Budget Reconciliation Bill Introduces Significant Restrictions on Clean Energy and Related Tax Credits

On July 4, 2025, President Donald Trump signed into law “[a]n Act to provide for reconciliation pursuant to title II of H. Con. Res. 14.” (formerly known as the One Big Beautiful Bill Act, referred to herein as the “Act”), an all-encompassing reconciliation bill including sweeping domestic policy changes championed by the president that are expected to impact virtually every industry, business, and household of America. The Act significantly carves back the availability of clean energy and related tax credits introduced or expanded by the Inflation Reduction Act in 2022 and will have far-reaching implications for impacted industries.

Overview

The following are among the key changes introduced by the Act:

• The “tech-neutral” production tax credit under Code Section 45Y (the “Tech-Neutral PTC”) and investment tax credit under Code Section 48E (the “Tech-Neutral ITC” and, together with the Tech-Neutral PTC, the “Tech-Neutral Credits”) for wind and solar facilities are only available for projects that either (i) begin construction by July 4, 2026 or (ii) are placed in service prior to January 1, 2028.¹
• The Tech-Neutral Credit remains available for other qualifying technologies, including storage, if the relevant facility begins construction prior to January 1, 2034 (with a phase-out period thereafter); however, the extended eligibility period under prior law, which would have continued Tech-Neutral Credit eligibility (with a phase-out period) until the U.S. green-house gas emission rates from energy production is equal to or less than 25% of the corresponding emissions rate for 2022, was eliminated.
• The Act introduced new “prohibited foreign entity” restrictions (the “Prohibited Foreign Entity Restrictions”) that limit the availability of Tech-Neutral Credits and a broad range of other clean energy and manufacturing credits for certain entities with ties to China, North Korea, Russia and Iran (“Prohibited Foreign Entities”).
• The Prohibited Foreign Entity Restrictions generally prohibit transfers of many credits to certain categories of Prohibited Foreign Entities.²
• The Code Section 45X credit for the production of wind generation equipment terminates for equipment produced and sold after December 31, 2027.
• The Act increases the Code Section 45Q carbon capture credit amount for carbon oxide captured and used in a commercial process or in connection with enhanced oil recovery to the credit amount applicable to carbon oxide that is stored in a secure geological formation.
• EV and related EV infrastructure credits are sharply curtailed – generally terminating this year (or, in the case of the EV infrastructure credit, June 30, 2026).
• The Act reinstates 100% bonus depreciation for property acquired and placed in service after January 19, 2025.³

Prohibited Foreign Entity Restrictions

This summary includes a table setting forth key changes made by the Act to clean energy and related credits. Many of the changes are relatively straightforward – reflecting modifications to termination dates and credit amounts as compared to prior law.

However, as referenced above, the Act introduces restrictions on the ability of taxpayers with certain ties to Prohibited Foreign Entities to claim or purchase various clean energy and related credits. These restrictions can largely be divided into the following categories: (i) the denial of credit eligibility with respect to facilities or components that derive “material assistance” from Prohibited Foreign Entities, (ii) the denial of the ability of Prohibited Foreign Entities to claim applicable credits, (iii) the prohibition on transfers of applicable credits to Specified Foreign Entities and (iv) a 10-year recapture period for certain taxpayers that claim the Tech-Neutral ITC and subsequently make a payment to a Specified Foreign Entity granting the Specified Foreign Entity “effective control” over the applicable facility or manufacturing process.

Thus, as a preliminary matter, it is helpful to understand key definitions and concepts described below that apply in connection with the Prohibited Foreign Entity Restrictions.

I. Prohibited Foreign Entity Restriction Definitions

As a threshold matter, the Prohibited Foreign Entity Restrictions key off of the following definitions:

1. 1. A Prohibited Foreign Entity includes the following: (i) a specified foreign entity (a “Specified Foreign Entity”) or (ii) a foreign-influenced entity (a “Foreign-Influenced Entity”).
      
      
   2. A Specified Foreign Entity includes the following categories of entities:
      
      
      1. Foreign entities of concern – generally entities designated as foreign terrorist organizations.
         
         
      2. Entities designated as Chinese military companies operating in the United States.
         
         
      3. Entities listed pursuant to the Uyghur Forced Labor Prevention Act.
         
         
      4. Certain battery producers that are listed in the National Defense Authorization Act for Fiscal Year 2024.
         
         
      5. A foreign controlled entity – generally, (i) the governments or instrumentalities of the governments of China, North Korea, Russia or Iran (“Covered Nations”), (ii) entities organized in or principally operating in a Covered Nation, (iii) citizens or nationals of a Covered Nation or (iv) an entity “controlled” by one of such entities or persons.
         
         
         • For this purpose, control generally is defined by such persons or entities beneficially owning (i) more than 50% of the vote or value of a corporation, (ii) more than 50% of the capital or profits interest of a partnership or (iii) more than 50% of the beneficial interests of other entities. In applying this control test, a number of ownership attribution rules are applied that attribute ownership to applicable entities based on overlapping relationships between such entities.⁴
           
           
   3. A Foreign Influenced Entity includes the following categories of entities:
      
      
      1. Entities with respect to which (i) a Specified Foreign Entity has the authority to appoint directors or executive-level officers, (ii) a single Specified Foreign Entity owns 25% or more of the applicable entity, (iii) one or more Specified Foreign Entities own 40% or more of the applicable entity or (iv) 15% or more of the debt of the entity has been issued to one or more Specified Foreign Entities.⁵
         
         
      2. Entities that are “effectively controlled” by a Specified Foreign Entity. For this purpose, “effective control” generally includes entities that make a payment to a Specified Foreign Entity pursuant to an arrangement which entitles the Specified Foreign Entity to exercise “specific authority over key aspects of the production of eligible components, energy generation in a qualified facility or energy storage.”

II. Material Assistance

As noted above, Tech-Neutral Credits and a number of additional credits are denied in the case of facilities / components that receive “material assistance” from a Prohibited Foreign Entity. For this purpose, whether a facility or component has received material assistance from a Prohibited Foreign entity generally is determined as follows:

1. 1. The “material assistance cost ratio” is established.
      
      
      1. In the case of battery storage or generation facilities, the cost ratio is equal to:
         
         
         • (A) the total direct costs to the taxpayer attributable to all manufactured components that are incorporated into the facility minus (B) the total direct costs of all such manufactured components that are mined, produced or manufactured by a Prohibited Foreign Entity, divided by
           
           
         • the total direct costs to the taxpayer attributable to all manufactured components that are incorporated into the facility.
           
           
      2. In the case of components eligible for the advanced manufacturing production tax credit under Code Section 45X, the cost ratio is equal to:
         
         
         • (A) the total direct material costs paid or incurred by the taxpayer for the production of the eligible component minus (B) the total direct material costs paid or incurred by the taxpayer for the production of the eligible component that are mined, produced or manufactured by a Prohibited Foreign Entity, divided by
           
           
         • the total direct material costs paid or incurred by the taxpayer for the production of the eligible component.
           
           
   2. If the material assistance cost ratio is less than the statutorily defined threshold, credit eligibility is denied.⁶

The Act directs the Treasury Secretary to issue tables (and such other requisite guidance) no later than December 31, 2026 to (i) identify the percentage of total direct costs of any manufactured product / component which is attributable to a Prohibited Foreign Entity and (ii) provide rules necessary for taxpayers to determine the level of material assistance applicable to a facility or component. Helpfully, until the date which is 60 days following the issuance of such guidance, taxpayers may rely on (i) the tables set forth in Notice 2025-08 to establish the percentage of direct material costs of any listed eligible component and any manufactured product and (ii) certifications from the supplier of the relevant manufactured product or component as to (a) the total direct costs of the relevant manufactured product or component not produced or manufactured by a Prohibited Foreign Entity or (b) the status of a product or component as not produced or manufactured by a Prohibited Foreign Entity.⁷

Summary of Modifications to Clean Energy Credits Introduced by the Act

The table below describes a number of the salient rules for clean energy credits (and related tax items) included in the Act.

¹ Wind and solar projects that began construction prior to 2025 remain eligible for the legacy production tax credit or investment tax credit under Code Sections 45 and 48. Such tax credits for wind and solar are unaffected by the Act.

² In particular, the Prohibited Foreign Entity Restrictions preclude “specified foreign entities” (as described below) from being an eligible transferee with respect to the following credits: (i) the Tech-Neutral Credits, (ii) the advanced manufacturing production tax credit under Code Section 45X, (iii) the carbon capture credit under Code Section 45Q, (iv) the nuclear energy production tax credit under Code Section 45U and (v) the clean fuel production tax credit under Code Section 45Z.

³ In contrast to the version of the Act initially passed by the House, the final version of the Act contains a transition rule permitting taxpayers to elect to claim 40% bonus depreciation for qualifying property placed in service during its first taxable year ending after January 19, 2025 (i.e., the percentage of bonus depreciation that would have otherwise been available for property placed in service this year prior to the Act becoming law).

⁴ Subject to certain exceptions, many publicly traded companies are largely exempt from the foreign controlled entity analysis.

⁵ Likewise, many publicly traded companies are largely exempt from these prongs of the Foreign Influenced Entity analysis, but not the category of Foreign Influenced Entity characterized by a Specified Foreign Entity having the authority to appoint directors or executive-level officers.

⁶ The applicable material assistance ratio threshold varies based on (i) the generation or storage technology in question / the component being produced and (ii) the beginning of construction date of the applicable generation or storage facility or date of sale of the applicable advanced manufacturing production tax credit component. In each case, the material assistance cost ratio scales upward in subsequent years.

⁷ Notice 2025-08 was issued by the IRS in connection with establishing a safe harbor to permit taxpayers to determine a facility’s eligibility for the domestic content bonus credit available with respect to both legacy Section 45 and 48 PTCs and ITCs and Tech-Neutral Credits. Thus, the safe harbor will be of little utility in applying the material assistance rules to Code Section 45X advanced manufacturing production tax credits, but it does provide helpful guidance in the context of a number of common Tech-Neutral Credit technologies – including wind, solar and storage.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Alexander Roberts, an O’Melveny partner licensed to practice law in New York; Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York; Jeff Hoffner, an O’Melveny partner licensed to practice law in California;  Dawn Lim, an O’Melveny counsel licensed to practice law in New York; Arsalan Memon, an O’Melveny associate licensed to practice law in New York, New Jersey, and California; and Lauren Lekey, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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