construction begins after December 31, 2025. In addition, the Bill would terminate the election to treat the facilities as energy property for purposes of IRC Section 48. The IRC Section 45V tax credit is one of several incentives enacted to bolster domestic investments in clean hydrogen. The early termination will require taxpayers to revisit future investment plans and determine if it is feasible to begin construction before December 31, 2025. Taxpayers with planned investments in 2026 and beyond may consider alternative hydrogen production pathways in favor of less costly solutions. IRC Section 45X provides a production tax credit (PTC) for each eligible component that is produced by the taxpayer in the United States and sold to an unrelated person during that tax year (see Tax Alert 2024-2057 for discussion of related final regulations). To qualify, the taxpayer must be in the trade or business of producing and selling the eligible component. The term "eligible component" generally means (1) any solar energy component (such as photovoltaic cells, photovoltaic wafers, solar grade polysilicon, etc.), (2) any wind energy component, (3) an inverter (as described in the IRA), (4) any qualifying battery component (including battery cells and modules), and (5) any applicable critical mineral. The IRC Section 45X credit amount varies depending on the eligible component. For eligible components other than applicable critical minerals, the IRC Section 45X credit decreases as follows: (1) 75% of the otherwise available credit for eligible components sold during 2030, (2) 50% of the otherwise available credit for eligible components sold in 2031, (3) 25% of the otherwise available credit for eligible components sold in 2032, and (4) no credit for components sold in 2033 or after. Applicable critical minerals are not subject to the phase-out. The Bill would add restrictions to, and advance termination of, the credit. The Bill would also terminate the credit for wind energy components for components sold after 2027 and eliminate the credit for sale of all other components, including critical minerals, after 2031. Transferability would be repealed for components sold after 2027. FEOC restrictions would apply as follows: No credit would be allowed for "specified foreign entities" for tax years beginning after the date of enactment; the "material assistance" FEOC rules would apply to manufactured components with a new prohibition on licensing agreements valued over $1 million with a prohibited foreign entity; "foreign-influenced entities" could not claim a credit for tax years beginning two years after the date of enactment; for this purpose, the restriction would apply across the entire eligible component category in IRC Section 45X (e.g., solar energy components). The additional restrictions on "material assistance" for FEOCs would require domestic producers of eligible components and materials to analyze their supply chain to confirm that their eligibility for IRC Section 45X is not impacted. These restrictions would likely create challenges for domestic producers that procure minor subcomponents or materials from select foreign suppliers that are used in producing eligible components and may reduce or eliminate their credit. The early termination of the credit would also impact those making new investments as the availability of the IRC Section 45X credit could significantly change project economics. The IRC Section 45Z clean fuel production credit applies to low-emission transportation fuel produced at qualified facilities (not including facilities for which an IRC Section 45V, 45Q or 48 (related to hydrogen) credit is available). The IRC Section 45Z credit is generally available for low-emission transportation fuel produced at a qualified facility in the United States until December 31, 2027. The IRC Section 45Z credit equals the (1) the applicable amount per gallon (or gallon equivalent) for transportation fuel produced by the taxpayer at a qualified facility and sold in the manner described in IRC Section 45Z(a)(4) during the tax year multiplied by (2) the emissions factor for such fuel as determined under IRC Section 45Z(b). Only registered production in the United States, including its territories, is considered for the IRC Section 45Z credit. The Bill would repeal certain provisions and modify others. The credit would be extended through December 31, 2031. The credit could not be transferred, however, after December 31, 2027. Fuel would have to be produced from feedstocks produced or grown in the United States, Mexico or Canada. In determining emissions rates, lifecycle greenhouse gas emissions would be adjusted to exclude emissions from indirect land use changes and new distinct emissions rates would be created for specific manure feedstocks. Addition of income from hydrogen storage, carbon capture to qualifying income of certain publicly traded partnerships Certain publicly traded partnerships (PTP) are not treated as corporations under IRC Section 7704(d) if at least 90% of their gross income comes from certain activities, including, but not limited to, the (1) exploration, development, and/or mining, or (2) the production, processing, refining, transportation, and/or the marketing of (3) any mineral or natural resources, industrial source carbon dioxide, or the transportation or storage of specified fuels. The Bill would expand the activities that can be categorized as qualifying income to include: (1) the transportation or storage of liquified hydrogen or compressed hydrogen, and (2) the generation of electricity or capture of carbon dioxide at a direct air capture or carbon capture facility.
Document ID: 2025-1069 | ||||||||
