This afternoon, on May 12th, the House Committee on Ways and Means released draft legislation outlining their proposed budget reconciliation package, “The One, Big, Beautiful Bill.” The clean energy industry has been long awaiting this proposal, expecting a potential rollback or repeal of the Inflation Reduction Act.
As expected, the draft proposal comes with changes to the Inflation Reduction Act provisions that have contributed to a clean energy boom over the last few years, driving hundreds of thousands of jobs and trillions of dollars in investment across red and blue states. However, while the proposal includes scaling back key provisions of the IRA and puts pressure on the clean energy industry, the starting point for the coming weeks’ negotiations may not as bad as it could have been.
Moreover, thanks to “beginning of construction” safe harbors, the impact on the transferable tax credit market and overall clean energy industry may not be as meaningful in the short-to-mid term, especially for commercially-owned mainstream technologies like solar and wind.
Some of the key proposed changes:
- A rollback of transferability… but only for projects that begin construction 2 years after the enactment of the bill (expected in the summer or fall of this year). In practice, this means that all projects that begin construction before mid-2027 will be allowed to transfer credits, which should allow for a very strong market until 2029-2030.
- A phasedown of credits… but still a 5-year delay for the tech-neutral ITC, and 4 years for tech-neutral PTC, nuclear PTC, and advanced manufacturing. The industry has long handled short timelines for tax credits (with 3-year phaseouts being typical), but this still cuts back one of the key benefits of the IRA: a longer horizon to provide confidence for investors to deploy capital.
- A hard stop after 2025 on credits for used EVs, EV charging, commercial EVs, energy efficient home improvements, and new energy efficient homes.
- A proposed new recapture and disallowance mechanism around "Prohibited Foreign Entities," commonly known as Foreign Entities of Concern (or "FEOCs"). Such entities are further described in the newly added §7701(a)(51) of the Internal Revenue Code, but in summary they are blacklisted entities or entities with ownership or influence from China, Russia, Iran, or North Korea.
- Cutting the 25D tax credit for residential solar after 2025. This may be one of most impactful changes for the solar industry, making solar less accessible for homeowners. We expect to see growth in third-party ownership and lease models in residential solar.
Additionally, it is important to note that this is a proposal that will be debated and negotiated over the coming weeks, with the Senate generally taking a more constructive view around clean energy tax incentives, so we expect some improvements from here. Furthermore, these tax credits have enjoyed broad bipartisan support thanks to the impact on job creation and economic development across the country, as recently shown by 21 House Republicans and 4 Republican Senators.
As a disclaimer, this article focuses on ITCs and PTCs for solar, wind and BESS projects, and we don't dive into other changes that are very negative for the industry at large, including cancelling DOE funds and a wide range of tax credits for other technologies and uses.
Below, more detail on each of the provisions and a couple of "cheat sheets."
Earlier Rollback of Transferability
As indicated above, the draft proposes an earlier rollback of transferability (as early as 2 years after the enactment of the bill), but in practice it will take longer for the rollback to apply to projects.
For the new ITC and PTC (45Y and 48E), any projects beginning construction two years after the passing of the bill would no longer be eligible for transferability. If the bill is passed this summer, projects beginning construction after mid-2027 would not be able to transfer tax credits, and will only have the choice of traditional tax equity or using their own tax appetite. Crucially, projects that elect to take 45Y should be able to transfer production tax credits for the full ten-year period so long as they begin construction prior to the cutoff date.
Read from a different perspective, projects could "safe harbor" transferability by incurring 5% of costs before mid-to-end of 2027, which would allow for the market to continue well beyond that date (assuming that date is not pushed or transferability re-enacted).
For production-based credits beyond the ITC (45Z, 45Q, 45U and 45X) the phaseout would be based on any production of energy or materials (or carbon captured) beyond December 31st, 2027.
Changes to Tax Credits
The proposed bill includes different schedules of phase-outs depending on the tax credit, ranging from phase-downs from 2029-31, to full cuts after the end of 2025, to ad-hoc schedules (e.g., legacy section 48 ITC).
Below is a summary of the key changes to traditional ITCs and PTCs (excludes 45X, 45U, 45Q and 45Z):
Under the proposed legislation, the tech-neutral ITC (48E) would begin phasing out for any projects placed in service after December 31, 2028, with the tax credit phase-out percentages being as follows: 80% in 2029, 60% in 2030, 40% in 2031, and 0% after December 31, 2031.
For 45Y, the tech-neutral production tax credit, the credit amount begins stepping down for projects placed in service after 2028, with 80% in 2029, 60% in 2030, 40% in 2031, and 0% for 2032 on.
Other changes include an accelerated termination of clean hydrogen production credits (45V) for projects starting construction after 2025, a phase out of 45U beginning in 2029, a repeal of the advanced manufacturing tax credit for components sold after 2029
On a less positive note, the following credits have been “cut” with early sunsets effective as of the end of this year (non-exhaustive): 30C (EV charging), 25D (residential clean energy), 45V (clean hydrogen) and 25C (energy efficient home improvement).
Prohibited Foreign Entities
Another major change is that 48E now includes a 10-year recapture period around foreign ownership. If at any time within the decade after the project goes live, more than 5% of that year’s dividends or other distributions flow to a single prohibited foreign entity (or more than 15% to multiple entities), the entire ITC is recaptured.
Prohibited foreign entities include companies and individuals on U.S. defense or export-control blacklists, and any entities majority-owned or effectively controlled by persons from China, Russia, Iran or North Korea. Separately, a project is automatically disqualified upfront if the taxpayer itself becomes one of these entities or is deemed foreign-influenced (>10% single ownership or >25% aggregate ownership, debt, or royalty exposure). This last disqualification also applies to 48 and 45Y.
Other Relevant Topics
One key omission is any changes to the bonus adders (Energy Communities, Low Income Communities and Domestic Content). There were some industry expectations of limiting bonus adders or making Domestic Content requirements mandatory for all projects, but the initial draft does not mention them.
In addition, as the proposed budget outlines clear sunsetting timelines for credits, we view the risk of retroactive change in law as becoming less likely. Previously, there was a fear that projects already under construction (or already placed-in-service) could have their eligibility removed, and some insurers in the tax recapture insurance market were not willing to cover it in their policies due to the uncertainty. The current proposal provides a forward-looking plan rather than retroactively changing credit eligibility.
Additionally, direct pay for non-profits and government entities, one of the key items potentially on the chopping block, has not been addressed in the proposed draft either.
Cheat Sheet
We have prepared the following cheat sheet, in case helpful as a reference:
For developers, we recommend the following actions:
- Safe harbor projects. Lock in “beginning-of-construction” (5% safe harbor or physical-work test) before the two-year window closes—expected mid-2027 if the bill passes this summer—to preserve credit-sale optionality.
- Document, document, document. Keep contemporaneous cost invoices, engineer affidavits and site photos close at hand; the IRS is likely to scrutinize dates that separate a transferable from a non-transferable credit.
- Map your cap table for PFE exposure. Track ownership, board rights, debt and payment flows to any entity linked to China, Russia, Iran or North Korea; keep single-party exposure under 5% and aggregate under 15% to avoid the 48E claw-back.
- Model COD drift for your projects. For example, slipping from 2028 to 2029 cuts a §45Y credit by 20%; carry a schedule-contingency case in financing models.
Concentro is continuing to analyze potential impacts of the bill; reach out to our team (hello@concentro.io) if you have any questions.
