Solar tax credit cliff tightens project deadlines

U.S. project developers face a shrinking timeline as federal investment and production tax credits are set to end early, and new import restrictions target Chinese components.

From pv magazine 8/25

On July 4, 2025, the “One Big, Beautiful Bill Act” (OBBBA) was signed into US law. The budget bill includes massive cuts to clean energy federal support.

Under the US Inflation Reduction Act of 2022, solar and wind energy projects were offered a 30% Investment Tax Credit (ITC) or an electricity generation output-based Production Tax Credit (PTC), with a gradual phase-out of the credits beginning in 2032.

The bill marks an early end to what was expected to be a long-term clean energy industrial policy, one that was backed by representatives from both ends of the political spectrum. Despite claiming to support an “all of the above” approach to energy on the campaign trail and in the president’s early days in office, the administration and Congress have targeted solar, wind and electric vehicle incentives for budget cuts.

Now, under the new budget, solar and wind projects that do not begin construction within 12 months of enactment of the OBBBA (by July 2, 2026) or are placed in service after Dec. 31, 2027, are not eligible for the credits. The budget also cut the 30% residential solar and home energy efficiency upgrade tax credit, making projects ineligible if they are not placed in service by the end of this year.

The Republican-backed bill cut the electric vehicle tax credit, while other technologies such as geothermal, nuclear and hydrogen are set to be phased out in 2032, unchanged by the bill.

“Beginning of construction”

Shortly after the heavily lobbied bill was passed, President Donald Trump signed an executive order to further clamp down on solar and wind development.

The order directed the Department of the Treasury to restrict safe harboring of projects, tightening interpretation of the “beginning of construction” language. The order requires that a “substantial portion” of a project is built to secure credits. The order requires the Treasury to enforce this within 45 days of the enactment.

The new guidance, issued in August, “made it harder” for projects to qualify for tax credits, but the changes “were not as bad as rumored” said Keith Martin, partner, Norton Rose Fulbright.

In the new guidance, Treasury discarded the bright-line 5% capital expenditure test for starting construction of solar projects over 1.5 MW. Projects smaller than 1.5 MW can still achieve tax credit eligibility by showing a 5% capital expenditure.

“At a time when we need energy abundance, these rules create new federal red tape. They eliminate long-standing precedent for how companies demonstrate they’ve begun project development,” said Heather O’Neill, president and chief executive officer, Advanced Energy United.

The 5% spend test for larger projects has been replaced with a “less clear facts-and-circumstances approach of looking at the amount of physical work done by a factory on custom-made equipment for the project or at the project site,” said Martin.

To qualify, projects must start “physical work of a significant nature” at the project site. In the past, projects merely had to have “begun” physical work, but under the new guidance it will have to have been “performed.”

“This leaves uncertainty about how much work is required,” said Martin. “The financiers will have to decide where they feel comfortable drawing lines. Many developers relied on physical work in the past to start construction, and the market was able to function.”

Projects that are approved for “start of construction” then have four years, or through the end of 2030, to complete the project to take in the federal tax credits. Anyone wanting more than four years will have to show continuous actual construction — rather than mere continuous efforts — to buy more time, said Martin. Interconnection and other specified delays can be excused for the four-year construction period under facts and circumstances.

The new rules apply to projects starting construction during the period of Sept. 2, 2025 through July 4, 2026, and thereafter the “placed in service” rules take effect. For those projects on which construction starts after July 4, 2026 must be completed by the end of 2027 to qualify.

FEOC

The bill also placed restrictions on component and mineral content from countries designated as foreign entities of concern (FEOC). The act denies technology-neutral tax credits, including the 48E Investment Tax Credit and the 45Y Production Tax Credit to projects that are in violation of FEOC rules. And 45X manufacturing tax credits are denied to US-produced components that exceed allowed thresholds of content from “prohibited foreign entities,” which primarily includes China as well as Russia, Iran and North Korea.

The FEOC restrictions take effect in the tax years beginning after July 4, 2025. Project developers seeking tax credit eligibility must now determine if the project received “material assistance” during construction from a “prohibited foreign entity.”

The IRS is expected to publish tables in late 2026 to calculate what qualifies as “material assistance.”

For solar, projects must contain at least 40% of components or minerals not from prohibited entities for projects starting construction in 2026, increasing to 60% for projects starting construction after 2029. For storage projects, the threshold is 55% for projects that start construction in 2026, increasing to 75% for storage projects starting construction after 2029. “There are significant penalties for getting the material assistance calculations wrong,” said Keith Martin, partner at Norton Rose Fulbright.

A 20% penalty will be imposed on any taxpayer that gets the calculation wrong if the taxpayer ends up paying more than 1% less tax than it should have.

Prohibited foreign entities under FEOC include companies that have direct or indirect interest of 50% or more from “Specified Foreign Entities,” the countries listed above. IRS also applies FEOC restrictions to “Foreign-Influenced Entities” which are entities “influenced” by Specified Foreign Entities (SFE). Influence is determined by an entity’s right to assign a board member or executive officer, by showing at least 25% ownership from an SFE, collective ownership of at least 40% from multiple SFE, or an SFE holding at least 15% of debt in the entity.

Solar resilience

Despite the challenges made by tax credit cliffs and FEOC restrictions, solar is forging ahead. Through April 2025, the Federal Energy Regulatory Commission (FERC) reported that solar represented 77.7% of electric generation capacity added to the US grid. FERC’s “high probability additions” expect continued solar dominance. From May 2025 to April 2028, FERC expects 90 GW of solar, 23 GW of wind, and 19 GW of natural gas. It also expects 24 GW of coal to be retired, as well as 14 GW of natural gas retirements and 1.9 GW of oil.

“Despite this setback, the clean energy industry remains committed to building the future. We’re already driving more than $300 billion in private investment, delivering reliable power, and creating jobs in every region of the country. Stable tax policies would have allowed us to do even more,” said Ray Long, CEO, American Council on Renewable Energy.