The OBBBA: A Major Shift in Federal Clean Energy Tax Incentives

I. Background

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, marking a significant turn in US clean energy policy. The new law dismantles or narrows many of the clean energy tax credits introduced under the Inflation Reduction Act of 2022 (IRA). For developers, manufacturers, and investors, the message is clear: access to federal tax credits is shrinking, and the rules for eligibility are tightening.

Days after signing the OBBBA, on July 7, President Trump reinforced this policy shift with an executive order (EO 14315) directing federal agencies to end support for wind, solar, and other “green” technologies. Treasury was tasked with enforcing accelerated deadlines and stricter rules to prevent projects from using safe harbors to lock in credits for wind and solar. Together, the OBBBA and EO 14315 set the stage for a new framework that scales back incentives and imposes tougher compliance hurdles, particularly around foreign ownership and supply chain sourcing.

II. New IRS Guidance: “Beginning of Construction” Rules

The IRS acted quickly, following EO 14315 with Notice 2025-42, which provides new rules addressing when wind and solar projects are considered to have “begun construction” for purposes of qualifying for the production tax credit (PTC) and investment tax credit (ITC) under Sections 45Y and 48E, respectively.[1] This notice significantly narrows the pathways available to developers.

• The familiar “5% safe harbor” introduced under Notice 2013-29 and further clarified under various IRS notices, such as Notice 2018-59 and Notice 2022-61 (Prior Notices), is eliminated for most wind and solar projects. Instead, taxpayers must now satisfy the “physical work test,” which requires that physical work of a significant nature begins before July 5, 2026. That said, the 5% safe harbor is preserved for small-scale solar projects (1.5 MW or less), recognizing the unique challenges for distributed generation.
• Qualifying work under the physical work test can include on-site activities such as excavation for wind turbine foundations or installation of racking for solar panels, as well as certain off-site manufacturing activities performed pursuant to binding written contracts. Preliminary steps like permitting or site clearing are not counted toward the physical work test.
• Once construction begins, projects must maintain a continuous program of construction (i.e., the “continuity requirement”). That said, the “continuity safe harbor” from the Prior Notices still exists. If a project is placed in service within four years of the end of the year in which construction began, the project is treated as having satisfied the continuity requirement. If the construction period extends beyond the four-year safe harbor, a solar developer can no longer rely on merely showing “continuous efforts” but must be able to demonstrate a continuous program of construction that involves continuing physical work of a significant nature.
• Fortunately, Notice 2025-42 preserves a list of excusable disruptions, such as weather, interconnection delays, and permitting delays, for purposes of satisfying the continuity requirement.
• Finally, it is worth noting that Notice 2025-42 specially provides that the “beginning of construction” rules set forth in the notice are not intended to address the “beginning of construction” rules for purposes of determining whether a project is subject to the new restrictions on foreign involvement discussed below. Such guidance is currently being prepared by Treasury.

For developers, the takeaway is clear: simply incurring costs or securing contracts will no longer be sufficient. Projects must demonstrate physical progress of a significant nature on or before the July 4, 2026 deadline to remain eligible for PTCs or ITCs without being subject to the accelerated December 31, 2027 placed-in-service deadline.

III. Change Under the OBBBA

New Restrictions on Foreign Involvement

A central feature of the OBBBA is the creation of the Prohibited Foreign Entity (PFE) regime. The goal is to limit foreign influence in the US clean energy sector, especially from countries deemed adversarial to the United States, such as China, Russia, North Korea, and Iran.

The rules operate on two levels:

• Specified Foreign Entities (SFEs): entities directly tied to adversarial governments or named in laws like the Uyghur Forced Labor Prevention Act.
• Foreign-Influenced Entities (FIEs): entities where an SFE has significant influence, such as owning at least 25%, holding certain debt interests, or having contractual control.

Even if a developer isn’t itself an SFE or FIE, projects can still lose eligibility if (1) they begin construction after December 31, 2025, and (2) they rely too heavily on goods or services sourced from PFEs. Treasury will measure this through a “material assistance” test, which compares overall project costs with the portion tied to PFEs. The thresholds will tighten overtime — wind and solar projects must show 40% non-PFE content in 2026, rising to 60% by 2030. Similar rules will apply across technologies, from batteries to inverters to critical minerals.

While official safe harbor tables won’t arrive until late 2026, transitional relief allows developers to rely on IRS Notice 2025-08 and supplier certifications in the meantime. Developers will need to closely track supply chains now, as eligibility will become progressively harder to maintain. As noted above, the “beginning of construction” rules under Notice 2025-42 for purposes of determining whether a project is eligible for PTCs or ITCs are not intended to address the “beginning of construction” rules for purposes of determining whether a project is subject to the “material assistance” restrictions. Until Treasury issues specific guidance, the historic “beginning of construction” rules remain applicable for this purpose.

Key Changes by Credit

• Investment Tax Credit (Section 48E): Wind and solar face early termination deadlines — in order to be eligible for this credit, construction must begin on or before July 4, 2026, or, for projects beginning construction after July 4, 2026, such projects must be placed in service by the end of 2027. As discussed earlier, Notice 2025-42 introduced new rules on when wind and solar projects are considered to have begun construction, which further narrows eligibility. That said, other technologies like geothermal, nuclear, and hydrogen retain longer timelines, with a gradual phaseout starting in 2034.
• Production Tax Credits (Section 45Y): Similarly, wind and solar projects must meet the July 4, 2026 “beginning of construction” date or the December 31, 2027 placed-in-service deadline. Other technologies, such as geothermal, hydrogen, and nuclear projects, are subject to the same phaseout schedule as the Section 48E ITCs.
• Advanced Manufacturing Production Credits (Section 45X): Wind components produced and sold after December 31, 2027 are ineligible for the Section 45X credit. With respect to critical minerals, the OBBBA (1) included metallurgical coal as an applicable critical mineral, and (2) provided for a critical mineral phaseout beginning in 2031 (except for metallurgical coal, which phases out beginning in 2030). In addition, the OBBBA tightened the definition of “battery modules” eligible for the Section 45X credit by clarifying that a battery module is comprised of all other essential equipment needed for battery functionality. The PFE rules also apply here, forcing manufacturers to reevaluate sourcing strategies.
• Carbon Oxide Sequestration Credit (Section 45Q): Credit amounts are equalized at $17 per ton (base) for carbon captured from industrial and power facilities (increased to $85 per ton if the prevailing wage and apprenticeship requirements are satisfied) and $36 per ton (base) for direct air capture (increased to $180 per ton if the prevailing wage and apprenticeship requirements are satisfied), regardless of end use. But PFE restrictions will now limit who can claim or transfer the Section 45Q credits.
• Zero-Emission Nuclear Power Production Credit (Section 45U): The Section 45U credit for electricity production at existing nuclear power plants that were operational at the time of enactment of the IRA (i.e., placed in service prior to August 16, 2022) remains intact through 2032, but with new restrictions on sourcing nuclear fuel from covered nations. Specifically, after December 31, 2027, taxpayers must certify that any nuclear fuel was not sourced from covered nations or “covered entities” (unless pursuant to a binding contract in force prior to January 1, 2023). In addition, SFEs are not eligible to claim the Section 45U credit after the date of enactment of the OBBBA, and FIEs cannot claim the Section 45U credit for tax year beginning after the second anniversary of the date of enactment.
• Clean Hydrogen Production Credit (Section 45V): Eligibility for the per kilogram credit for qualified clean hydrogen production now requires construction to begin before 2028, significantly shortening the runway for new projects. Projects beginning construction after December 31, 2027, will no longer be eligible.
• Clean Production Fuel Credit (Section 45Z): The Section 45Z credit for the production of certain transportation fuel and sustainable aviation fuel has been extended and is available through 2029, but with narrowed eligibility and stricter sourcing rules. PFE restrictions also apply. For example, for fuel produced after December 31, 2025, the enhanced rate for sustainable aviation fuel is no longer available and the credit value for fuels derived from foreign feedstocks would be reduced by 20%.
• Direct Pay and Transferability (Sections 6417 and 6418): Both remain available, but credits cannot be transferred to PFEs (immediately for SFEs and two years later for FIEs).

IV. Looking Ahead

The OBBBA fundamentally reshapes clean energy incentives by accelerating phaseouts, shortening deadlines, and layering in complex new foreign entity restrictions. While certain technologies like nuclear and hydrogen retain more favorable treatment, the overarching trend is a sharp contraction in federal support for wind, solar, and PFE-linked projects.

Below is a list of action items for developers to do now:

• Move quickly on project starts. Wind and solar developers must begin construction on or before July 4, 2026 to preserve credit eligibility while retaining the four-year “continuity safe harbor” to place the project in service; otherwise, such projects that begin construction after the first anniversary of the enactment of the OBBBA have to be placed in service by the end of 2027.
• Focus on the Physical Work Test. For wind and solar projects, developers can no longer “begin construction” by satisfying a 5% safe harbor (other than certain small-scale solar projects of 1.5 MW or less). Paying or incurring costs for the manufacturing of project components is no longer enough — developers must plan for tangible, qualifying construction steps that constitute physical work of a significant nature, both for purposes of showing that construction began and for purposes of maintaining a continuous program of construction.
• Track supply chains. The introduction of the PFE regime intended to limit foreign influence in the US clean energy sector means that developers and manufacturers must strengthen the supplier due diligence process and carefully document sourcing of key inputs to ensure no impermissible material assistance and build strategies to reduce foreign exposure.
• Plan for shorter timelines. Credits phase out sooner for wind, solar, and certain manufacturing components, so consider accelerated construction and financing schedules.
• Monitor Treasury guidance. Future notices (including notices regarding the PFE regime and the beginning of construction rules for the PFE regime) will shape enforcement and safe harbor rules; staying up to date will be critical to avoid disqualification.

In this new era, careful planning and compliance will be essential to securing clean energy tax incentives, and maintaining strong documentation will be key to supporting credit eligibility and ensuring investors and tax credit purchasers that the underlying credits are secure. Please reach out to Gregg M. Benson or your Mintz relationship attorney if you have any questions regarding the changes to the clean energy tax credits under the OBBBA and relevant guidance.

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