Modified Law Alters Individual Retirement Account Tax Deductions
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, has brought about significant changes to certain energy tax credits under the Inflation Reduction Act of 2022. One of the most notable changes concerns wind and solar projects, which now face stricter foreign entity of concern (FEOC) restrictions.
Accelerated Phaseout for Wind and Solar Projects
Wind and solar projects placed in service after 2027 will lose eligibility for key technology-neutral tax credits unless construction begins by July 4, 2026. This creates an accelerated phaseout, making it crucial for these projects to start construction as soon as possible to maintain eligibility for energy tax incentives.
Prohibited Foreign Entities and Material Assistance
Projects owned, controlled by, or receiving "material assistance" from a prohibited foreign entity (PFE)—defined broadly to include entities tied to China, Russia, North Korea, or Iran, or those with significant foreign influence—are ineligible for related tax credits.
A "prohibited foreign entity" includes "specified foreign entities" such as foreign terrorist organizations, entities on OFAC lists, Chinese military companies, governments or entities incorporated in covered nations, and "foreign-influenced entities" where foreign actors hold significant ownership, control, or intellectual property rights over the project or components.
Material assistance covers supply chain inputs, licensing agreements, debt, contracts, or any arrangement granting effective control or influence by PFEs, whether direct or indirect. Even minority ownership or contractual rights that confer control can trigger disqualification.
Penalties for Overstating Material Assistance Cost Ratio
The Act introduces accuracy-related penalties for understatements of income tax by more than 1% due to overstating the "material assistance cost ratio" of property qualifying for credits under sections 45X, 45Y, or 48E.
FEOC Restrictions for Sections 45X, 45Y, 48E, 45U, and 45Q
FEOC restrictions apply to sections 45X, 45Y, 48E, 45U, and 45Q for tax years beginning after July 4, 2025. These restrictions disallow credit to certain foreign entities and taxpayers who are a "specified foreign entity" or a "foreign-influenced entity."
Under section 45X, FEOC restrictions are in effect for tax years beginning after July 4, 2025, disallowing credit to certain foreign entities. For taxpayers who are a "specified foreign entity" or a "foreign-influenced entity" (without regard to "effective control"), the restrictions apply for tax years beginning after July 4, 2027, under section 45U.
Under section 48E, FEOC restrictions disallow credit to taxpayers who are a "specified foreign entity" or a "foreign-influenced entity" for tax years beginning after July 4, 2025.
Under section 45Q, FEOC restrictions disallow credit to taxpayers who are a "specified foreign entity" or a "foreign-influenced entity" (without regard to "effective control") for tax years beginning after July 4, 2025.
Special Conditions for Sales of Integrated Components under Section 45X
For tax years beginning after Dec. 31, 2026, sales of integrated components under section 45X are credit-eligible only if specific conditions are met.
Enhanced FEOC Restrictions for Wind and Solar Facilities
Enhanced FEOC restrictions apply to wind and solar facilities beginning construction after Dec. 31, 2025.
Placed in Service Deadline for Wind and Solar Facilities under Section 48E
The placed in service deadline for wind and solar facilities under section 48E is Dec. 31, 2027, for projects beginning construction after July 4, 2026.
Other Affected Credits
The Act affects various energy credits, including EV Credits, 30D, 45W4, 30C, Residential credits 25C, 25D, 45L, Production credit 45Y, Investment credit 48E, Nuclear credit 45U, Hydrogen credit 45V, Manufacturing credit 45X, and Clean Fuel credit 45Z.
[1] IRS Notice 2026-01 [2] IRS Notice 2026-02 [3] IRS Notice 2026-03 [4] IRS Notice 2026-04 [5] IRS Notice 2026-05
- The One Big Beautiful Bill Act (OBBBA) has brought about changes in certain energy tax credits under the Influation Reduction Act of 2022, notably affecting wind and solar projects.
- Projects placed in service after 2027 will lose eligibility for key technology-neutral tax credits if construction is not initiated by July 4, 2026.
- Foreign entities of concern (FEOC) restrictions have been imposed on wind and solar projects due to the new act.
- Projects owned, controlled by, or receiving material assistance from prohibited foreign entities (PFE) are ineligible for related tax credits.
- A prohibited foreign entity includes foreign terrorist organizations, entities on OFAC lists, Chinese military companies, governments or entities incorporated in covered nations, and foreign-influenced entities where foreign actors hold significant ownership, control, or intellectual property rights.
- Material assistance covers supply chain inputs, licensing agreements, debt, contracts, or any arrangement granting effective control or influence by PFEs.
- Penalties for understatements of income tax by more than 1% due to overstating the material assistance cost ratio have been introduced.
- FEOC restrictions apply to sections 45X, 45Y, 48E, 45U, and 45Q for tax years beginning after July 4, 2025.
- Under section 45X, FEOC restrictions are in effect for tax years beginning after July 4, 2025, disallowing credit to certain foreign entities.
- The placed in service deadline for wind and solar facilities under section 48E is Dec. 31, 2027, for projects beginning construction after July 4, 2026.
- Sales of integrated components under section 45X are credit-eligible only if specific conditions are met, starting from tax years beginning after Dec. 31, 2026.
- The Act affects various energy credits such as EV Credits, 30D, 45W4, 30C, Residential credits 25C, 25D, 45L, Production credit 45Y, Investment credit 48E, Nuclear credit 45U, Hydrogen credit 45V, Manufacturing credit 45X, and Clean Fuel credit 45Z.
