The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces sweeping changes to the U.S. energy tax credit and incentives landscape. While it builds on the framework established by the Inflation Reduction Act (IRA), the new law primarily imposes significant limitations, phase-outs, and restrictions on many of the IRA’s clean energy provisions. Solar and wind technologies, in particular, face accelerated phase-out schedules and new eligibility constraints, signaling a shift in policy away from broad deployment incentives toward more targeted support for domestic manufacturing and energy security.
Also among the most consequential updates are new restrictions on the involvement of certain foreign entities in energy projects. These rules affect eligibility for several major tax credits and will require businesses to reassess supply chains, ownership structures, and contractual relationships.
Energy incentives for individuals
Incentives and credits available to individuals for residential energy efficiency were significantly impacted by the OBBBA. These provisions, which previously offered support for residential energy improvements and clean vehicle purchases, have been narrowed or terminated, signaling a shift in federal policy.
Section 25C provides a credit for energy-efficient home improvements, such as insulation, windows, and HVAC systems, with a maximum annual credit of $1,200. Section 25D offers a credit for residential clean energy property, including solar panels and geothermal systems, with a phased percentage based on the year the property was placed in service. Both credits were extended under the IRA and had been scheduled to remain available through 2032 and 2034, respectively.
The OBBBA, however, accelerates the sunset of these provisions. Section 25C is terminated for property placed in service after Dec. 31, 2025, and Section 25D is terminated for expenditures made after that same date. This significantly shortens the window for homeowners to claim these incentives, particularly for solar and geothermal installations.
Clean vehicle incentives are similarly curtailed. Section 30D, which provides up to $7,500 for the purchase of new clean vehicles, and Section 25E, which offers up to $4,000 for previously owned clean vehicles, are both terminated for vehicles acquired after Sept. 30, 2025.
The OBBBA also impacts Section 45L, which provides a credit to builders of energy-efficient homes. The law terminates the credit for homes acquired after June 30, 2026, shortening the incentive period for residential construction projects that meet energy efficiency standards.
Grant Thornton Insight:
Taken together, these changes represent a significant contraction of federal support for individual-level clean energy adoption. While some incentives remain temporarily available, the shortened timelines and abrupt terminations mean that taxpayers considering energy-efficient upgrades or clean vehicle purchases may need to act quickly ꟷ or risk missing out entirely.
Energy incentives for businesses
The OBBBA also significantly reshapes the energy tax credit framework for businesses. While several incentives remain available, many others — particularly those supporting solar, wind, and non-carbon burning transportation — are curtailed through accelerated phase-outs, narrowed eligibility, and new compliance requirements. Most of the credits and incentives also become subject to new restrictions relating to prohibited foreign entities.
Clean electricity investment and production credit
Section 48E, introduced under the IRA, provides a technology-neutral investment tax credit for facilities that generate electricity with zero greenhouse gas emissions and energy storage technologies. The credit is a base rate of 6% of the qualified investment in a qualified facility or energy storage technology, with a rate of 30% for projects meeting the prevailing wage and apprenticeship requirements or exceptions. Additional bonus credits are available for facilities located in certain energy communities or meeting domestic content thresholds. The credit was scheduled to phase out beginning in the later of the year after the calendar year in which greenhouse gas emissions from the production of electricity were 25% or less than in 2022, or by 2032.
Section 45Y, introduced under the IRA, provides a technology-neutral production tax credit for facilities generating electricity with zero greenhouse gas emissions. It replaced the legacy production tax credit under Section 45 with a simplified framework applicable to a broad range of technologies, including solar, wind, geothermal, nuclear, and others. The credit is available for facilities placed in service after 2024, with a base rate of 0.3 cents per kilowatt-hour and a rate of 1.5 cents per kilowatt-hour for projects meeting the prevailing wage and apprenticeship requirements or exceptions, indexed for inflation. The credit is available for the 10-year period beginning on the date the qualified facility is placed in service.
Additional bonus credit amounts are available for facilities located in energy communities or meeting domestic content thresholds. The credit was scheduled to phase-out for property that began construction in the later of the year after the calendar year in which greenhouse gas emissions from the production of electricity were 25% or less than in 2022, or by 2032.
The OBBBA retains the core structure of Sections 48E and 45Y but introduces several important changes. Most notably, the phase-out schedule for the credits is accelerated: for most technologies, the credits begin to phase out for facilities that begin construction in 2034 or later (which is similar to the IRA rule, without the potential “later of greenhouse gas emissions” phase-out). Solar and wind facilities face a more immediate deadline ꟷ they must be placed in service before 2028 unless construction begins before July 5, 2026, which will be discussed further below.
The OBBBA also eliminates the credits for qualified solar water heating properties and qualified small wind energy properties leased to individuals and used at their residences. It did not, however, limit such arrangements for qualified solar electric property. The OBBBA imposes new restrictions on foreign involvement in clean energy projects, including restrictions on ownership, control and material assistance. These restrictions are discussed further below.
The law modifies the domestic content requirements for Section 48E credits. Under the IRA, taxpayers needed to use 100% U.S. iron or steel for certain structural components, and 40% of all other manufactured products needed to be of U.S. origin (20% in the case of offshore wind facilities). The OBBBA modified the requirement around manufactured products such that facilities that begin construction after June 16, 2025, but before 2026, increases to 45% (or 27.5% for offshore wind facilities), and continues to increase up to 55% for construction beginning after 2026.
In a notable expansion of the Section 45Y production credit, the definition of an “energy community” is broadened for advanced nuclear facilities. A metropolitan statistical area (MSA) qualifies as an energy community if it has — or had after 2009 — at least 0.17% direct employment related to the advancement of nuclear power, which includes jobs in nuclear facility operations, advanced nuclear power R&D, nuclear fuel cycle R&D, and component manufacturing.
Finally, the law introduces a new investment credit under Section 48E for qualified fuel cell property. Fuel cell systems that begin construction after 2025 are eligible for a 30% credit, with no adjustments or bonus credits, regardless of whether they meet the zero-emissions requirement that applies to other technologies. This carve-out reflects a targeted policy preference for fuel cell technology, particularly in industrial and backup power applications.
Grant Thornton Insight:
Taken together, the changes to Section 48E narrow the window of opportunity for solar and wind developers while reinforcing incentives for technologies that support domestic manufacturing and grid reliability. Businesses considering clean electricity investments should carefully evaluate project timelines, sourcing strategies, and ownership structures to ensure compliance and maximize available credits.
The changes to Section 45Y reflect a slightly more constrained environment for clean electricity production tax credits. While the credit remains generous for qualifying projects, the shortened timelines suggest that taxpayers with plans to qualify for the credit should act promptly and strategically to preserve their eligibility. Businesses that were considering an expansion into advanced nuclear facilities may find the additional energy community bonus credit helps decide the location of the facility.
New rules for solar and wind construction
One of the most consequential administrative developments following the enactment of the OBBBA is IRS Notice 2025-42, which provides updated guidance on what it means to “begin construction” for purposes of claiming the clean electricity credits under Sections 45Y and 48E. This guidance is especially important in light of the OBBBA’s accelerated termination of the credits for solar and wind projects placed in service after Dec. 31, 2027, unless construction begins prior to July 4, 2026. The guidance was required by Executive Order 14315 (July 7, 2025).
The IRS has previously issued several notices, collectively referred to as the “IRS Notices” in section 2.02 of Notice 2022-61, which allowed taxpayers to establish the beginning of construction date using either the Physical Work Test or the Five Percent Safe Harbor, provided they also met a continuity requirement. These rules have been widely used in the renewable energy industry to secure credit eligibility while allowing flexibility in project timelines.
Notice 2025-42 significantly narrows the options available to solar and wind developers establishing the beginning of construction for purposes of Sections 45Y and 48E by eliminating the Five Percent Safe Harbor. Going forward, only the Physical Work Test may be used to establish that construction has begun.
The Physical Work Test requires that a taxpayer begin physical work of a significant nature on the project site or on project components. The test focuses on the nature of the work, not the amount or cost, and it includes both on-site and offsite work. Qualifying activities include, for example, site grading, foundation pouring, or the manufacture of custom components or equipment. Preliminary activities such as planning or design, obtaining permits and licenses and conducting surveys and studies are not considered physical work of a significant nature.
The notice also clarifies that taxpayers must demonstrate continuous progress toward completion once physical work has begun (the “Continuity Requirement”). This includes maintaining a consistent schedule of development, procurement, and construction activity. Projects that experience extended delays or inactivity may be deemed to have failed the continuity requirement, even if physical work was initiated on time.
The notice provides a safe harbor whereby the Continuity Requirement is deemed met if the qualified solar or wind facility is placed in service no later than the last day of the fourth calendar year after the calendar year in which construction began. For example, if construction begins during 2025 (as determined under Notice 2025-42), then the safe harbor is met as along as the qualified facility is placed in service no later than Dec. 31, 2029, without regard for certain excusable disruptions.
Notice 2025-42 allows taxpayers with low output solar facilities (maximum net output not greater than 1.5 MW nameplate capacity as measured in alternating current) to continue to rely on the IRS Notices, including the Five Percent Safe Harbor.
The notice only applies only to solar and wind facilities that begin construction on or after Sept. 2, 2025, as determined under the IRS Notices, including projects relying on the now-disallowed Five Percent Safe Harbor. This creates a brief window of opportunity for developers to initiate construction under the more flexible pre-OBBBA rules. It allows taxpayers that have begun construction prior to Sept. 2, 2025, to continue to rely on the rules that were in effect under the IRS Notices, including the Five Percent Safe Harbor.
Grant Thornton Insight:
Taxpayers should immediately evaluate project timelines to ensure physical work of a significant nature begins prior to July 5, 2026, for solar and wind facilities. Documentation of physical work and continuity efforts will be essential to preserve eligibility under Sections 45Y and 48E. The guidance in the notice does not apply to projects that began construction prior to Sept. 2, 2025, nor does it apply for any purpose other than the solar and wind credit termination deadlines (e.g., as described further below, it does not apply to the material assistance restrictions).
Clean vehicle infrastructure and commercial vehicles
Section 30C, originally expanded under the Inflation Reduction Act, provides a credit for alternative fuel vehicle refueling property, including electric vehicle (EV) charging stations. The credit was available for property placed in service through 2032.
Section 45W offers a credit for qualified commercial clean vehicles, including electric and fuel cell vehicles. The credit amount was based on the lesser of 30% of the vehicle’s cost (15% for hybrids) or the incremental cost compared to a conventional vehicle, with a cap of $7,500 for light-duty vehicles and $40,000 for heavy-duty vehicles. The credit applied to vehicles acquired and placed in service through 2032, and was not subject to the same manufacturer limitations as the individual clean vehicle credit under Section 30D.
The OBBBA significantly shortens the availability of both credits. Section 30C is terminated for property placed in service after June 30, 2026, and Section 45W is terminated for vehicles acquired after Sept. 30, 2025.
Grant Thornton Insight:
These changes mark a clear departure from prior policy, which had emphasized long-term support for clean transportation infrastructure and fleet electrification. Businesses considering investments in EV charging or commercial clean vehicles should reassess project timelines and procurement strategies, and, if possible, accelerate timeline to qualify for the expiring credits.
Advanced manufacturing production credit
Section 45X provides a production-based tax credit for eligible components manufactured in the U.S., including solar energy components, wind energy components, battery cells and modules, inverters, and critical minerals. As originally enacted under the IRA, the credit was available for components produced and sold through 2032, with a phasedown beginning in 2030 for most technologies. Critical minerals were exempt from the phaseout schedule and could continue to qualify beyond that date.
The OBBBA significantly modifies Section 45X. First, it adds metallurgical coal to the list of eligible critical minerals at a credit rate of 2.5% of production costs. It also tightens the rules around integrated components. For taxable years beginning after 2026, the credit is only available for secondary components produced in the same facility as their primary components.
To qualify, at least 65% of the total direct material costs of the secondary component must be attributable to primary components that were mined, produced or manufactured in the United States. This change is intended to reinforce domestic sourcing and discourage fragmented or offshore production strategies.
Similar to Sections 45Y and 48E, OBBBA imposes new restrictions on foreign involvement in the advanced manufacturing of components, including restrictions on ownership, control and material assistance. This further reinforces the push for domestic sourcing and production and will be discussed further below.
Lastly, the OBBBA also changes the phase-out and termination dates as follows:
- Credit terminates for wind components produced and sold after 2027
- Credit terminates for metallurgical coal (newly added as a critical mineral) produced after 2029
- Credit phases-out for all other eligible components sold from 2030-2032
- Credit phases-out for all other critical minerals produced from 2031-2033
Grant Thornton Insight:
The changes to Section 45X have a mix of effects. Certainly, manufacturers of wind components have a shortened timeline to qualify for the credit, which may significantly impact the cost of such parts. The addition, though temporary, of metallurgical coal to the list of critical minerals expands the availability of the credit to additional taxpayers. Lastly, any taxpayers that claim the credit on critical minerals no longer have a permanent credit due to the new phase-out dates.
Clean fuel incentives
Sections 40A and 45Z provide tax incentives for the production and use of biodiesel, renewable diesel, and other clean fuels. These credits are designed to support domestic fuel producers and encourage the transition to lower-emission transportation fuels.
Section 40A offers a credit for biodiesel and renewable diesel used as fuel, including a separate credit for small agri-biodiesel producers. The credit was scheduled to expire after 2024. Section 45Z, introduced under the IRA, provides a performance-based credit for clean fuel production, with eligibility beginning in 2025 and going through 2027. The credit amount is based on the fuel’s emissions profile, with higher credits available for fuels with lower lifecycle greenhouse gas emissions.
The OBBBA extends and modifies both credits. For Section 40A, the general credit is still terminated for fuel sold or used after Dec. 31, 2024, but the small agri-biodiesel producer credit is extended through 2026. It also doubles the credit rate from 10 cents-per-gallon to 20 cents-per-gallon and makes the credit transferrable under Section 6418 for fuel sold or used after June 30, 2025. Notably, the law allows small producers to claim both credits for qualifying fuel, provided certain conditions are met.
Section 45Z is extended through 2029, but with new restrictions. Fuel produced after Dec. 31, 2025, must be exclusively derived from feedstocks produced in the United States, Mexico, or Canada. In addition, fuel with a calculated emissions rate below zero is no longer eligible for the credit. These changes are intended to prevent over-crediting for certain biofuels and to reinforce regional supply chain integrity. Lastly, the OBBBA also eliminates the increased credit amount for sustainable aviation fuel.
Grant Thornton Insight:
Taxpayers that currently use qualifying feedstocks generally benefit from the changes in the OBBBA, especially the extension of the Section 45Z credits for two additional years. Small producers using domestically sourced feedstocks get a double benefit because they can claim both credits on the same gallon of fuel. Producers that do not exclusively or predominantly use feedstocks from the U.S., Mexico or Canada should evaluate their sourcing, and potentially look to new supply chain or contracts to continue to qualify for the credits.
Energy efficient commercial buildings deduction
Section 179D provides a deduction for energy-efficient improvements made to commercial buildings, including lighting systems, HVAC, and building envelope upgrades. The deduction was ranged from $2.50 per square foot to a maximum deduction of $5.00 per square foot (indexed for inflation) based on meeting certain annual energy and power cost reduction and the prevailing wage and apprenticeship standards. Tax-exempt entities (including governmental entities) could assign the deduction to the designer of such property, in effect creating a permanent deduction to the designer.
The OBBBA terminates Section 179D for property that begins construction after June 30, 2026.
Grant Thornton Insight:
Unlike other energy-related incentives, Section 179D has historically been used by a broad range of taxpayers, including building owners, designers of government-owned buildings, and real estate investment trusts. The termination of this deduction removes a key incentive for energy efficiency in commercial real estate and may reduce the financial viability of certain projects.
This is especially true for projects constructed by tax-exempt entities because the allocated deduction was frequently a component of the compensation to the designer. Businesses considering energy-efficient upgrades should evaluate whether construction can begin before the cutoff date to preserve eligibility. In some cases, accelerating design and procurement timelines may be necessary to secure the deduction under current law.
Foreign entity restrictions
The OBBBA introduces a multi-layered framework of new restrictions on foreign involvement in clean-energy projects, with implications that extend well beyond ownership and control. These rules apply across a wide range of energy credits, including Sections 45Y, 48E, 45X, 45Z, 45Q and 45U (not discussed in this article), and are designed to limit the role of certain foreign actors in U.S. energy infrastructure. The restrictions come into play under three main categories: specified foreign entities; foreign-influenced entities; and material assistance from prohibited foreign entities.
Specified Foreign Entities (SFEs) are defined under new Section 7701(a)(51) and include foreign entities of concern, Chinese military companies, foreign-controlled entities, or entities otherwise specified in applicable law. In general, this includes entities organized under, or with principal places of business in, China, Russia, Iran and North Korea. Any taxpayer that is an SFE is ineligible for the affected energy credits.
Foreign-Influenced Entities (FIEs) are those under significant influence or control by specified foreign entities. FIEs are ineligible for the affected energy credits. The OBBBA sets out several tests to determine foreign influence, including:
- Ownership: Substantial equity ownership or governance control by SFEs (or related entities), including appointing of officers, 25% ownership by a single SFE, or 40% ownership by one or more SFEs, with limited exceptions (generally for publicly traded companies).
- Debt threshold: 15% or more of an entity’s debt issued to SFEs.
- Effective control: Resulting from payments made to SFEs pursuant to an agreement or other contract, which might include timing or amount of activities for production of electricity or eligible components.
- Intellectual property agreements: Agreements entered into or modified after July 4, 2025, with SFEs that allow them to direct sourcing of components, receive long-term royalties and other contractual rights.
Grant Thornton Insight:
The Treasury Department is required to issue guidance by Dec. 31, 2026, to clarify the definition and application of foreign-influenced entities. Until then, taxpayers will need to carefully analyze ownership, operations to determine if the rules might potentially apply, and the effect, if any, on the availability of energy credits and incentives. The low debt threshold and expanded definitions of control may affect eligibility across multiple credits.
Publicly traded entities must ensure that their parent companies are not incorporated or headquartered in covered nations. The FIE rules, in specific, are far-ranging and contain a lot of definitions and tests that could surprise companies.
Collectively, specified foreign entities and foreign-influenced entities are referred to as prohibited foreign entities. The determination of whether an entity is a prohibited foreign entity is generally made as of the last day of the taxable year. For a taxpayer’s first taxable year beginning after July 4, 2025, the determination is instead made as of the first day of the taxable year.
Grant Thornton Insight:
With the first testing date being the first day of the first taxable year beginning after July 4, 2025, taxpayers should act immediately to analyze their position and, if necessary, pursue changes to contracts, ownership or other relationships, as allowed, to preserve eligibility for energy credits.
The third restriction comes in the form of the Material Assistance Rules, which target supply chain relationships. This is accomplished by establishing material assistance cost ratios for qualified facilities, energy storage technologies, eligible components and critical minerals. Material assistance includes direct costs attributable to manufactured products or components sourced from prohibited foreign entities. The ratios are computed as direct costs from non-prohibited foreign entities divided by total direct costs. To qualify for the affected credits, taxpayers must have a material assistance cost ratio greater than the applicable threshold.
For purposes of qualified facilities or energy storage technologies under Section 48E and 45Y, the following are the material assistance cost ratios that apply based on when construction begins:
| Begin Construction | Qualified Facility | Energy Storage Technology |
|---|---|---|
| During 2026 | 40% | 55% |
| During 2027 | 45% | 60% |
| During 2028 | 50% | 65% |
| During 2029 | 55% | 70% |
| After 2029 | 60% | 75% |
For purposes of the production of eligible components, the following are the material assistance cost ratios that apply based on when the component is sold:
| Sale Date | Solar Energy Component | Wind Energy Component | Inverter | Battery Component |
|---|---|---|---|---|
| During 2026 | 50% | 85% | 50% | 60% |
| During 2027 | 60% | 90% | 55% | 65% |
| During 2028 | 70% | N/A - terminated | 60% | 70% |
| During 2029 | 80% | N/A - terminated | 65% | 80% |
| After 2029 | 85% | N/A - terminated | 70% | 85% |
Critical minerals sold before 2030 have a material assistance cost ratio of 0%. That increases to 25% for 2030, 30% for 2031, 40% in 2032, and 50% for critical minerals sold after 2032. Treasury must issue alternative threshold percentages for each of the applicable critical minerals by Dec. 31, 2027, which must be at least the amounts specified in OBBBA. These alternative thresholds would take into account domestic geographic availability, supply chain constraints, domestic processing capacity needs and national security concerns.
Prior to Dec. 31, 2026, Treasury is required to issue safe harbor tables or other necessary guidance to assist taxpayers in identifying the percentage of total direct costs of manufactured products and direct material costs of eligible components. Prior to that guidance, taxpayers can use the tables in Notice 2025-8 (issued as safe harbors for domestic content bonus credits) and reasonably rely on certifications from suppliers.
Grant Thornton Insight:
The ability to rely on safe harbor tables in Notice 2025-8 (and forthcoming tables as required under the OBBBA) allows taxpayers to proactively plan their projects and, if necessary, change sources of components or manufactured products to meet the material assistance cost ratios.
Businesses should begin by conducting a comprehensive review of their supply chains, ownership structures, and contractual relationships. This includes identifying any direct or indirect ties to specified foreign entities and assessing the risk of disqualification under the new rules. While ownership and financing structures may be relatively straightforward to analyze, the material assistance provisions require a deep dive into sourcing, procurement, and vendor relationships. Companies may need to re-evaluate supply chains for exposure to specified foreign entities; renegotiate contracts or seek alternative suppliers; restructure financing arrangements; and monitor Treasury guidance closely as definitions and thresholds evolve.
Conclusion
The OBBBA represents a fundamental shift in the energy credit landscape, with a clear change in U.S. government incentives and priorities, as well as increased emphasis on domestic sourcing and national security with regards to supply chains. While the credits and incentives remain generous for qualifying projects, the new restrictions introduce complexity and potential disqualification risks that must be proactively managed. Companies that act early to align their operations with the new rules will be best positioned to secure incentives and avoid costly surprises.
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