In July 2025, Congress passed budget reconciliation legislation that significantly altered clean energy tax credits for solar and wind projects. This article explores the impact of the bill for commercial & industrial solar and storage projects.
Accelerated phase-outs for solar ITC eligibility
On July 3, 2025, Congress passed budget reconciliation legislation that became law on July 4 upon receiving the president’s signature. Formerly known as the One Big Beautiful Bill, the reconciliation law made significant changes to energy tax policy, including adjustments to the clean energy investment tax credit (ITC) under Section 48E of the Internal Revenue Code.
In particular, the law restricts ITC eligibility for solar and wind projects that do not meet specific deadlines for starting construction or being placed into service. The law also enacted new foreign entity of concern (FEOC) guidelines that will affect ITC eligibility going forward.
Impact for solar projects
Solar projects will no longer be eligible for the ITC unless they meet the following deadlines for beginning construction or being placed into service:
- July 4, 2026: Solar projects may still receive the full ITC, along with any adders, if they meet IRS criteria for beginning construction by July 4, 2026.
- December 31, 2027: Regardless of when they began construction, solar projects may still receive the full ITC if they’re placed into service before the end of 2027.
Impact for battery storage projects
Battery storage projects generally remain on the same scheduled phaseout implemented under the Inflation Reduction Act, though under the Inflation Reduction Act the phaseout would have been postponed based on greenhouse gas emissions rates:
- 30% ITC for projects placed in service through 2032
- 22.5% ITC for projects placed in service in 2033
- 15% ITC for projects placed in service in 2034.
- 0% ITC for projects placed in service on or after January 1, 2035.
Impact for bonus-credit adders
Adders phase down in line with the credits they’re attached to. Solar projects cannot claim adder credits for domestic content or location within an energy community if the project cannot qualify for the ITC under the new deadlines. Adder percentages for battery projects phase down along the same lines above, receiving 75% of the full adder for projects that go into service in 2033, 50% in for projects entering service in 2034, and 0% for projects placed in service in 2035.
FEOC requirements
The bill also added new “foreign entity of concern” or FEOC contingencies for the ITC. These provisions will affect battery storage projects as well as solar projects that continue to qualify for the ITC.
The new FEOC provisions are meant to ensure that clean energy projects are not subject to control by a potential foreign adversary, and are not unduly reliant on foreign supply chains. In practice, it means that developers and owners of clean energy projects cannot claim the ITC if they receive material support from a foreign entity of concern (such as China, Iran, North Korea, or Russia), or if they engage in certain behaviors that put them at risk of foreign control.
In addition, FEOC entities cannot claim ITCs, and credits may not be transferred to them.
FEOC provisions will not apply immediately, but will phase in according to the schedule below.
FEOC implementation schedule
The legislation included a delayed implementation of FEOC restrictions. The delayed implementation give government agencies additional time to supply guidance on new requirements, and give taxpayers time to get up to speed with the new regulations.
The new FEOC requirements related to the ITC will come into effect according to the following schedule:
- Projects that begin construction in 2025: Projects that meet IRS guidelines for beginning construction before January 1, 2026 are not subject to any new FEOC requirements.
- Projects that begin construction after 2025: Projects that begin construction on or after January 1, 2026 or after will need to comply with FEOC requirements to be eligible for the ITC.
What is a foreign entity of concern?
A foreign entity of concern (FEOC) is any foreign entity—whether a government, organization, or individual—that is owned, controlled, or located in the jurisdiction of a “covered nation.” At present, the covered nations are China, Russia, Iran, and North Korea.
The term "foreign entity" is not limited to the governments of those countries, and can include:
- A foreign political party
- A foreign individual from a covered country
- A company or organization established under foreign law or with its principal place of business in a foreign country
U.S. entities can also be considered FEOCs if they are owned, controlled, or directed by a foreign entity that meets the above criteria.
What is a prohibited foreign entity?
A prohibited foreign entity or PFE is similar to a foreign entity of concern, but the definition is more expansive.
PFEs include:
- Specified Foreign Entities (SFE)
- Entities where 50% of stock, profit, capital, or beneficial interest is held by a government, individual, or business from China, Russia, North Korea, or Iran
- Entities where SFE have the power to appoint board members or executive officers
- Entities at least 25% equity ownership by SFE, or at least 40% equity ownership across one or more SFE
- Entities where at least 15% of debt has been issued to SFEs
- Entities making substantial payments to SFE
Rules for how businesses can ensure compliance with the new FEOC requirements are still forthcoming from the Treasury Department. However, as noted above, they do not apply to projects that begin construction before the end of 2025.
FEOC recapture and penalties
New FEOC provisions have several methods of enforcement:
Recapture for violation of FEOC provisions
Tax credits will remain subject to a 10-year recapture period. During this period, the full value of the tax credits may be recaptured by the IRS if the seller is found to have made applicable payments to an SFE. This rule goes into effect for taxable years beginning after July 4, 2027.
Penalty for underestimating material assistance
The new FEOC language prohibits material assistance above a certain percentage each year. Material assistance includes project financing, as well as the sourcing of materials.
To qualify for the ITC, developers of clean energy projects will need to calculate the percentage of materials in a project derived from a foreign entity of concern (such as China) and keep below certain thresholds.
The IRS will publish tables and additional guidance meant to simplify these calculations, which do not apply to projects that begin construction in 2025.
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