The House Ways and Means Committee cleared $3.8 trillion in tax proposals on Wednesday morning by a party-line 26-19 vote after working all night and batting away nearly three dozen Democratic amendments.

The proposals will be folded with proposed spending cuts from other House committees into a massive budget reconciliation bill that the House speaker, Mike Johnson (R-Louisiana), hopes to put through the House by the end of May.

From there, it heads to the Senate, which is expected to make changes.

Republicans would like the bill to be on the President’s desk by July 4.

Many people think a more realistic estimate is August.

The House tax plan is focused on extending 2017 tax cuts that are scheduled to expire at the end of this year and on rolling back parts of the Inflation Reduction Act to help cover the cost.

The plan would keep the current tax credits for renewable energy projects and batteries in place through 2028 to be followed by a three-year phase down in tax credit amounts.

However, complicated FEOC -- for "foreign entity of concern" -- rules would deny tax credits to projects and taxpayers that use equipment or critical minerals from, or have ties to, companies in China, Russia, North Korea and Iran.

A survey by Roth Capital Partners that polled industry insiders and investors who listened to a Wednesday morning webinar found that the industry is more pessimistic about the House tax bill than investors are. Investors averaged 6.3 favorability, with 10 being the most optimistic. The industry was 4.8.

PTCs and ITCs

The US government allows production tax credits (PTCs) for generating electricity from power plants that have zero or negative emissions and investment tax credits (ITCs) for investing in batteries and in such power plants. Project owners must choose one or the other such tax credit. Eleven types of tax credits can be sold to other companies for cash.

PTCs and ITCs on wind, solar and other renewable electricity and battery storage projects that are already in operation will not be affected by the House bill.

Neither will tax credits on new projects that were under construction for tax purposes by the end of 2024. Such projects must be completed within a required period that is generally four years after the year construction started. The tax credits are claimed under sections 45 and 48 of the US tax code.

The House bill would end tax credit sales after a transition period, but generally not for PTCs and ITCs claimed under section 45 or 48.

The bill would accelerate the phase out of new technology-neutral tax credits that took effect this year. Those are tax credits are claimed under section 45Y or 48E of the tax code.

The technology-neutral tax credits apply to projects that are placed in service in 2025 or later.

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 power plants with zero or negative greenhouse gas emissions rather than limiting tax credits to generators who 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 this year. Any developer whose project was under construction by December 31, 2024 has the option to claim tax credits under the old 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.

The technology-neutral tax credits are currently scheduled to start phasing out sometime in the mid-2040s when the emission reduction target for the US power sector set in the Inflation Reduction Act is currently projected by analysts to be achieved.

Under the House bill, developers would have until the end of 2028 to place projects in service to qualify for the technology-neutral PTCs and ITCs at full rates. Projects put in service in 2029 would qualify for such tax credits at 80% of the full rate, in 2030 at 60%, in 2031 at 40% and zero thereafter. Thus, for example, a PTC project put in service in 2029 would qualify for PTCs at 80% of the full rate for the full 10-year PTC period.

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 for bonus tax credits.

Eligibility for the bonus credits would work as before. However, the bonuses would suffer the same haircut in amount as the underlying PTCs or ITCs for projects placed in service during the phase-out period.

There is one exception. The House is not making any effort to fix a drafting error with calculation of the domestic content bonus credit on projects that claim technology-neutral ITCs. The required domestic content percentage to claim a bonus credit on most projects increases from 40% to 55% over time, but it will remain fixed at 40% for the technology-neutral ITC for projects on land and 20% for offshore wind projects. This would have the unusual result that some projects would qualify for a domestic content bonus credit under the technology-neutral ITC rules but not the technology-neutral PTC rules.

45X

Section 45X tax credits are credits claimed by manufacturers for making wind, solar and storage equipment.

The tax credits would end on wind equipment sold after December 31, 2027.

Tax credits for solar and storage components would remain in place but stop after 2031. They had been scheduled to ramp down in amount over a three-year period starting after 2029. The phase out will now be over a two-year period.

Section 45X credits can also be claimed for processing any of 50 different critical minerals. Examples are aluminum, cobalt, lithium and nickel. The tax credits for processors of critical minerals were permanent, but the House bill would end them on the same schedule and ramp-down as the credit for manufacturers.

Hydrogen

Tax credits for producing clean hydrogen would be repealed for any hydrogen facilities that are not under construction for tax purposes by the end of 2025.

However, companies engaged in storing liquified or compressed hydrogen could restructure themselves 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.

Depreciation Bonus

The House bill would restore a 100% depreciation bonus on property acquired and placed in service after January 19, 2025 through the end of 2029. The bonus is an option to deduct the full cost of new equipment in the year it is placed in service rather than depreciate the equipment over time.

Transferability

The ability to sell tax credits to other companies for cash would end two years after the budget reconciliation bill is enacted for seven types of tax credits.

PTCs and ITCs claimed under section 45 and 48 would not be affected.

Thus, for example, the technology-neutral tax credits could only be sold on projects that are under construction within two years after the budget reconciliation bill is enacted.

Section 45X credits for manufacturing wind, solar and storage equipment could only be sold on equipment the manufacturer sells to customers by the end of 2027.

Carbon capture projects would have to be under construction within two years after the reconciliation bill is enacted to sell the section 45Q tax credits.

Section 45Z credits for making sustainable aviation fuel and other clean transportation fuels could not be sold on fuel produced after 2027.

Direct Pay

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

Direct pay would 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 2025) and section 45X credits for manufacturers and mineral processors. Private parties can convert up to five years of such credits into cash at the direct-pay window.

FEOC

There are complicated new FEOC restrictions that are a maze that companies will have to work through before any of the following tax credits can be claimed: technology-neutral PTCs and ITCs on power and battery projects, section 45X credits for manufacturers, section 45Q credits for carbon capture, section 45Z credits for making transportation fuels and section 45U credits for generating nuclear electricity.

The FEOC restrictions do not apply to renewable energy and battery projects on which PTCs or ITCs are claimed under section 45 or 48. Such projects were under construction for tax purposes by the end of 2024.

FEOC: Power

There are two sets of FEOC restrictions in the House bill for the technology-neutral PTCs and ITCs.

The first is a project-level restriction. The other is a restriction on entities that can claim tax credits that starts as a weaker restriction in 2026 and becomes much tougher in 2028.

No tax credits can be claimed on any power or battery project that begins construction more than one year after the budget reconciliation bill is enacted if any “material assistance” is received during construction from a “prohibited foreign entity.” 

The reconciliation bill is expected to be enacted in August. Thus, the deadline to be under construction for tax purposes to avoid the project-level restriction will be around August 2026.

“Material assistance” is the use in a project of any component, subcomponent or critical mineral that was “extracted, processed, recycled, manufactured, or assembled” by a “prohibited foreign entity” or the use of any design that relies on intellectual property held or provided by such an entity.     

“Prohibited foreign entity” is a broad term that covers entities with ties to China, Russia, North Korea or Iran. The ties can be such things as 10% or more Chinese ownership, at least 25% of total debt held by Chinese entities, or payments for services or royalties for use of intellectual property to a single Chinese company that amount to at least 10% of the total such payments -- or to two or more Chinese companies that amount to at least 25% of such payments -- by the entity in a year.

Subcomponents of products -- for example, parts of solar modules -- and critical minerals can be ignored if a number of boxes can be checked.

First, the subcomponents or minerals cannot be acquired directly from a prohibited foreign entity. Second, the subcomponents cannot be uniquely designed for a particular project. Third, they cannot be listed in section 45X as the type of parts of solar, wind and storage equipment on which a manufacturer might claim a section 45X tax credit for manufacturing in the US. Fourth, they cannot be exclusively or predominantly produced by prohibited foreign entities. Fifth, minerals must not be uniquely formulated for use in a particular project. Sixth, minerals must not be exclusively or predominantly produced, processed or extracted by prohibited foreign entities.

Moving to the FEOC restriction at the taxpayer level, technology-neutral PTCs and ITCs cannot be claimed starting in 2026 by any taxpayer that is a "specified foreign entity." 

A “specified foreign entity” is any company that is owned more than 50% by the Chinese, Russian, North Korean or Iranian government, by a company organized or having its principal place of business in one of the four countries, or by CATL, Gotion, BYD, EVE Energy Company, Hithium Energy Storage Technology, companies on the OFAC list or companies that make products that benefit from Uyghur forced labor in Xinjiang in western China.

Starting in 2028, no such tax credits can be claimed by any "foreign-influenced entity."  The ownership restriction drops to 10% and some contractual relationships with specified foreign entities also become a problem.

Making certain types of payments to a prohibited foreign entity would also lead to inability to claim technology-neutral tax credits.

The taxpayer restrictions are tested annually.   

The types of payments that could bar claiming tax credits in a year are dividends, interest, compensation for services, rents, royalties and similar payments to prohibited foreign entities. No single prohibited foreign entity could receive payments that are at least 5% of the total such payments made by the taxpayer during the year "related to the production of electricity or storage of energy."  No two or more prohibited foreign entities could receive payments that are at least 15% of the total such payments made by the taxpayer during the year.

Compliance with payment restrictions must be tested each year for the first 10 years after a project on which a technology-neutral ITC is claimed is placed in service.

Any breach of the payment restrictions in any such year would lead to recapture of the full such ITC on the project.

FEOC: 45X

There are FEOC restrictions at both the product and taxpayer levels that could prevent US manufacturers from claiming section 45X tax credits.

The restrictions on tax credits for products take effect in 2028. US manufacturers will no longer be able to claim tax credits for making two types solar and storage equipment.

The two types are equipment made with "material assistance" from any prohibited foreign entity and equipment that is made under a licensing agreement with a prohibited foreign entity. The licensing agreement would have to have a value of more than $1 million.

Use of stock subcomponents and minerals is not considered "material assistance" if the same six boxes can be checked that were described earlier for the technology-neutral tax credits.

There are also restrictions on taxpayers who can claim section 45X credits. Starting in 2026, tax credits could not be claimed on factory output by any company that is a "specified foreign entity." 

In 2028, the restrictions would become tougher. No section 45X credits could be claimed by any company that is a "foreign-influenced entity" or that makes certain types of payments to any "prohibited foreign entity."  These are the same categories of taxpayers that will not be allowed to claim technology-neutral tax credits on power and battery projects.

Cross-Border Payments

The House bill would increase the US income tax rate on income earned by companies and individuals in other countries that impose "unfair" taxes against US companies by 5% a year until the US tax rate reaches 20%.

This is on top of the taxes the companies or individuals would otherwise pay.     

For example, the US imposes a 30% withholding tax on dividends by US subsidiaries to foreign parent companies and interest by US borrowers to foreign lenders. The withholding rate would increase to as much as 50%. The withholding tax rates are often reduced by bilateral income tax treaties. The House bill would add the additional tax rate to the tax rates in the treaties. Thus, if the treaty rate is 0%, it would move over time to 20%.

Unfair taxes include digital services taxes. Digital services taxes are a share of gross receipts allocated to the taxing country from companies using the internet to sell into the local market or target advertisements to local audiences. Canada and about half of European countries, including France, Spain, Italy and the United Kingdom, have either announced, proposed or already implemented digital services taxes.

Other types of unfair taxes identified in the House bill are top-up taxes imposed as part of the joint effort among OECD countries to prevent a race to the bottom in global tax competition, taxes that discriminate against US companies and exterritorial taxes that are imposed on income that the US does not view as earned in the foreign country.

The higher rates would apply immediately after the bill is enacted.

The US Treasury would publish a list of affected countries and update it quarterly.

45Z

Tax credits for making sustainable aviation fuel and other clean transportation fuels would be extended through 2031. They expire currently after 2027.

Use of foreign feedstocks would be prohibited. Fuel sold after this year would have to be "exclusively derived from a feedstock which was produced or grown in the United States, Mexico or Canada."

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 under the heading "FEOC: Power."

45Q

Section 45Q authorizes tax credits for capturing CO2 emissions and putting them to one of three uses. The tax credits can be claimed for 12 years after the capture equipment is first put in service. They are either $60, $85 or $180 per metric ton of captured emissions, depending on the facts. The tax credit amounts increase over time due to inflation adjustments.

The House bill makes no change in the underlying tax credits.

However, section 45Q tax credits could not be sold to other companies unless construction starts on the capture project within two years after the budget reconciliation bill is enacted.

No tax credits could be claimed starting in 2026 by any US taxpayer that is a "specified foreign entity" or starting in 2028 by any US taxpayer that is a "foreign-influenced entity."  These terms are explained under the heading "FEOC: Power."

The bill would allow carbon capture companies to restructure as master limited partnerships. See the discussion under the heading "Hydrogen."

Geothermal Heat Pumps

Investment tax credits can be claimed currently on geothermal heat pump projects on which construction starts for tax purposes by the end of 2034. These tax credits are claimed under section 48 of the US tax code.     

The House bill would require construction to start by the end of 2031.

Projects on which construction starts in 2030 would qualify for only a 26% base investment tax credit (rather than the 30% base ITC that would apply to projects on which construction starts earlier). Projects that start construction in 2031 would qualify for only a 22% base ITC.     

Tax credits could only be sold on projects that are under construction within two years after the budget reconciliation bill is enacted.

No tax credits could be claimed starting in 2026 by any US taxpayer that is a "specified foreign entity" or starting in 2028 by any US taxpayer that is a "foreign-included entity."  These terms are discussed under the heading "FEOC: Power."