The massive budget reconciliation bill that President Trump signed on July 4 may set off a rush to start construction of more projects by year end 2025 and again by early July 2026 to qualify for federal tax credits. 

However, President Trump muddied the water this afternoon by issuing an executive order directing the US Treasury to issue "new and revised guidance" within 45 days "restricting the use of broad safe harbors [to treat projects as under construction] unless a substantial portion of a subject facility has been built."

The budget reconciliation bill allows power and storage projects that start construction by December 31, 2025 to avoid some new restrictions on use of Chinese equipment.

Under the bill, solar and wind projects that start construction by July 4, 2026 will avoid a deadline to be placed in service by the end of 2027. Such projects should generally have four years after the year construction starts under the existing Treasury guidance to finish construction. Thus, a project on which construction starts in the first half of 2026 should have until the end of 2030 to be completed. 

Solar and wind projects that are not under construction by July 4, 2026 must be in service by the end of 2027 to qualify for tax credits.

The bill modifies the rules for "technology-neutral" tax credits that are found in sections 45Y and 48E of the US tax code. 

Such tax credits can be claimed on power projects that have zero or negative lifecycle greenhouse gas emissions and on battery and other energy storage projects regardless of emissions. They can amount to 30% to 70% of the project cost. 

Projects that claim "legacy" tax credits under section 45 or 48 of the US tax code are not affected by the bill. Legacy tax credits can be claimed on projects that were under construction by the end of 2024 (except that geothermal heat pump projects have until the end of 2034).

New FEOC -- for "foreign entity of concern" -- rules will deny technology-neutral tax credits to projects that use too much Chinese equipment and to taxpayers that rely on Chinese equity or debt or that make payments to Chinese-related counterparties under contracts and technology licenses that give the counterparties "effective control" over projects or companies. The project-level restrictions will not apply to projects that are under construction by the end of 2025. 

The FEOC rules are complicated, but they distill to a three-step analysis. They take effect in 2026.

An underreported story is the distant sunset date for technology-neutral tax credits on energy storage and other, non-solar and non-wind power projects. Storage, geothermal, biomass, hydroelectric and other non-solar and non-wind projects will have until the end of 2033 to start construction to qualify for technology-neutral tax credits at the full rate. The tax credit amounts phase down for such projects starting construction in 2034 and 2035.

The bill does not restrict sales of tax credits, except to tax credit buyers that the FEOC rules bar from claiming them.

The bill is a sprawling measure that affects many segments of the project finance market.

The start and end dates for the various provisions are a minefield to be navigated carefully.    

More details follow.

PTCs and ITCs

The US government allows two types tax credits to be claimed on new power projects. Project owners must choose one. 

They are production tax credits (PTCs) on the electricity output for 10 years after a project is originally placed in service or an investment tax credit (ITC) that is a percentage of the project cost in the year the project is originally placed in service.

When the Inflation Reduction Act passed in 2022, both houses of Congress wanted to extend tax credits for renewable energy projects and increase the amounts, but they could not agree on an approach.  The House wanted to change dates and amounts. The Senate wanted to take a technology-neutral approach of allowing tax credits to be claimed on all new power plants with zero or negative lifecycle greenhouse gas emissions rather than limiting tax credits to generators that use renewable energy. The House got its way through the end of 2024, and the tax credits moved to new tax code sections and became technology neutral starting on January 1, 2025.

Both houses wanted to allow investment tax credits -- but not PTCs -- on storage projects.  

Any developer whose project was under construction by December 31, 2024 has the option to claim tax credits under the legacy tax code sections (45 and 48), as long as the project is completed within four years after the year construction started. Some types of projects have more time.

All other projects placed in service in 2025 or later must claim tax credits under section 45Y (PTCs) or 48E (ITC).

The budget reconciliation bill amended the technology-neutral tax credits. It did not change the legacy tax credits, with the exception of a change benefiting geothermal heat pumps and elimination of a permanent 10% ITC under section 48. Thus, for example, the new FEOC restrictions do not apply to the legacy tax credits. 

The bill requires solar and wind projects to be placed in service by the end of 2027 to qualify for technology-neutral tax credits. 

However, this in-service deadline does not apply to any solar or wind project on which construction starts within 12 months after President Trump signed the bill on July 4.

Developers generally have four years after the year construction starts under existing Treasury guidance to finish construction and claim tax credits.  Offshore wind projects and projects on federal land have 10 years, but the Biden Treasury inadvertently left room for argument about whether the 10-year period applies to such projects that claim technology-neutral tax credits by referring only to the legacy tax code sections when referring to the 10-year period in Notice 2022-61. There is no logic for different time periods for such projects under the legacy credits and the technology-neutral credits.

Energy storage and all other types of power projects (i.e., other than  solar and wind) have until the end of 2033 to start construction to qualify for technology-neutral tax credits at the full rate. Such projects that start construction in 2034 will qualify for tax credits at 75% of the full rate and in 2035 at 50% of the full rate.

Section 48 of the tax code allowed a permanent 10% ITC to be claimed on renewable energy projects after the other tax credits expire. The bill eliminated it.

Projects that are in areas of the country that are transitioning from oil, gas or coal employment -- called "energy communities" -- and projects that use enough domestic content qualify currently for bonus tax credits. 

The bonus credits will remain available on projects that qualify for the underlying base credits. Eligibility for the bonus credits will work as before.

However, there is one exception. The bill fixes a drafting error that Congress made in the Inflation Reduction Act on domestic content bonus credits. The IRA left the required domestic content percentage to claim a bonus credit fixed at 40% for project owners claiming technology-neutral ITCs, while the percentage increased over time to 55% for projects on which PTCs are claimed. The required threshold will increase on the same schedule as for other credits. However, ITC projects that started construction between from January 1 through June 15, 2025 can still qualify for a bonus by hitting 40%.

Construction Start

There are two main ways to start construction of projects for tax purposes under existing Treasury guidance. One is to "incur" at least 5% of the total project cost. Costs are usually incurred only as the developer takes delivery of equipment or services, with one exception. A payment for specific equipment or services by the deadline counts if delivery is reasonably expected within 3 1/2 months. There are nuances about counting payments for services. 

The other way to start construction is to start "physical work of a significant nature" at the project site on the parts of the project on which an ITC can be claimed or at a factory on equipment that is tailored for use in the project.

Some members of the conservative House Freedom Caucus believe they were promised tougher enforcement of the construction-start rules in exchange for voting for the final bill.

Rep. Ralph Norman (R-South Carolina), a member of the conservative House Freedom Caucus, said on CNBC Squawk Box on July 3 that President Trump is "going to make sure that they're doing what they say when they say they've started construction . . . they can't take a backhoe out there any dig a ditch and say that's construction.  So things like that the president is going to enforce."

Tim Burchett (R-Tennessee), another hardline conservative, said Trump confirmed that the administration would vigorously enforce construction-start dates.

President Trump directed the Treasury by executive order on July 7 to issue "new and revised guidance" within 45 days "consistent with applicable law to ensure that policies concerning the 'beginning of construction' are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built."

Historically, whenever Treasury has changed a longstanding policy, the change is prospective.  The current construction-start rules have been in place since 2013 and mirror similar rules that were used in the section 1603 Treasury cash grant program starting in 2009.

45X

The bill makes a number of changes in section 45X tax credits for manufacturers. Such tax credits can be claimed currently by manufacturers of solar, wind and storage equipment. They ramp down in amount over a three-year period starting after 2029. For more detail about such tax credits, see here.

The bill eliminates section 45X credits for wind equipment "produced and sold" after 2027.

Congress debated whether to prevent stacking of tax credits for manufacturers that make more than one type of component -- for example, solar wafers, cells and modules -- by limiting the credits to the final product into which the other components are incorporated. The final bill has a modest limit on stacking. If a manufacturer makes components A and B and A is incorporated into B, then a tax credit can be claimed on both A and B when B is sold to an unrelated customer, but only if A and B are made in the same factory and at least 65% of the direct material costs paid or incurred by the manufacturer to make B are for inputs mined, produced or manufactured in the United States. The only inputs whose costs factor into the 65% calculation are inputs for which there are section 45X tax credits. The change applies to components sold in the manufacturer's first tax year starting after December 31, 2026.

Section 45X tax credits can also be claimed currently by companies that process 50 critical minerals or that mine such minerals. Examples are aluminum, cobalt, lithium and nickel. The tax credits may be claimed by mining companies only if they also process the raw minerals to a required level of purity.

The bill adds metallurgical coal to the list of critical minerals on which section 45X tax credits can be claimed. The coal must be suitable for producing steel. The credit for metallurgical coal is 2.5% of the cost to produce it, unlike other critical minerals where the credit is 10% of the cost.

Tax credits can be claimed currently for manufacturing battery modules. The bill adds another box to check for an article to qualify as a battery module and, therefore, for tax credits. The battery module must be "comprised of all other essential equipment needed for functionality, such as current collector assemblies and voltage sense harnesses, or any other essential energy collection equipment."   

Credits for producing critical minerals are currently permanent. The bill reduces them to 75% of the full credit amount for minerals produced during 2031, 50% during 2032, 25% during 2033, and zero thereafter. There is no phase-down of tax credits for producing metallurgical coal, but such credits can only be claimed on metallurgical coal during the period 2026 through 2029.

FEOC

Companies will have to work through a maze of complicated new FEOC restrictions before claiming any of the following tax credits: technology-neutral PTCs and ITCs on power and storage projects, section 45X credits for manufacturing solar, wind and storage equipment and for producing critical minerals, section 45Q credits for carbon capture, section 45Z credits for making clean transportation fuels and section 45U credits for generating nuclear electricity.

There are separate FEOC restrictions at both the project and taxpayer levels for companies claiming tax credits on power and storage projects and for manufacturers and mineral producers claiming section 45X tax credits.

Although complicated, they distill to a three-step analysis. 

They do not apply to renewable energy and storage projects on which legacy PTCs or ITCs are claimed under section 45 or 48. Such projects had to be under construction for tax purposes by the end of 2024.

Including the FEOC discussion in this paper would have made the paper too long. It is in a separate paper that can be found here.

Transferability

The bill does not restrict sales of tax credits, except to tax credit buyers that the FEOC rules would bar from claiming them. 

It adds a 12th type of tax credit to the list of tax credits that can be sold to other companies for cash: a tax credit under section 40A of the US tax code for small agri-biodiesel producers that expired at the end of 2024. The bill extends this section 40A tax credit through 2026 and doubles the amount from 10¢ to 20¢ a gallon.

Rooftop Solar

The House voted to bar tax credits on residential rooftop solar systems that are leased to homeowners. The final bill lets tax credits be claimed on leased residential rooftop systems, but denies them on leased solar hot water heaters and small wind turbines placed in service after December 31, 2025.

25D

Homeowners would not be allowed to claim a 30% residential solar credit under section 25D of the US tax code for spending on solar generating equipment, geothermal heat pumps, batteries and some other items installed after 2025. The credit had been available on such items placed in service through 2034, but at a 26% rate in 2033 and 22% rate in 2034.

Cross-Border Payments

The final bill drops a "revenge tax" that passed the House. The revenge tax would have increased the US tax rate by 20% over four years on dividends, interest and other income received from US subsidiaries or other US sources by companies in Canada, Spain, France, the UK, Italy and other countries that impose digital services or other "unfair" taxes on US companies. 

However, the Trump administration still retains authority under section 891 of the tax code to double US taxes on income from US sources earned by citizens and companies in countries that impose discriminatory or extraterritorial taxes on US citizens or companies. Examples of such US source income are dividends from US subsidiaries and interest on cross-border loans to US borrowers. The US taxes cannot exceed 80% of the US source income.

Presidents have had this authority since 1934, but it has never been used. 

Trump directed the Treasury in a day-one executive order to explore using it and repeated the instruction in another executive order in February that directed the Treasury to draw up a list of offending countries by March 21.

Hydrogen

Clean hydrogen projects would have to be under construction for tax purposes by the end of 2027 to qualify for section 45V tax credits of up to $3 a kilogram of hydrogen produced. This is five years earlier than the current deadline of end of 2032.

45Z

Section 45Z credits of $1 a gallon can be claimed currently for making clean transportation fuels and of $1.75 a gallon can be claimed for making sustainable aviation fuel (SAF) during the period 2025 through 2027. 

The bill extends the period for two years through the end of 2029, but reduces the SAF credit to $1 starting in 2026. 

SAF sold during the period January 1 through September 30, 2025 qualifies currently for an excise tax credit under section 6426(k)(1) of the US tax code that can reach $1.25 or more a gallon, depending on the lifecycle greenhouse gas emissions reduction compared to petroleum-based jet fuel. The bill denies such excise tax credits to the extent a section 45Z tax credit is "allowable" on the same fuel. The change is retroactive to the start of 2025, but only for fuel for which an excise tax credit has not already been paid or "allowed." 

No tax credits can be claimed under the bill in 2026 or later on any transportation fuels unless they are made exclusively from feedstocks grown or produced in the US, Mexico or Canada.

The tax credit amounts are a function of the amount of CO2-equivalent emissions required to produce the fuel. It is possible under current law to have a negative "emissions rate," which would allow tax credits higher than the $1 or $1.75 a gallon. The bill bars negative emissions rates starting in 2026.

It directs the IRS to publish tables with distinct emissions rates for different types of cow, hog, poultry and other animal manure used to produce fuels. Emissions rates for use of such fuels can be negative.

Fuel producers will not be able to claim 45Z credits starting in 2026 for producing any fuel that uses another fuel on which section 45Z credits are "allowable."

Tax credits can only be claimed currently on fuels sold to third parties that put the fuel to one of three permitted uses. The bill will let credits be claimed on sales to any related party that the fuel producer "has reason to believe" will resell the fuel to a third party.

Fuel producers who are "specified foreign entities" would not be able to claim tax credits starting in 2026. Starting in 2028, fuel producers who are "foreign-influenced entities" would not be able to claim tax credits. These terms are explained in a separate FEOC paper that can be found here.

45Q

Section 45Q allows tax credits for capturing CO2 emissions and putting them to one of three permitted uses. The tax credits currently are $85 a ton for CO2 permanently sequestered underground and $60 ton for CO2 used for enhanced oil recovery or put to a permitted commercial use, like making carbonated beverages. The credit rates are higher for direct air capture.

The bill allows tax credits of $85 a ton to be claimed on all three permitted uses for CO2 captured from industrial facilities or capture equipment put in service after the enactment date. The credit amounts will be adjusted for inflation after 2025 starting in 2027.

No tax credits can be claimed starting in 2026 by any US taxpayer that is a "specified foreign entity" or a "foreign-influenced entity." These terms are explained in a separate FEOC paper that can be found here.

Geothermal Heat Pumps

Geothermal heat pump companies that install and retain ownership of heat pumps that they use to heat or cool buildings have had a hard time navigating around a "limited use property" issue. It is hard to claim ownership of -- and therefore tax credits on -- equipment that cannot be removed. It is like claiming ownership of a chimney on someone else's house. The bill waives the issue.

Fuel Cells

Technology-neutral ITCs at a 30% rate will be allowed on fuel cell projects without the need to demonstrate zero or negative lifecycle greenhouse gas emissions and without the need to comply with wage and apprentice requirements that apply to other tax credits. However, such projects will not qualify for bonus tax credits. These changes apply to fuel cell projects on which construction starts after 2025. Fuel cell projects that begin construction in 2025 qualify for no tax credits due to being too late for legacy ITCs and too early for the change made by the bill for technology-neutral ITCs.

Depreciation

The bill may require adjusting the depreciation assumed in financial models for some projects.

Projects that qualify for legacy or technology-neutral tax credits qualify currently for 5-year MACRS depreciation, meaning such projects can be depreciated over five years on a front-loaded basis.

The bill eliminates this automatic 5-year classification for projects to which the legacy tax credits apply, but only for such projects that start construction after 2024. The main effect is to rule out 5-year MACRS depreciation for geothermal heat pumps since they have until the end of 2034 to start construction and claim legacy tax credits. Any other projects claiming legacy tax credits would have been under construction by the end of 2024.   

Projects on which technology-neutral tax credits are claimed will remain classified automatically as 5-year MACRS property.

The bill restores a 100% depreciation bonus on property acquired after January 19, 2025. Property is considered "acquired" for this purpose no later than when a written binding contract is signed to acquire it. 

The bonus is an option to deduct the full cost of equipment in the year it is placed in service rather than depreciate the equipment over time. It applies to both new and used equipment. However, any used equipment cannot be acquired from a related party. For more information about how the depreciation bonus works, see here.

Companies would be able to choose a 40% or 60% bonus instead of the full 100% bonus on projects that are placed in service in the first tax year ending after January 19, 2025. The option is 60% for projects that have long construction periods and 40% for other projects. This is basically the same percentage bonus for which they would have qualified under current law.

The bill will also accelerate depreciation for many factory owners. 

The part of a factory that is a building must normally be depreciated currently over 39 years on a straight-line basis. Not all structures are buildings for tax purposes. A structure that is merely a shell for the equipment it covers is treated as part of the equipment.

The bill allows the cost of the part of any new factory or improvement to an existing factory that is a building to be deducted immediately. Construction must begin for tax purposes after January 19, 2025 and by the end of calendar year 2028. The work must be placed in service after July 4, 2025 and by the end of calendar year 2030. The IRS can extend the 2030 deadline if an "act of God" prevents the work from being placed in service in time.

There must be a substantial transformation inside the factory of raw materials and components into a different product. The product must be equipment or other "tangible personal property." It cannot be a food or beverage if those items are sold at retail in the same building.

Any taxpayer acquiring an existing factory after January 19, 2025 through the end of calendar year 2028 may also deduct the cost immediately. However, the transaction would have to check three boxes that are in the new statute.

The bonus cannot be claimed on the parts of the building that are used for office space, sales or research activities, software development, engineering services, parking and other functions unrelated to actual manufacturing, production or refining. 

The factory owner will have to repay any depreciation bonus claimed to the US Treasury if the factory stops being used in a qualified manner at any time during the next 10 years after it is put in service. A sale to a new owner will not trigger recapture as long as the new owner continues to use the factory in a qualifying manner.

48C

A 30% investment tax credit can be claimed currently under section 48C of the US tax code for building a new factory or expanding an existing factory to make products for the green economy. 

The Inflation Reduction Act gave the IRS $10 billion in such tax credits to allocate. All of the credits have been allocated. Companies receiving allocations have up to four years to complete construction. Credits that are forfeited for missing deadlines would normally be reallocated. The bill bars any such reallocation.

Direct Pay

State and local governments, tax-exempt entities, rural electric cooperatives, Indian tribes, the Tennessee Valley Authority and Alaska Native Corporations will retain the ability to be paid the cash value of tax credits on projects they own from the US Treasury.

Direct pay will also remain available for private companies for section 45Q credits for capturing carbon emissions, PTCs for making clean hydrogen (for projects that are under construction by the end of 2027) and section 45X credits for manufacturers and mineral producers. Private parties can convert up to five years of such credits into cash at the direct-pay window.

Interest Deductions

The bill makes it less likely that a 30% cap on interest deductions will restrict interest deductions. 

Interest on debt cannot be deducted in a year to the extent a company's net interest expense exceeds 30% of its adjusted taxable income. A company's income for this purpose means its income ignoring interest expense, interest income, NOLs and -- only through 2021 -- depreciation, amortization and depletion. 

The bill allows depreciation, amortization and depletion to be added back to income before applying the 30% cap in tax years after December 31, 2024. Thus, the cap will be a larger number, making it less likely to come into play.

However, to the extent the cap applies, it will prevent capitalized interest from being added to the tax basis on which tax credits and depreciation are claimed. The cap will be applied first to such capitalized interest and then to interest that would otherwise be deductible. Construction-period interest that must be capitalized under section 263A of the US tax code will not be affected.

For more details about the cap, see here.

Master Limited Partnerships

The bill will allow some companies that do carbon capture, store liquefied or compressed hydrogen, generate electricity from certain nuclear power plants, produce electricity or steam from geothermal energy or operate geothermal wells, power plants or heat pumps to restructure as master limited partnerships starting in 2026. 

A master limited partnership is a company whose shares are publicly traded, but that faces only one level of federal income taxes. Most publicly-traded companies must pay corporate income taxes on their earnings and then the earnings are taxed again when they are distributed as dividends to shareholders. For master limited partnerships, there is a single tax at the partner level.

For more information about such partnerships, see here and here.  

BEAT

The House voted for an enhanced base erosion and anti-abuse tax -- called BEAT -- that would have exposed some large tax equity investors and tax credit buyers to potential clawbacks of some tax credits claimed.

The final bill reverts to the BEAT that has been in existing law since 2017, but makes two changes.

The aim of the base erosion tax is to prevent multinational companies from reducing their US taxes by "stripping" earnings across the US border by making payments to foreign affiliates that can be deducted in the United States.  An example of such a payment is interest on an intercompany loan or a payment to a back office in India for services.

The goal is to ensure that multinational companies do not use cross-border payments to reduce their US taxes to less than 10% of an expanded definition of taxable income.

Large corporations must calculate two amounts each year: A and B.

If B is less than A, then the US government collects the entire gap as a tax.

A = 10% of the corporation’s taxable income after adding back two amounts: deductible cross-border payments to affiliates and a percentage of any tax losses claimed that were carried from another year.

B = the corporation’s regular tax liability reduced by all tax credits other than an R&D tax credit.

Claiming tax credits has the potential to create a gap by reducing B.

Congress decided in 2017 when BEAT was enacted that B does not need to be reduced by 80% of renewable electricity production tax credits, investment tax credits for energy assets or low-income housing credits or, if less, 80% of the gap between A and B if B were reduced fully for these tax credits.  

The full tax credits were scheduled to reduce B after 2025. The bill drops this change.

The tax rate used for the calculations was scheduled to increase to 12.5% in 2026. The bill reduces the rate for 2026 and later years to 10.5%.

For more details about how BEAT works, see here.

Semiconductor Fabs

The bill increases an existing investment tax credit in section 48D of the US tax code for investing in new factories or expansions of existing factories -- called "fabs" -- to make semiconductors and semiconductor manufacturing equipment. Any facility on which such tax credits are claimed must be under construction by the end of 2026. Companies entitled to such tax credits can apply to the IRS for cash "refunds."

The bill increases the credit to 35% for property placed in service in 2026 or later.

For more information about this tax credit, see here.