Navigating clean energy tax credits following the signing of the One Big Beautiful Bill Act (OBBBA)
By Michael C. Laur
The renewable energy sector is entering a new era of compliance as foreign ownership, supply-chain sourcing, and tax credit qualification become increasingly intertwined.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, significantly expanded and enhanced the Foreign Entity of Concern (FEOC) restrictions beyond the initial scope of the Inflation Reduction Act (IRA). It also prompted the IRS to issue Notice 2025-42, which provides significant guidance for the wind and solar energy industries that modifies the rules for establishing when construction begins for clean energy tax credits.
For energy developers, these changes influence procurement decisions, construction timing, and—most importantly—the ability to qualify for tax credits. The changes may be complex but with proper planning and execution, the tax credits can still be claimed.
New Categories of Prohibited Foreign Entities
The OBBBA introduces two new categories of entities that may be prohibited from claiming or receiving certain tax credits:
- Specified Foreign Entities (SFEs) – Organizations that meet defined ownership or control thresholds tied to certain foreign governments or entities.
- Foreign-Influenced Entities (FIEs) – Entities where SFEs hold significant influence, whether through ownership, governance rights, or financing structures
FEOC nations include China, Russia, North Korea and Iran. Energy companies must re-examine ownership structures, joint-venture arrangements, financing relationships, and board-level rights to ensure continued eligibility to qualify for tax credits.
Material Assistance Restrictions and Supply-Chain Scrutiny
One of the most consequential additions is the new material assistance test, which applies to solar & wind credits such as §45X, §45Y, and §48E. Under these rules, a project may lose eligibility for tax credit if a specified percentage of its components originate from a FEOC. These percentage thresholds vary by technology and change each year. Solar and wind projects that start construction in 2026 must have less than 60 percent of manufactured components sourced from a FEOC nation. Energy storage projects must have less than 45 percent of manufactured components sourced from a FEOC nation. It is important to remember that the entire supply chain must be analyzed. For example, transformers manufactured in the U.S. must still be analyzed to ensure that the subcomponents and materials originating from FEOC nations are understood.
Developers must be diligent with each manufacturer, wholesaler, and retailer they work with to ensure the entire supply chain is compliant. Equipment procurement, contracting decisions, and construction timing will all factor in whether a project satisfies the material assistance limitations. Developers will need to ensure a thorough review of the entire supply chain has been completed as part of their tax credit due diligence process.
Understanding IRS Notice 2025-42
IRS Notice 2025-42 tightens the criteria for securing clean energy Production Tax Credits (PTCs) under §45Y and Investment Tax Credits (ITCs) under §48E of the Internal Revenue Code. The key changes include:
- Elimination of the 5 percent Safe Harbor: The previously available “5 percent safe harbor” where incurring 5 percent of a project’s cost established the construction start date, has been eliminated except for Low-Output projects with a total output of 1.5 MWac or less.
- Physical Work Test as Primary Method: The Physical Work Test is now the primary method for demonstrating the start of construction, focusing on the significant nature of the physical work performed rather than the cost incurred. This can be onsite or off-site under binding contract and has started before July 5th, 2026. Developers relying on the look-through test for offsite work have a short window to ensure compliance as the actual manufacturing process must begin before the July 4th deadline.
- Continuity Requirement: Taxpayers must still maintain a continuous program of construction to qualify for the credits. The standard continuity safe harbor requires the facility to be placed in service within four calendar years of the year construction began.
- Beginning of Construction Deadline: Projects must begin construction by July 4, 2026 (one year after the OBBBA was enacted) to be eligible for the tax credits.
Why Specialized Advisors Matter
Whether the developer is planning to utilize a tax equity model or sell their tax credits, a thorough due diligence package will be needed to substantiate the tax credits. Key considerations should include:
- reviewing projects within the pipeline & establish secure beginning of construction
- reviewing ownership structures for FEOC exposure
- assessing suppliers and vendors for FEOC risk
- evaluating financing arrangements for prohibited foreign involvement
- aligning procurement with 2026 sourcing thresholds
- modeling tax impacts under the new rules
- conducting a cost segregation study to identify and document energy property
- establishing audit-ready documentation systems to withstand extended IRS scrutiny
The 2026 and future clean energy tax credits will be subject to significantly more scrutiny than previous years, so partnering with the right tax advisory firm before your facility is placed into service can help avoid pitfalls along the way.
Michael C. Laur, CPA MTx, is the founder of Taxster (www.taxster.co). Taxster partners with businesses of all sizes to provide expert guidance on energy incentives, R&D tax credits, cost segregation studies, and other specialty tax services. The firm keeps clients informed of relevant tax law changes and evolving opportunities—ensuring they stay compliant and fully benefit from available incentives. Taxster provides tax advisory services to companies in all 50 states.
Q2 2026
