23 June 2025 Senate Finance Committee modifies energy credit phaseouts in reconciliation bill
The Bill would modify and clarify some restrictions related to the House-passed foreign entity provisions; however, the rules remain complex and introduce new ambiguities that could significantly impact the eligibility of projects and taxpayers. The Senate Finance Committee's version of the tax reconciliation bill (the Bill), which was released on June 16, 2025, modifies many of the provisions of H.R. 1 (the House-passed bill) that accelerate the phaseout of most of the renewable energy credits created under the Inflation Reduction Act (IRA). The Bill also fine-tunes the provisions for foreign entities of concern and how they affect taxpayer eligibility for the credits (see Tax Alert 2025-1332). The Bill would repeal the following key credits, albeit on a slightly different timeline from the House-passed bill:
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. While the House-passed bill would generally repeal transferability provisions for credits two years after the date of its enactment, the Senate Finance Committee version leaves the transferability provisions largely intact, but does add in an additional prohibition of transfer of credits to specified foreign entities (see Tax Alert 2025-1069 for details on the initial House bill). 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 would repeal the credit under IRC Section 25E for vehicles acquired more than 90 days after the DOE. The credit under IRC Section 30D and IRC Section 45W would be repealed for vehicles acquired more than 180 days after enactment. Vehicles that qualify for the IRC Section 45W credit and are under 14,000 pounds would also have to comply with the critical mineral and battery component restrictions in IRC Section 30D that are effective for vehicles acquired after June 16, 2025. The House-passed 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. Taxpayers considering electric vehicle purchases 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. While incentives may still be available at the state and local level, the federal credits have historically been used to lower the total cost of purchasing clean vehicles. 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. The Bill would generally repeal the credit for property placed in service more than 12 months after the DOE. The House-passed bill would generally repeal the credit for property placed in service after December 31, 2025. 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 could significantly impact ongoing and planned projects that may not be completed before the credit is repealed. 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). The IRC Section 48E technology-neutral investment tax credit (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 a three-year 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. This is commonly referred to as the "later of" rule. 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 projects 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. The Bill would phase out the IRC Section 45Y and 48E credits for wind and solar facilities to 60% for facilities that begin construction in 2026, 20% for facilities that begin construction in 2027, and 0% thereafter. No credit would be allowed for wind and solar leasing arrangements to residential customers. In addition, the domestic content percentages would be adjusted as follows. For a facility that:
For all other qualified facilities, including hydropower, nuclear and geothermal, the credits would phase out as if the "later of" rule did not apply. Foreign entity of concern (FEOC) limitations: No credit would be allowed for a facility that commences construction after December 31, 2025, which includes any material assistance from a prohibited foreign entity. For prohibited foreign entities, no credit would be allowed for tax years beginning after the DOE. (See Tax Alert 2025-1332.) The House-passed bill would terminate the credit for facilities that have not begun construction 60 days after the DOE and have not been placed in service by December 31, 2028. It would also modify the phase-out for IRC Section 48 ITCs for geothermal heat pump property starting with construction that begins before January 1, 2030, until no credit is available for property whose construction begins on or after January 1, 2032. This provision would be effective for tax years beginning after the DOE. The domestic content rules would apply on or after June 16, 2025. The Senate Finance Committee proposal notably eliminates the placed-in-service deadline from the House-passed bill, and ties project eligibility to when the projects began construction, which is the standard under current law and has historically been determinative for when credits phase out. Early phase-out of clean energy ITCs and PTCs for solar and wind energy technologies under IRC Sections 48E and 45Y would present a major challenge for large-scale renewable energy projects. The Senate Finance Committee proposal keeps the timeline for other technologies aligned with the current law and would provide a longer runway for taxpayers considering investments in these technologies. While many expected the definition of 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 qualified carbon oxides. The value of the tax credit is (1) $17 per metric ton if the carbon oxide is disposed of in permanent geological storage and (2) $12 per metric ton if the taxpayer utilizes the carbon oxides as a tertiary injectant and then securely stores it or utilizes such oxides in certain approved manners. For direct air capture facilities placed in service after December 31, 2022, the value is $36 per metric ton for carbon oxides that are disposed of in secure geological storage, and $26 per metric ton if the taxpayer utilizes the carbon oxide as a tertiary injectant and then securely stores it, or utilizes it in an approved manner. For certain qualifying projects, IRC Section 45Q credits are increased fivefold if the prevailing wage and apprenticeship provisions are met. The 12-year credit term begins on the date the equipment is placed in service 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. For carbon capture equipment placed in service after December 31, 2022, the Bill would enact parity for credit values regardless of end-use, which would be a material change from current law (i.e., $17 per metric ton for point-source capture and $36 per metric ton for direct air capture). Significantly, under the Bill, transferability for IRC Section 45Q projects would be retained. FEOC limitations: Specified foreign entities and foreign-influenced entities would not be allowed to claim the tax credit for the tax years beginning after the DOE, applicable to facilities placed in service after 2022. (See Tax Alert 2025-1332.) The House-passed bill would not allow a specified foreign entity to claim the tax credit for tax years beginning after the DOE. Foreign-influenced entities could not claim the tax credit in tax years starting two years after the DOE. It would also repeal transferability for carbon capture equipment that begins construction after the date that is two years after the DOE. The Bill would be effective for facilities or carbon capture equipment placed in service after 2022. The Senate Finance Committee's proposed modifications to IRC Section 45Q that would create parity in the credit values for projects that use captured carbon oxides as a tertiary injectant in a qualified oil or natural gas project, or for those projects that "utilize" such oxides in an approved manner, would be a material change and provide a significantly quicker path to market for a number of IRC Section 45Q projects. The retention of transferability of the IRC Section 45Q credits would also be welcome news to carbon capture project developers. Conversely, the FEOC limitations would 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. In addition, the Bill would deny the credit for facilities that utilize nuclear fuel produced in a covered nation (defined in section 4872(f) of title 10) or by a covered entity (effective for tax years beginning after December 31, 2027) unless the nuclear fuel is obtained pursuant to a written binding contract in effect before January 1, 2023. FEOC limitation: For a specified foreign entity, no credit would be allowed for tax years beginning after the DOE. For a foreign-influenced entity, no credit would be allowed for tax years starting two years after the DOE. (See Tax Alert 2025-1332.) The provisions relating to prohibited foreign entities would be effective for tax years beginning after the DOE. The provisions relating to the use of certain imported nuclear fuel would apply to tax years beginning after 2027. 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 is unchanged from the House-passed version, which would repeal the credit for facilities whose construction begins after December 31, 2025. 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. IRC Section 45X provides a 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 phase out the credit for producing critical minerals by allowing: 75% of the credit in 2031, 50% in 2032, 25% in 2033, and 0% beginning in 2034. The Bill would phase out the credit for wind energy components sold after 2027. In addition, the Bill would repeal the provision in IRC 45X(d) under which a person is treated as having sold an eligible component to an unrelated person if that component is integrated, incorporated or assembled into another eligible component, which is sold to an unrelated person, for components sold during tax years beginning after December 31, 2026. The Bill would also update the definition of battery modules to add "which is comprised of all other essential equipment needed for battery functionality, such as current collector assemblies and voltage sense harnesses." FEOC limitations: No credit would be allowed for "components manufactured" after the DOE that are the subject of material assistance from a prohibited foreign entity. For specified foreign entities and foreign influenced entities, no credit would be allowed for tax years beginning after enactment. The House bill would terminate the credit for wind energy components sold after 2027, and eliminate the credit for the sale of all other components, including critical minerals, after 2031. It also would repeal transferability for components sold after 2027. 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 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 reduce the value of the credit by 20% for fuel produced from feedstocks produced or grown outside the United States, effective for transportation fuel produced after December 31, 2025. In determining emissions rates, the Bill would adjust lifecycle greenhouse gas emissions to exclude emissions from indirect land use changes and create new distinct emissions rates for specific manure feedstocks. Additionally, emission rates would not be less than zero. The Bill also would address overlapping claims for this credit as well as an excise tax credit in IRC Section 6426(k)(1) for sustainable aviation fuel, by reducing the value of this credit to the extent the credit under IRC Section 6426(k)(1) was taken, effective for fuel sold after December 31, 2024, as well as terminating the IRC Section 6426(k) credit for periods after September 30, 2025. FEOC limitations: For a specified foreign entity, no credit would be allowed for tax years beginning after the DOE. For a foreign-influenced entity, no credit would be allowed for two years after the DOE. The House bill would extend the credit through 2031. Fuel sold after December 31, 2025, would have to be produced from feedstocks produced or grown in the United States, Mexico or Canada. In determining emissions rates, the House bill would adjust lifecycle greenhouse gas emissions to exclude emissions from indirect land use changes and create new distinct emissions rates for specific manure feedstocks. The "specified foreign entity" limitation would be effective in tax years beginning after the DOE, and the "foreign-influenced entity" rule would be effective two years after the DOE. 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 did not change the House-passed bill provisions, which 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. IRC Section 48C provides an investment tax credit for advanced energy projects. The credit has a base amount of 6% (which can go up to 30%, if the prevailing wage and apprenticeship requirements are met). The IRC Section 48C(e) program was established to allocate the IRC Section 48C credits. Credits that are not expended must be returned to the credit grant program for later reissuance. Modification of termination of cost recovery for qualified clean energy facilities, property and technology Taxpayers must capitalize the cost of business property used to produce income and recover it over time through depreciation or amortization deductions. A special five-year recovery period under IRC Section 168(e)(3)(B)(viii) applies to certain energy properties described in IRC Sections 45E and 48Y, such as zero-emission electric generation facilities, biogas property, microgrid controllers, electrochromic glass, and energy storage technology. The proposal would terminate the special recovery period for these types of property placed in service after the DOE. If the proposal is enacted, the depreciation recovery periods for affected property would be determined under the general recovery period rules in IRC Section 168. Certain affected property, such as equipment that uses wind or solar energy to generate electricity, could still be eligible for a five-year recovery period under IRC Section 168(e)(3)(B)(vi)(I). Other affected property would generally be assigned a longer recovery period.
Document ID: 2025-1331 | ||||||
