July 2, 2025
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The H.R. 1 Bill (informally dubbed the "Big Beautiful Bill") introduces major changes to Inflation Reduction Act (IRA) clean energy tax credits, including new deadlines, credit phaseouts, and restrictions related to Foreign Entities of Concern (FEOCs). Below are the key updates.
While Sections 45Y and 48E were originally intended to be “technology-neutral” under the IRA, the Bill introduces specific phaseout rules for solar and wind facilities.
To qualify for the full value of the Section 45Y and 48E credits, solar and wind projects must meet one of the following conditions:
Projects that meet neither condition will receive 0% credit value.
The Bill also introduces FEOC restrictions to Section 45Y and Section 48E credit recipients, which are detailed below.
The original phaseout structure for BESS facilities laid out in the IRA remains intact in the Bill.
That said, the Bill also applies FEOC restrictions to these credits.
Specified Foreign Entity (SFE):
An entity qualifies if it falls under the definition in Section 9901(6) of the FY 2021 William Thornberry National Defense Authorization Act (NDAA), including if it:
(1) Has been designated a foreign terrorist organization by the U.S. Secretary of State under Section 219 of the Immigration and Nationality Act (8 U.S.C. § 1189)
(2) Appears on the Specially Designated Nationals and Blocked Persons List (SDN List) maintained by the Treasury’s Office of Foreign Assets Control (OFAC)
(3) Has been identified by the U.S. Attorney General as being involved in conduct that led to a conviction
(4) Is recognized as a Chinese military company
(5) Is listed under the Uyghur Forced Labor Prevention Act
(6) Is one of the entities named in Section 154(b) of the FY 2024 NDAA, specifically those outlined in paragraphs 1 through 7 on page 47 of Public Law 118-31
(7) Qualifies as a foreign-controlled entity, meaning it is directly or indirectly owned or controlled (defined as having 50% or more voting power, capital, or beneficial interest) by:
• A government of a covered nation (North Korea, China, Russia, or Iran)
• An agency or instrumentality of such a government
• A citizen or national of a covered nation
• An organization formed or headquartered in a covered nation.
Foreign-Influenced Entity Definition (FIE):
A taxpayer is considered a Foreign-Influenced Entity if any of the following apply:
(1) An SFE has direct authority to appoint a covered officer, including:
• A board member
• A supervisor or equivalent
• An executive officer or equivalent.
(2) A single SFE owns 25% or more of the entity
(3) Multiple SFEs collectively own 40% or more of the entity
(4) One or more SFEs hold 15% or more of the entity’s debt (Exception: Certain publicly traded companies are excluded)
(5) In the previous tax year, the entity (or a related party) made a payment to an SFE under a contract, agreement, or other arrangement where the SFE (or related party) has effective control (referred to as the “payment rule”)
• Effective control means influence over key business functions such as:
a) Producing eligible components or
b) Operating energy generation or storage facilities.
c) This applies even without formal control through ownership, appointments, or debt
• Also includes licensing agreements entered into or modified after enactment where the SFE is allowed to:
a) Source components, subcomponents, or critical minerals
b) Direct operational decisions
c) Use intellectual property (IP)
d) Receive royalties (Exception: Bona fide purchases of IP are not disqualifying)
(6) The entity is either:
• Located in a covered nation
• Subject to the jurisdiction of a covered nation
Prohibited Foreign Entity (PFE)
• Includes both Specified Foreign Entities (SFEs) and Foreign-Influenced Entities (FIEs).
Material Assistance from a PFE
A “material assistance cost ratio” test is used to determine whether material assistance occurred
(1) For Section 45Y and 48E:
• Ratio = Total direct costs for all manufactured products (including components) that were mined, produced, or manufactured by a PFE
(2) For Section 45X:
• Ratio = Total direct materials costs for the eligible component that are attributable to a PFE
• Includes constituent materials and subcomponents
• Certain costs may be excluded under the existing contract exception, which requires a binding written contract executed before June 16, 2025
• Note: There is a six-year statute of limitations for material assistance violations
The threshold ratio differs by technology and year.
Section 45Y and Section 48E FEOC Restrictions:
Entities classified as Specified Foreign Entities (SFEs) or Foreign-Influenced Entities (FIEs) will be ineligible to receive tax credits beginning in tax years following the Bill’s enactment.
Additionally, projects that start construction after December 31, 2025 will be denied credits if they receive material assistance from a Prohibited Foreign Entity (PFE).
“Material assistance” is defined by a material assistance cost ratio that exceeds a specified threshold. These thresholds vary by technology and year. See the charts below for the applicable values:
