On July 4th of this year, President Trump signed into law the One Big Beautiful Bill Act (H.R. 1 119th Congress) (“OBBBA”). Among its many tax and spending provisions, the law curtailed or eliminated many of the tax incentives, primarily for wind and solar clean energy projects, that were established or expanded by the Biden administration under the Inflation Reduction Act of 2022 (“IRA”). The IRA, which marked the most significant expansion of federal clean energy incentives in U.S. history, expanded both the investment tax credit (ITC) and production tax credit (PTC) for solar, wind, storage, and other low- or zero-emission technologies. It also introduced new provisions for municipal and other tax-exempt entities allowing for transferability of credits and elective pay (also known as direct pay), which allows tax-exempt entities to receive cash payments in lieu of tax for eligible projects. The OBBBA, in contrast to the IRA, accelerates phase-outs of the ITC and PTC clean energy credits, tightens eligibility standards for commercial and utility-scale projects, and restricts the direct pay benefit that had underpinned much of the IRA’s support for clean energy. The OBBBA marks a significant reversal in clean energy policy in the United States and a dramatic contraction of federal support for the clean energy industry championed by the Biden administration.
Whereas the IRA extended the ITC and PTC tax credits to 2032 with a phase-out period thereafter, under the new law, the tax credits for solar and wind projects will terminate at the end of 2027. Projects must begin construction by July 5, 2026 and be placed in service no later than December 31, 2027 to be eligible. Further, recently issued new guidance by the Internal Revenue Service and the Department of the Treasury (Notice 2025-42) makes more stringent the requirements for “beginning of construction” for new solar and wind projects under Internal Revenue Code Section 48E (ITC) and Section 45Y (PTC). The guidance follows an executive order issued by the Trump administration on July 7, 2025 that directed the Department of Treasury to revisit the “beginning of construction” rules to, among other things, “restrict[ ] the use of broad safe harbors unless a substantial portion of a subject facility has been built.” Under the existing IRS guidance, a taxpayer could begin construction by commencing “physical work of a significant nature” on the project (the “Physical Work Test”) or incurring 5% of the cost of equipment for the project (the “5% Safe Harbor”). With the exception of “low output solar facilities” – defined as a solar facility that has a maximum net output no greater than 1.5 megawatts – the new guidance removes the 5% Safe Harbor limiting developers to the Physical Work Test to meet the start of construction requirement for ITC and PTC eligibility. Under a Continuity Requirement developers must also maintain a continuous construction program once construction commences.
In addition to narrowing the window to qualify for tax credits, the OBBBA requires that all solar and wind projects that commence construction after December 31, 2025 meet strict new foreign ownership and material sourcing requirements. Originally introduced under the Biden administration with a narrower scope confined to EV and battery supply chains, the OBBBA expanded these “foreign entity of concern” (“FEOC”) requirements to eligibility for solar and wind tax credits. Simply, the FEOC rules disqualify projects from tax credit eligibility if they are owned or controlled by certain foreign entities or purchase materials from or make project-related payments to certain foreign entities, including China, which leads the world in solar manufacturing.
The start date for construction, therefore, is a critical factor to determining a project’s eligibility for tax credits and the extent to which projects must meet burdensome new FEOC requirements. Importantly, a developer will be subject to recapture of 100% of the ITC claimed if, within 10 years after the subject project is placed in service, it engages in a transaction that would be deemed to give a foreign entity of concern “effective control” of the project. Any new project after 2025 should rigorously ensure that neither ownership nor supply chains involve prohibited foreign entities.
With respect to municipal entities (cities, towns, public schools, water/sewer districts) and other tax-exempt entities, the OBBBA left the “direct pay” option available but constrained its timing. To qualify municipal entities must begin construction by July 4, 2026 and projects must be placed in service by December 31, 2027. Municipal entities, or any direct pay recipient, should proceed carefully because disallowed credits can trigger a 20% “excessive payment” penalty in addition to recapturing the disallowed amount.
Overall, following the OBBBA, across market segments the combination of requirements to begin construction by July 4, 2026 and be placed in service by December 31, 2027 is a key gating item for many projects. Build schedules, EPC contracts, and procurement should be evaluated in view of these deadlines to benefit from tax credit eligibility. With removal of the 5% Safe Harbor developers will have to prove that significant on-site or factory-level work (e.g., foundation excavation, tower fabrication) began by July 5, 2026. Developers should carefully document construction progress sufficiently to withstand IRS scrutiny under the Physical Work Test. Municipal owners should continue to plan for direct pay but should be especially attentive to the new FEOC and placed-in-service requirements.
Fundamentally, while the OBBBA does not eliminate clean-energy credits, it significantly compresses the timelines and raises the bar for proving eligibility. In all cases – whether residential, municipal, commercial and industrial, or utility scale projects – tax credit eligibility has become a project-management exercise as much as a tax analysis, requiring more careful coordination of acquisition. construction, and supply chain diligence for eligibility for these benefits to be realized.