14 July 2025 Final reconciliation legislation modifies some IRA energy credits, repeals others
Final reconciliation legislation (P.L. 119-21, the Act), signed on July 4, 2025, repeals or modifies most of the renewable energy credits created under the Inflation Reduction Act of 2022 (IRA).
Following the legislation's enactment, President Trump issued an Executive Order on July 7, 2025, (the Order) in which he directed the Department of Treasury, within 45 days of the Act's enactment, to "take all action … necessary and appropriate to strictly enforce the termination of the clean electricity production and investment tax credits under [IRC] Sections 45Y and 48E for wind and solar facilities." Specifically, the Order directs the Secretary of the Treasury (Secretary) to issue guidance to assure policies around the "beginning of construction" are not circumvented and to restrict the use of broad safe harbors unless a "substantial portion of a subject facility has been built." The Order further directs the Secretary, within 45 days of enactment, to issue guidance implementing the Act's enhanced foreign-entity-of-concern (FEOC) restrictions. The provision referenced in the Order is a safe harbor whereby a wind or solar project is deemed to have begun construction once it incurs 5% of the ultimate total cost of the facility. Renewable developers and financing institutions have relied on this safe harbor provision for years and will be keenly focused on any new guidance that revises and elevates this critical definition. Since the Act now requires a solar or wind facility to begin construction within one year of the date of enactment (to avoid a rule requiring that the facility be placed in service by the end of 2027), developers will need to react quickly across their construction and supply chains to meet any new or revised definition. It is difficult to anticipate just how differently the Treasury will define whether 'a substantial portion of the facility has been built,' but the Order implies the threshold will likely be significantly higher. The IRA allows 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 Act leaves the transferability provisions largely intact but prohibits the transfer of eligible tax credits to specified foreign entities. 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. For taxpayers 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 (5) 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 acquiring 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 that 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 Act repeals the credits under IRC Section 25E, 30D and 45W for vehicles acquired after September 30, 2025. Taxpayers considering electric vehicle purchases should assess the timing and potential acceleration of their purchase or transition plans given the repeal. While incentives may still be available at the state and local level, federal credits have historically been used to lower the total cost of purchasing clean vehicles. The IRC Section 30C 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 to any single item of qualified alternative fuel vehicle refueling property. A full repeal of the IRC Section 30C credit based on the placed-in-service date of eligible property, as opposed to when property construction began, will 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 will be available based on when their assets will be placed in service. 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 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 US for calendar year 2022. This is commonly known as the "later of" rule. The ITC under IRC Section 48 is generally available for eligible projects on which construction begins 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 Act eliminates the IRC Section 45Y and 48E credits for wind and solar projects placed in service after December 31, 2027, except for projects whose construction begins within 12 months of July 4, 2025. Projects incorporating technologies other than wind and solar energy may access the full tax credit until the end of 2033 and will be subject to a phase-out after that. FEOC limitations: For projects receiving material assistance from a prohibited foreign entity, no credit is allowed for a facility on which construction commences after December 31, 2025; for prohibited foreign entities, no credit is allowed for tax years beginning after July 4, 2025. The Act also directs Treasury to establish anti-circumvention rules to prevent stockpiling designed to avoid the Act's effective dates. The Act also addresses the error of fixing the domestic content bonus credit at 40% for projects claiming the IRC Section 48E tax credits, while gradually increasing the percentage to 55% for projects on which IRC Section 45Y tax credits are claimed. The 40% domestic content requirement is still available for IRC Section 48E projects on which construction began before June 15, 2025. Suppliers must now provide certification documents with the total direct material costs for production of eligible components that are mined, produced or manufactured by a prohibited foreign entity. The statute of limitations and increased tax penalties for "material assistance" missteps have now been extended to six years. This provision is effective for tax years beginning after July 4, 2025. The domestic content rules apply on or after June 16, 2025. Early phase-out of clean energy ITCs and PTCs for solar and wind energy technologies under IRC Sections 48E and 45Y presents a challenge for large-scale renewable energy projects whose construction begins after July 4, 2026. The Act keeps the timeline for other technologies aligned with the current law and provides a longer runway for taxpayers considering investments in these technologies. While many expected the definition of FEOC and its requirements to be expanded, the restrictions will likely impact the viability and costs of new projects significantly. 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 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 or utilizes them 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 in secure geological storage, and $26 per metric ton if the taxpayer utilizes the carbon oxides as a tertiary injectant and then securely stores or utilizes them in an approved manner. For certain qualifying projects, IRC Section 45Q credits increase 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. Construction on projects eligible for the carbon oxide sequestration credit must begin before January 1, 2033. For carbon capture equipment placed in service after July 4, 2025, the Act provides for parity in credit values regardless of which qualified end use is deployed. Instead of allowing a credit of $12 or $17 per metric ton for projects where qualified carbon oxides are captured from an industrial or manufacturing facility, depending of the qualified end use, the modifications to IRC Section 45Q permit a credit of $17 per metric ton for all such qualified projects (which can result in a credit of up to $85 per metric ton credit so long as the taxpayer satisfies the prevailing wage and apprenticeship rules). Similarly, instead of allowing a credit of $26 or $36 per metric ton for direct-air-capture projects, depending on the qualified use, the modifications to IRC Section 45Q permit a credit of $36 per metric ton for all qualified direct-air-capture projects (which can result in a credit of up to $180 per metric ton so long as the taxpayer satisfies the prevailing wage and apprenticeship rules). Significantly, transferability for IRC Section 45Q projects is retained (except for transfers to specified foreign entities). FEOC limitations: Specified foreign entities and foreign-influenced entities cannot claim the tax credit for tax years beginning after July 4, 2025. This limitation applies to facilities placed in service after 2022. (See Tax Alert 2025-1332.) The Act is effective for tax years beginning after December 31, 2024. Carbon capture facilities or equipment must be placed in service after July 4, 2025. The Act's modifications create parity in the maximum IRC Section 45Q credit values, regardless of the qualified end use of the captured carbon oxides. These are significant changes that will provide a quicker path to market for numerous IRC Section 45Q projects. The retention of transferability of the IRC Section 45Q credits is also welcome news to carbon-capture project developers. Conversely, the FEOC limitations affect joint ventures in the carbon capture space where the venture partner is a foreign-influenced entity, among others, and may impact current projects. While the modifications are limited, taxpayers should consider how the provisions affect their project economics and structure where they have engaged partners in the deployment of carbon capture assets. The IRC Section 45U credit for zero-emission nuclear power production 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, (2) uses nuclear energy to produce electricity, (3) is not an advanced nuclear power facility as defined in IRC Section 45J(d)(1), and (4) is placed in service before August 16, 2022. The credit does not apply to tax years beginning after December 31, 2032. The Act effectively follows the current phaseout provisions of IRC Section 45U, with added FEOC limitations. FEOC limitation: For a specified foreign entity, no credit is allowed for tax years beginning after July 4, 2025. For a foreign-influenced entity, no credit is allowed for tax years beginning after July 4, 2027. (See Tax Alert 2025-1332.) The provisions on prohibited foreign entities are effective for tax years beginning after July 4, 2025. The provisions on the use of certain imported nuclear fuels apply to tax years beginning after July 4, 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 may also elect to treat clean hydrogen production facilities as energy property under IRC Section 48. Repeal of the credit is effective for facilities on which construction begins after December 31, 2027. 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, 2027. IRC Section 45X provides a PTC for each eligible component that is produced by the taxpayer in the US 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 Act adds restrictions to, and advances termination of, the credit. The Act phases 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 Act phases out the credit for wind energy components produced and sold after December 31, 2027. In addition, the Act amends the provision in IRC 45X(d) on integrated components, allowing the credit only for integrated components if the primary and secondary component are assembled in the same facility, the secondary component is sold to an unrelated person, and 65% off the secondary components is attributable to primary components mined, produced or manufactured in the US. This provision applies to components sold during tax years beginning after December 31, 2026. The Act also updates 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." Metallurgical coal suitable for use in the production of steel is added as a credit-eligible critical mineral through December 31, 2029, at a rate of 2.5% of the cost incurred regardless of whether production occurs within the US. FEOC limitations: No credit is allowed for components that are "manufactured" in tax years beginning after July 4, 2025, and subject to any material assistance from a prohibited foreign entity. For specified foreign entities and foreign influenced entities, no credit is allowed for tax years beginning after July 4, 2025. These provisions are effective for tax years beginning after July 4, 2025. The changes to IRC 45X(d)'s treatment of integrated components applies to components sold during tax years beginning after December 31, 2026. The "material assistance" restrictions for FEOCs require domestic producers of eligible components and materials to review their supply chain to reevaluate eligibility for the credit. These restrictions will likely create challenges for domestic producers that procure subcomponents or materials from select foreign suppliers that produce eligible components and may reduce or eliminate the producers' credit. The early termination of the credit for wind energy components also affects those making new investments, as the availability of the IRC Section 45X credit could significantly change project economics. The addition of metallurgical coal makes the credit available to a broader set of taxpayers in the US. 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 (for hydrogen) credit is available). The IRC Section 45Z credit is generally available for low-emission transportation fuel produced at a qualified facility in the US 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 US, including its territories, is considered for the IRC Section 45Z credit. The Act extends the credit for sales of clean fuel through December 31, 2029. Fuel produced after December 31, 2025, must be exclusively derived from feedstock grown or produced in the US, Canada or Mexico. The Act lowers the credit for sustainable aviation fuel to $1 per gallon for transportation fuels produced after December 31, 2025. In determining emissions rates, the Act adjusts 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 will not be less than zero. The Act also addresses 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. The IRC Section 6426(k) credit is terminated for periods after September 30, 2025. FEOC limitations: For a specified foreign entity, no credit is allowed for tax years beginning after July 4, 2025. For a foreign-influenced entity, no credit is allowed after July 4, 2027. Addition of income from hydrogen storage, carbon capture to qualifying income of certain publicly traded partnerships IRC Section 7704(d) does not treat certain publicly traded partnerships as corporations if at least 90% of their gross income comes from certain activities (i.e., "qualifying income). These activities include, but are not limited to, (1) "the exploration, development, mining or production, processing, refining, transportation … , or marketing of any mineral, or natural resources … or industrial source carbon dioxide," or (2) the transportation or storage of specified fuels. The Act expands the pool of activities that can generate qualifying income to include the transportation or storage of certain additional fuels, as well as liquified hydrogen or compressed hydrogen. Further, the Act includes certain IRC Section 45Q project-related income in the definition of qualifying income., For IRC Section 7704(d)(1)(E) purposes, qualifying income also includes income from (1) the production of electricity from any advanced nuclear facility (as defined in IRC Section 45J(d)(2)), and (2) the operation of a geothermal-related energy property described in IRC Section 48(a)(3)(A)(iii). 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 48, 45, 45Y and 48E, such as zero-emission electric generation facilities, biogas property, microgrid controllers, electrochromic glass and energy storage technology. "Energy property" as described in IRC Section 48 will no longer be listed as five-year MACRS property. The Act effectively eliminates the five-year MACRS depreciation for geothermal heat pumps since this is the only technology for which projects beginning construction after 2024 would continue to be eligible for tax credits under IRC Section 48. The five-year recovery period for the technology-neutral credits under 45Y and 48E is still available.
Document ID: 2025-1434 | ||||||
