Client Alert: Reconciliation Bill Passes House: Detailed Analysis of Energy Tax Credit Changes

Introduction

The House of Representatives has passed a sweeping tax reconciliation bill that makes significant changes to the U.S. energy tax credit regime.  The bill, as originally reported out of the House Ways and Means Committee, proposed accelerated phaseouts, new transferability restrictions, and stringent foreign entity limitations for a range of energy credits.  At the floor vote, substantial amendments were proposed and incorporated into the bill that will now be considered by the Senate. 

With the intention of capturing the steps that resulted in the version of the bill passed by the House, this alert provides a section-by-section analysis of the current law, the original reconciliation bill, and the final House-passed version as amended, focusing on Sections 45, 48, 45Y, 48E, 45U, 45X, and 6418 of the Code, with discussion of related provisions where relevant.   We have also included a table summarizing these changes.

Section 45: Renewable Electricity Production Credit (Legacy PTC)

• Current Law:
  • Section 45 provides a production tax credit (PTC) for electricity generated from certain renewable energy resources (wind, solar, geothermal, etc.).The credit is available for projects that began construction before the end of 2024, with a 10-year credit period based on actual production.The credit is not subject to the new technology-neutral phaseout rules and is eligible for transferability under Section 6418.
• Original Reconciliation Bill:
  • No changes were proposed for legacy Section 45 credits. Projects that began construction before the end of 2024 would continue to be eligible for the PTC and for transferability.The focus of the bill was on the new technology-neutral credits (Sections 45Y and 48E).
• Final House-Passed Bill:
  • No changes were made to Section 45. Legacy PTCs remain available for qualifying projects, and transferability is preserved for these credits.The new foreign entity restrictions and phaseouts do not apply to Section 45 projects that began construction before 2025.

Section 48: Energy Investment Tax Credit (Legacy ITC)

• Current Law:
  • Section 48 provides an investment tax credit (ITC) for certain energy property, including solar, fuel cells, small wind, and geothermal.The credit is available for projects that began construction before the end of 2024, with a phasedown schedule for certain technologies.Transferability is allowed under Section 6418.
• Original Reconciliation Bill:
  • No changes for legacy Section 48 credits, except for geothermal heat pump property, which would have its eligibility period shortened to align with the new technology-neutral ITC phaseout.Transferability would remain in place for legacy ITC projects.
• Final House-Passed Bill:
  • No changes to the original reconciliation bill passed by the House Ways and Means Committee. There are no changes for legacy Section 48 credits.Transferability remains for legacy ITC projects, except for geothermal heat pumps, which are now subject to the new restrictions.

Section 45Y: Clean Electricity Production Credit (Technology-Neutral PTC)

• Current Law:
  • Section 45Y, a new credit enacted by the Inflation Reduction Act (IRA) in 2022, provides a technology-neutral PTC for electricity produced from facilities with net-zero greenhouse gas emissions.The credit is available for facilities placed in service after 2024, with no fixed expiration date, and is intended to replace the Section 45 legacy PTC; instead, the credit phases out based on the beginning of construction in the later of (i) 2032, or (ii) the year in which U.S. greenhouse gas emissions from the production of electricity fall are equal to or less than 25% of such 2022 emissions (which is projected to be well after 2032).The credit is fully transferable under Section 6418.
• Original Reconciliation Bill:
  • Accelerated Phaseout: The bill would phase out the Section 45Y credit based on the date the facility is placed in service, not when construction begins.The proposed phaseout schedule was:
    • 80% of the full credit for facilities placed in service in 2029
    • 60% in 2030
    • 40% in 2031
    • 0% after 2031
  • Transferability: Transferability would be repealed for facilities for which construction begins more than two years after the date of enactment.
  • Foreign Entity Restrictions: The bill introduced broad restrictions on credits for projects with “material assistance” from prohibited foreign entities (PFEs), and for taxpayers that are “specified foreign entities” or “foreign-influenced entities.” These restrictions would apply to both the project and taxpayer level, with recapture provisions for violations.
    • Specified foreign entities would generally be defined as the four foreign countries of concern, North Korea, Russia, China, and Iran, citizens of these countries (provided that such person is not a U.S. citizen or lawful permanent resident), or entities controlled by these countries. No credit would be allowed to a taxpayer for any taxable year beginning after the date of enactment if the taxpayer is a specified foreign entity.
    • Foreign-influenced entities would be defined as entities over which a specified foreign entity has authority or control. Furthermore, an entity that makes certain payments to a specified foreign entity in the previous taxable year may be considered a foreign-influenced entity if the entity makes such payments knowingly or has reason to know of such payments.No credit would be allowed to a taxpayer for any taxable year beginning two years after the date of enactment if the taxpayer is a foreign-influenced entity.
    • Projects that receive “material assistance” from PFEs include facilities with components, subcomponents, and critical minerals acquired from PFEs, including any design of property based on copyrights, patents, or trade secrets held by a prohibited foreign entity. The Section 45Y credit would not be available for any facility that begins construction one year after the date of enactment and that receives material assistance from a PFE.
    • No credit would be allowed to a taxpayer for any taxable year beginning two years after the date of enactment if the taxpayer makes certain payments to a PFE, which is a restriction from the foreign-influenced entity determination.
• Final House-Passed Bill:
  • Termination Instead of Phaseout: The amended reconciliation bill eliminates the phase out.As amended, no credit is allowed for any qualified facility:
    • The construction of which begins more than 60 days after enactment, or
    • That is placed in service after December 31, 2028.
    • Nuclear Exception: Advanced nuclear facilities (new and expanded) are not subject to the rule above but must begin construction by December 31, 2028.
  • Wind and Solar Leasing Arrangements: The amended reconciliation bill disallows credits for wind and solar property leased to third parties if the lessee would otherwise qualify for the Section 25D residential clean energy credit, effective the taxable year beginning after the date of enactment.
  • Transferability: The amended reconciliation bill undoes the proposed repeal of transferability for Section 45Y credits for projects that can meet the accelerated start-of-construction requirements, meaning that Section 45Y credits would be fully transferable.
  • Foreign Entity Restrictions: The amended reconciliation bill disallows the Section 45Y credit for any facility on which construction begins after December 31, 2025 that receives material assistance from a PFE.The other foreign entity restrictions remain as proposed in the original reconciliation bill.Due to the accelerated start-of-construction requirements to qualify for Section 45Y, as drafted, the material assistance restrictions will not apply to otherwise eligible 45Y projects unless the bill is enacted in the last 60 days of 2025; this is likely a drafting bust.

Section 48E: Clean Electricity Investment Credit (Technology-Neutral ITC)

• Current Law:
  • Section 48E, also enacted by the IRA, provides a technology-neutral ITC for investments in zero-emission electricity generation and energy storage. The credit is available for property placed in service after 2024, with phase out tied to greenhouse gas emissions from the production of electricity as in Section 45Y and is fully transferable.
• Original Reconciliation Bill:
  • Accelerated Phaseout: The phaseout schedule mirrored Section 45Y:
    • 80% for property placed in service in 2029
    • 60% in 2030
    • 40% in 2031
    • 0% after 2031
  • Transferability: Transferability would be repealed for property for which construction begins more than two years after enactment.
  • Foreign Entity Restrictions: Similar to Section 45Y, with project-level and taxpayer-level restrictions and material assistance rules. In addition, the credit would be subject to full recapture if the taxpayer makes an applicable payment to a PFE within 10-years of claiming the Section 48E credit.The recapture provision would apply to any taxpayers that have been allowed under Section 48E beginning two years after the date of enactment.The recapture provision does not include a start-of-construction safe harbor; as drafted, it would apply to all Section 48E projects placed in service in any taxable year beginning after the date which is two years after enactment of the bill.
• Final House-Passed Bill:
  • Termination Instead of Phaseout: No credit is allowed for any qualified facility or energy storage technology:
    • The construction of which begins more than 60 days after enactment, or
    • That is placed in service after December 31, 2028.
  • Nuclear Exception: Advanced nuclear facilities (new and expanded) are not subject to the rule above but must begin construction by December 31, 2028.
  • Wind and Solar Residential Leasing Arrangements: Credits are denied for wind and solar property leased to third parties if the lessee would otherwise qualify for the Section 25D personal tax credit, effective the taxable year beginning after the date of enactment.
  • Transferability: The amendment undoes the proposed repeal of transferability for Section 48E credits for projects that can meet the accelerated start-of-construction requirements, meaning that Section 48E credits would be fully transferable.
  • Foreign Entity Restrictions: The amended reconciliation bill disallows the Section 48E credit for any qualified facility or energy storage technology on which construction begins after December 31, 2025 that receives material assistance from a PFE.The other foreign entity restrictions remain as proposed in the original reconciliation bill.100% recapture rules for payments to PFEs remain the same as in the original reconciliation bill. Similar to Section 45Y, due to the accelerated start-of-construction requirements to qualify for Section 48E, as drafted, the material assistance restrictions will not apply to otherwise eligible 48E projects unless the bill is enacted in the last 60 days of 2025; this is likely a drafting bust.

Section 45U: Zero-Emission Nuclear Power Production Credit

• Current Law:
  • Section 45U provides a PTC for zero-emission nuclear power produced by existing nuclear facilities, available through 2032.
• Original Reconciliation Bill:
  • Phaseout: The bill would have phased out the credit in line with the schedules for Sections 45Y and 48E.
  • Transferability: Transferability would be repealed for electricity produced and sold after December 31, 2027.
  • Foreign Entity Restrictions: Similar restrictions were proposed as for Section 45Y.
• Final House-Passed Bill:
  • Termination: The reconciliation bill, as amended, eliminates the phaseout and instead terminates the credit at the end of 2031.
  • Transferability: The amendment undoes the proposed repeal of transferability for Section 45U credits.
  • Foreign Entity Restrictions: The foreign entity restrictions remain as proposed in the original reconciliation bill.

Section 45X: Advanced Manufacturing Production Credit

• Current Law:
  • Section 45X provides a PTC for the domestic production of eligible components (solar, wind, battery, and critical minerals). The credit phases down for components sold after 2029, with a permanent credit for critical minerals.
• Original Reconciliation Bill:
  • Accelerated Phaseout: The bill would eliminate the credit for wind energy components sold after December 31, 2027, and for all other components after December 31, 2031.
  • Transferability: Transferability would be repealed for eligible components sold after December 31, 2027.
  • Foreign Entity Restrictions: Beginning in the taxable year after enactment, the 45X credit would be prohibited if the taxpayer is a specified foreign entity.Beginning in the taxable year that is two years after the date of enactment, the 45X credit would be denied for components manufactured with material assistance from PFEs or produced under certain licensing agreements with PFEs.
• Final House-Passed Bill:
  • No Change to Phaseout: The phaseout schedule for wind and other components remains as in the original reconciliation bill.
  • Transferability: Repeal of transferability remains the same as under the original reconciliation bill. No transfers of Section 45X credits will be permitted for components sold after December 31, 2027.
  • Foreign Entity Restrictions: The foreign entity restrictions remain as proposed in the original reconciliation bill.

Section 6418: Transferability of Energy Credits

• Current Law:
  • Section 6418 allows for the transfer (sale) of certain energy tax credits, including Sections 45, 48, 45Y, 48E, 45X, 45U, 45Q, and others, to unrelated taxpayers for cash.
• Original Reconciliation Bill:
  • Repeal of Transferability: The proposed bill would have repealed transferability for most energy credits for projects that begin construction more than two years after enactment (45Y, 48E, 45Q) or produce and sell components (45X), electricity (45U), or fuel (45Z) after December 31, 2027.
  • Legacy Credits: Transferability would remain available for legacy PTC and ITC for projects that started construction before the end of 2024.
• Final House-Passed Bill:
  • Restoration of Transferability: The amendment undoes the proposed repeal of transferability for Sections 45Y, 48E, and 45U, so transferability remains available for these credits in addition to Sections 45 and 48. Transferability for Sections 45Q, 45X, and 45Z are still repealed as in the proposed bill.

Other Provisions Impacting Energy Credits

• Section 45Q (Carbon Capture): No major changes to the underlying credit, but transferability is repealed for projects that begin construction more than two years after enactment.Foreign entity restrictions apply.
• Section 45V (Clean Hydrogen): The credit is terminated for facilities whose construction begins after December 31, 2025.
• Section 45Z (Clean Fuel Production): The credit is extended through 2031, but transferability is repealed for fuel produced after December 31, 2027.Feedstock must be sourced from the U.S., Canada, or Mexico.
• Section 25D (Residential Clean Energy): The credit is terminated for property placed in service after December 31, 2025.
• Section 25C (Energy Efficient Home Improvement): The credit is terminated for property placed in service after December 31, 2025.
• Section 45L (New Energy Efficient Home): The credit is terminated for homes acquired after December 31, 2025 (with a special rule for homes under construction before May 12, 2025).

Practical Implications and Next Steps

The House-passed bill, as amended, represents a dramatic shift in the U.S. energy tax credit landscape. While the Senate is expected to further revise the bill, and final provisions may differ, project developers, manufacturers, and investors should look into accelerating project timelines, especially for projects expected to qualify for Section 45Y or 48E, and discussing supply chain strategies to ensure compliance with the foreign entity restrictions. We will continue to monitor the bill as it moves through the legislative process and provide updates.