A Summary of the Tax Credit Implications of the One Big Beautiful Bill Act

July 4, 2025 |

In the afternoon of July 3rd, 2025, the House passed the One Big Beautiful Bill Act (“OBBBA”), which modifies the federal credit opportunities for various project types. The credits available for wind and solar were largely negatively impacted, but other asset classes, for example fuel cells, advanced nuclear facilities, and geothermal have some additional opportunities under the OBBBA. In this article, we lay out the current situation as it relates to federal tax credits at a high level to help guide the paths forward for project developers and other stakeholders.

Leasing Arrangements for Wind and Solar

Key takeaway: For tax years beginning after the enactment of the OBBBA, no ITCs or PTCs will be available for small wind and solar water heating projects that are leased to third parties. Business models designed around solar water heating leases, in particular, may require significant modification to avoid detrimental impacts in connection with this new provision.

The OBBBA contains a revision to which disallows Code Section 48E investment tax credits (“ITCs”) and Code Section 45Y production tax credits (“PTCs”) for wind, and certain solar technologies leased to third parties. While leasing generally will be largely incompatible with these tax credits, we might expect that business models that rely on leased solar water heating equipment will be particularly affected.

Geothermal Leasing

Key takeaway: The introduction of an exception to the “limited use” rules for leased geothermal projects should reduce the perceived tax risk around claiming credits for those projects.

Geothermal projects received a helpful clarification in the OBBBA related to the “limited use” rules (see Rev. Proc. 2001-28 for an explanation if unfamiliar). Those rules introduced a perception of heightened tax risk in some commercial arrangements involving geothermal technologies, driven primarily by the functionally-interdependent chain of equipment requirements discussed at length in the Code Section 48 ITC regulations finalized in 2024.

Wind and Solar Placed in Service Deadlines

Key takeaway: No wind and solar ITCs or PTCs for projects that 1) begin construction later than 12 months from the enactment of the OBBBA and 2) are placed into service after December 31, 2027.

More generally, wind and solar installations that begin construction after the date which is 12 months after the OBBBA’s enactment and are placed into service after December 31, 2027 are not eligible for either Code Section 48E ITCs or Code Section 45Y PTCs (notably, this December 31, 2027 deadline will not apply to energy storage technologies that might be co-located with such wind and solar projects). However, even those projects that begin construction within 12 months of enactment, but after December 31, 2025, will be subject to the Foreign Entity of Concern (“FEOC”) limitations discussed in further detail below. Prior to the OBBBA, the expectation was that these incentives would begin to phase out starting in 2032 at the earliest. Therefore, revisiting both the start of construction rules and the meaning of placed in service for US federal income tax purposes (“USFIT”) is a worthwhile exercise that will certainly be helpful in formulating a path forward. As it relates to start of construction, the “5% safe harbor” and physical work of a significant nature (“PWSN”) methods from Internal Revenue Service (“IRS”) Notices 2013-29 and 2018-59 have been codified in the statute.

Foreign Entities of Concern

Key takeaway: Any project otherwise eligible for ITCs or PTCs that begins construction after December 31, 2025 will be subject to limitations in connection with Foreign Entities of Concern.

As mentioned above, all otherwise Code Section 48E or 45Y eligible projects (including wind and solar projects) that begin construction after December 31, 2025 will be subject to the FEOC material assistance limitations scattered throughout the OBBBA. FEOC considerations touch nearly every aspect of the incentives available for energy in one way or another.

Calculating Material Assistance Ratios Attributable to Foreign Entities of Concern

Key takeaway: Any project otherwise eligible for ITCs or PTCs that begins construction after December 31, 2025 will be disallowed those ITCs or PTCs if they demonstrate a FEOC material assistance threshold over a certain level. For now, existing domestic content guidance can be used to calculate those ratios, but this will change once additional guidance is published.

FEOC material assistance limitations come into play (leaving out important details at the moment for the sake of clarity) when the ratio of a project’s costs paid to FEOCs divided by the project’s total costs exceeds a designated percentage (“FEOCMAT”). In that case, the project will not be eligible for either ITCs or PTCs under Code Sections 48E or 45Y, respectively. The definition of costs is more specific in the OBBBA, but those familiar with the “domestic content” adder and its calculation methodologies will likely find the level of detail required to perform the FEOCMAT calculation familiar. In fact, until the moment that is 60 days after more detailed guidance is issued concerning the calculation of FEOCMAT, taxpayers can rely on the domestic content guidance contained in the “First Updated Elective Safe Harbor” contained in IRS Notice 2025-08 for domestic content adders (not to be confused with the New Elective Safe Harbor provided in IRS Notice 2024-41). Once that safe harbor expires, however, in an environment of anti-dumping and countervailing tariffs, which may very well be included in FEOC costs, the ability of projects to satisfy FEOCMAT thresholds will become increasingly difficult, even without the FEOCMAT escalation built into the OBBBA.

Investment Tax Credit Domestic Content Clarification

Key takeaway: In order to claim a domestic content adder, ITC eligible projects that begin construction after June 16, 2025 must fulfill the same manufactured product requirements as PTC eligible projects. Prior to the OBBBA, this alignment was not clear and resulted in diversity of practice among various advisors and stakeholders.

The OBBBA clarifies that the domestic content adder for Code Section 48E ITCs is subject to the same escalating manufactured product adjusted percentages that clearly apply to Code Section 45Y credits under the IRA. However, in a clause beneficial for project developers who may have taken a position otherwise, the escalating requirement only applies for projects that begin construction after June 16, 2025.

Mining

Key takeaway: The production of metallurgical coal for steelmaking will be eligible for manufacturing PTCs for tax years beginning after the enactment of the OBBBA through December 31, 2029.

Code Section 45X was introduced as part of the IRA as a way to incentivize the manufacture of certain energy components and the production of certain applicable critical minerals (“ACMs”). However, in the initial incarnation of Code Section 45X, metallurgical coal was not on this list of ACMs. In May of 2025, the Department of Energy (“DOE”) added it to the ACM list as a way to encourage US steel production. Incidentally, we will track whether this incentive may have implications for coal closure Energy Communities. Metallurgical coal PTCs under Code Section 45X will be available through December 21, 2029.

More broadly as it relates to ACMs, when Code Section 45X was initially introduced, there was no phase out for their associated PTCs. The OBBBA has introduced phase-outs for ACMs similar to the phase outs already in place for the manufacture of eligible components under Code Section 45X.

Energy Component Manufacturing

Key takeaway: No production tax credits for wind energy components produced and sold after December 31, 2027.

Eligible component production is also now subject to FEOC limitations similar to those introduced for qualified facilities and energy storage technologies. Manufacturers of wind energy components may be discouraged by the removal of such from eligible component list in Code Section 45X PTC. Otherwise, there are a few changes scattered about the OBBBA that affect manufacturing of eligible components such as more stringent FEOC-driven limitations on the credits available for integrated components and a more specific and limited definition of what constitutes a battery module.

As it relates to other manufacturing incentives, the OBBBA changed Code Section 48C such that if a taxpayer who had received an allocation award under the program effectively forfeited it by not placing his operation into service within 2 years, that would-be Code Section 48C ITC vanishes instead of being sent back to the allocation pool for another round.

Semiconductor Manufacturing

Key takeaway: The ITC for semiconductor manufacturing equipment increases from 25% of eligible costs to 35% of eligible costs for facilities that are placed into service after December 31, 2025.

Finally, Code Section 48D, an ITC incentive for semiconductor and semiconductor production equipment manufacturers will now be able to claim a 35% ITC for advanced manufacturing facilities placed in service after December 31, 2025. Previously that Code Section 48D ITC applicable percentage was capped at 25%.

Nuclear Energy

Key takeaway: Nuclear energy may constitute an increasingly large share of domestic energy generation enabled, in part, by the introduction of Nuclear Energy Communities.

We will also be keeping an eye on how nuclear technologies will be deployed to meet the nation’s ever-rising energy needs. Throughout the OBBBA are references to Code Section 45J in particular, and the nuclear technologies approved by the Nuclear Regulatory Commission in connection with the Code Section 45J guidelines. The OBBBA introduces a new Nuclear Energy Community which is incorporated into Code Section 45 and, by reference, into Code Section 45Y. Small modular reactors may constitute a meaningful portion of our energy composition going forward, perhaps along a development timeline that is more rapid compared to larger, monolithic power plants.

Fuel Cells

Key takeaway: Fuel cell projects that begin construction after December 31, 2025 will have an easier path to claiming ITCs through the removal of the requirement to calculate lifecycle greenhouse gas emissions for those projects.

Fuel cells also receive relatively favorable treatment under the OBBBA. With the passage of the IRA, fuel cells faced a requirement to demonstrate greenhouse gas emissions below a certain threshold to qualify for Code Section 48E ITCs because they were classified as combustion and gasification technology. However, the OBBBA explicitly identifies fuel cells (at least those that meet the required specifications described in Code Section 48) as now being ITC-eligible under Code Section 48E without the need to demonstrate greenhouse gas emissions below the required threshold. This addition, however, has two perhaps surprising features: 1) the ITC is for 30% and there can be no increases or decreases for any other provisions in the section, and 2) the addition is effective only for projects that begin construction after 2025. So, fuel cell projects that began construction prior to 2025 may be eligible for Code Section 48 ITCs and those that begin construction after December 31, 2025 may be eligible for Code Section 48E ITCs. However, as currently written, it may be the case that fuel cell projects that begin construction during 2025 may need to demonstrate lifecycle greenhouse gas emissions below a certain threshold to be eligible for ITCs.

Alternative Fuels

Key takeaway: Mostly increased opportunities for alternative fuel producers but some additional constraints put in place.

Code Section 45Z experienced mostly positive changes in the OBBBA: 1) the PTC has been extended through the end of 2029; whereas previously, it was scheduled to be phased out in 2027 and 2) the determination of the emissions rate used to calculate the emissions factor (which is then used to calculate the Code Section 45Z PTC) now no longer includes the presumed greenhouse gas impact related to indirect land use changes. However, the OBBBA also clarifies that emissions rates can’t be a negative, except in the case of projects which source feedstock from animal manures. Also, feedstocks are now required to be from the US, Canada or Mexico. Prior to the OBBBA, only production of the qualifying fuel had to take place in the US with the incentive being ambivalent to the feedstock source.

There are some other changes to fuel production incentives, such as the 40A agri-diesel PTC per-gallon increase, the extension of that credit through the end of 2026, the possibility to “double-dip” with Code Section 45Z PTCs, and the ability to transfer those PTCs under Code Section 6418.

Publicly Traded Partnerships

Key takeaway: The population of activities that generate qualifying income for publicly traded partnerships has expanded.

Under the OBBBA, for tax years starting after December 31, 2025, qualifying income includes “income and gains” derived from the production of electrical or thermal energy from geothermal or hydropower, electricity generated from 45J advanced nuclear facilities, as well as transportation and storage of various fuels under 6426, sustainable aviation fuel as described under 40B, liquefied or compressed hydrogen, and even the generation, the availability for such generation and storage of electric power for facilities described in Code Section 45Q(d) (electricity generating facilities) if not less than 50% of the total carbon oxide production is qualified carbon oxide.

Carbon Capture

Key takeaway: Captured carbon oxide used for enhanced oil recovery will be eligible for the same level of incentive as captured carbon oxide that is permanently sequestered, though prospective inflation adjustment factors are reduced.

The OBBBA changes Code Section 45Q to align the amount of credit available for sequestered carbon oxide and carbon oxide deployed in other uses like enhanced oil recovery. However, the OBBBA changes the reference year for the application of the inflation adjustment factor applicable to Code Section 45Q credits in a way that most stakeholders expect will reduce the overall credits generated during the applicable credit period.

Other Credit-Related Items

Key takeaway: The phase outs of credits for green hydrogen production, alternative fuel vehicles and their refueling property have been accelerated.

The OBBBA was not friendly to certain other project types not discussed in detail here. The Code Section 45V credit for the production of green hydrogen is now only available for projects that start construction prior to January 1, 2028 whereas prior to the OBBBA, that date was January 1, 2033. The Code Section 30C credit for alternative fuel vehicle refueling property is now only available for projects that are placed into service prior to June 30, 2026, whereas before the placed in service deadline was December 31, 2032. The Code Section 45W credit for qualified commercial clean vehicles is no longer available for such vehicles acquired after September 30, 2025 whereas before, the acquisition deadline was December 31, 2032.

Closing

In summary, the federal credit landscape for a wide array of asset classes will shift under the OBBBA. Please reach out to a Leo Berwick professional to discuss how we can assist navigating changing circumstances.