The enactment of the One, Big, Beautiful Bill (OBBB) on July 4, 2025, significantly altered the tax landscape. That is especially true for those developing and constructing renewable energy projects that are intended to qualify for tax credits under the Inflation Reduction Act (IRA). The OBBB specifically targeted some of those credits while leaving other rules intact. Importantly, transition rules provide for continued eligibility if construction of solar and wind projects begins within one year of OBBB enactment. Our tax specialists review the changes to energy credits, requirements to satisfy the beginning of construction (BOC) test, and planning steps that can be taken now to provide certainty for future tax credit filings.
What did and didn’t change with the OBBB and IRA energy tax credits?
Historically, taxpayers who wished to install renewable energy property (e.g., wind, solar, geothermal) had two alternative paths to choose from. The first, the investment tax credit under Section 48 (ITC), was claimed in the year that the property was placed in service and was calculated as a percentage of the project’s cost basis. The second, the production tax credit under Section 45 (PTC), was claimed annually over 10 years based on the amount of electrical output in such years. The IRA significantly enhanced both the ITC and PTC on a temporary basis, with Dec. 31, 2024, being the operative BOC date. Projects meeting that deadline are generally unaffected by the OBBB.
The IRA also created new versions of the ITC and PTC, under Section 48E (ITC) and Section 45Y (PTC), respectively. Those credits have been available for projects that began construction after Dec. 31, 2024. However, the OBBB has now modified such rules with varying effective dates. Specific changes include:
- Wind and solar early termination; creation of one-year safe harbor. The general rule is that the ITC and PTC will no longer be available for wind and solar projects that are placed in service after Dec. 31, 2027. However, a special transition rule provides that wind and solar projects that begin construction within one year of OBBB enactment will still qualify for the ITC or PTC, even if placed in service after 2027. One clarifying exception allows energy storage property that’s installed at a wind or solar facility to continue to qualify.
- Increased ITC domestic content threshold. Bonus credits are available for projects that use U.S. steel and components meeting domestic content thresholds. The OBBB aligns the ITC rules with the PTC rules by applying a 20% threshold for offshore wind and 40% for all others for projects that began construction prior to June 16, 2025. However, those are increased in three sequential increments. First, up to 27.5% for offshore wind and 45% for all others for projects beginning construction after June 15, 2025, and before Jan. 1, 2026. Second, to 35% and 50% for those with BOC dates in 2026. Finally, both are increased to 55% for those beginning construction after Dec. 31, 2026.
- Expanded ITC for qualified fuel cell property. The ITC is also expanded to include eligibility for qualified fuel cell property without applying the zero greenhouse gas emissions test. Qualifying projects must begin construction by Dec. 31, 2025.
- Material assistance from prohibited foreign entities. The ITC and PTC rules, as modified by the OBBB, disqualify projects that are owned or controlled by prohibited foreign entities or that receive material assistance from prohibited foreign entities. The material assistance restriction is based on a cost ratio measuring the degree of manufactured products used in the facility that are mined, produced, or manufactured by a prohibited foreign entity. Enhanced penalties will also apply to those that make false certification of data for the material assistance test when they know or reasonably should know of the inaccuracy of such certification. The material assistance rules apply to facilities for which construction begins after Dec. 31, 2025.
Further complicating matters, a July 7 executive order directs the Treasury Secretary to “strictly enforce” the termination of the ITC and PTC for wind and solar facilities. Such enforcement includes the publication of new guidance within 45 days to ensure that policies regarding the beginning of construction aren’t circumvented by “the artificial acceleration or manipulation of eligibility … unless a substantial portion of a subject facility has been built.” That direction hints at significantly more restrictive guidance coming in short order. As we wait for additional guidance, one thing is clear to those with wind or solar projects in the planning or early development stages: the window to qualify for key tax credits may be closing rapidly. As the legal framework governing eligibility continues to evolve and become more restrictive, planning opportunities are becoming increasingly time-sensitive.
Determining the beginning of construction (BOC) date
The forthcoming BOC guidance may meaningfully change what had been an established landscape. The ITC and PTC, as modified by the IRA, were initially structured to remain in effect through at least 2035. That extended runway provided long-term certainty for project planning and financing. However, these credits had previously undergone periodic changes, which necessitated corresponding BOC rules. Thus, the concept of BOC has been defined in IRS Notices 2013-29 and 2018-59. These notices provide two methods for establishing that construction has begun:
- Physical work test — This test requires commencement of physical work of a significant nature either on-site or off-site. Examples in the notices include construction and installation of the energy property. However, digging foundations, laying footings or pads, or installing rebar can also qualify. Once the project begins, the taxpayer must maintain a sufficient level of activity to meet continuous construction rules.
- 5% safe harbor — An alternative test considers the taxpayer to have begun construction when it pays or incurs at least 5% of the total project costs. Notably, this must be 5% of the total cost, not the budgeted cost, so cost overruns can pose a challenge. The continuous construction rules also apply to this safe harbor.
The OBBB added a definition for BOC that directly references Notices 2013-29 and 2018-59, so such guidance will continue to be influential. However, the OBBB clarified that the definition would also be based on “any subsequently issued guidance clarifying, modifying, or updating either such Notice … ” That language and the direction in President Trump’s recent executive order set the stage for potentially substantial changes to the applicable rules, likely with more stringent requirements. Although, in the interim, both the substance and effective date of any changes to the BOC rules are unknown.
Should you act now?
It was widely anticipated that the tax credits expanded by the IRA could be modified this year as part of broader tax legislation. In that sense, the resulting OBBB approach to the ITC and PTC aren’t necessarily surprising. However, the date of the early termination, one- year safe harbor, potential for enhanced BOC restrictions, and looming material assistance testing create a complex environment for planning purposes. The challenges are heightened for significant projects that ordinarily take multiple years to plan, source equipment, and complete. When evaluating the options, a few questions may inform decision-making.
- How critical is the credit to feasibility of the project? Tax credits are vitally important incentives for many renewable energy projects, but they are not the only consideration. So, a threshold matter would involve considering the impact if the benefits of credits are never fully realized in the future. Such a situation could be presented by failure to meet eligibility or BOC tests, or through additional scrutiny by the IRS.
- Which effective dates will actually matter for this project? This discussion has largely focused on the termination of the credits for wind and solar and the BOC safe harbor. Although projects involving other qualifying technologies (geothermal projects, energy storage technology, and many others) will not face the same challenges. That said, the looming material assistance and prohibited foreign entity ownership rules might necessitate even earlier work, depending on plans for the project.
- What can reasonably be done now, by the end of the year, and by the 12-month date? After determining the earliest applicable BOC date, the next task would be to honestly assess what can be accomplished within short timelines. With nationwide changes taking effect, permitting delays, contractor bottlenecks, and supply chain congestion could escalate quickly — potentially jeopardizing project eligibility if action isn’t taken promptly.
- What level of certainty is required? When considering potential levels of certainty, there are both timing and interested party considerations. From a timing perspective, actions taken before publication of new BOC guidance could potentially create a better factual record, depending on the effective date of such guidance. After such guidance is published, then there will be clarity about the level of BOC activity that will be required by the relevant testing date. Similarly, it will be important to define who will be the interested parties to the credit filing, including investors or potential tax credit buyers. To that end, creating a plan to maximize satisfaction of all relevant rules is the best practice to avoid future surprises.
Depending on the available options, stakeholders may consider either: (1) accelerating development efforts to complete as much work as possible under current guidance; (2) adopting a “wait-and-see” posture in hopes that forthcoming guidance will allow more clarity of project feasibility; or (3) revising project scope, scale, or design to better align with the requisite tax credit dates. Unfortunately, this is expected to be a quickly evolving environment, so proactive planning is more critical than ever. Building strong documentation throughout the process will also be essential to defend eligibility positions in the face of IRS scrutiny or future due diligence.
