GOP Plan to Ax Clean Energy Funds Means Moving Up Green Projects (1)

A House tax proposal that passed early Thursday would eliminate certain green tax incentives enacted by the Inflation Reduction Act and revise the phase-out of others would considerably affect the availability of future clean energy credits, at least during the current administration. The bill will still need to go through the Senate and likely reconciliation.

Under the current proposal, all existing federal electric vehicle tax credits would be eliminated by year end, requiring immediate action to comply with the existing credits constraints. Businesses would have to complete all transactions regarding EVs before the end of this year with a grandfather clause for binding contracts related to commercial vehicles over 14,000 pounds. This means, for example, that a fleet of Tesla Cybertrucks will need to be purchased by year end but that a custom 10-ton EV snowplow would have needed to be already under binding contract before the bill passes if not placed in service this year.

The specific EV tax code sections on the chopping block are the clean vehicle credit under Section 30D, the previously owned clean vehicle credit under Section 25E, and the credit for qualified commercial clean vehicles under Section 45W. All would expire by Jan. 1, 2026. Except for the 45W grandfather clause mentioned above, there is a one-year extension for EV manufacturers with 200,000 or less units sold in the US between 2010 to 2025.

Terminating the Section 30C alternative refueling property credit would curtail the expansion of the EV charging station infrastructure. The effect would be huge on US charging station infrastructure when combined with the termination of the federal grant program under the Unleashing American Energy executive order signed on Jan. 20, 2025.

Another initiative, the new residential energy-efficient home credits under Section 45L, would be eliminated after Dec. 31, 2025, with no grandfather clause for beginning construction, meaning the lease-up or sell of the residential units must occur this year. Terminating new residential energy-efficiency measures under Section 45L is a mixed bag because of the difficulty of qualifying for the Energy Star and Zero Energy Ready standards, resulting in minimal loss to new residential developers from the existing law.

The clean energy (or tech-neutral standard) investment tax credit under Section 48E and the commercial production tax credit under Section 45Y would be phased out for projects placed in service after 2028.This would reduce the credit to 80% for projects that begin producing energy in 2029, to 60% for a project that begins producing energy in 2030, and to 40% for a project that begins producing energy in 2031. On Jan. 1, 2032, new projects wouldn’t be eligible for the credits.

Direct Pay under Section 6417 would remain in place for government, nonprofit and other nontaxable entities such as universities, hospitals, school districts, etc. While the provision would be untouched for now, the proposed phase-out in 2028 for Section 48E projects is just around the corner. As a result, these entities may want to accelerate investment in green energy projects.

Transferability under Section 6418 would be repealed for Sections 45Y/48E projects that begin construction two years after the date of enactment—sometime in mid-2027. Terminating Section 6418 transferability would have an immediate effect on the tax credit marketplace by putting a tight window on buying these tax credits.

Overall, Section 6418 tax credit transferability has been a massively useful tool, and green energy tax credit buyers would notice its termination. The draft legislative language includes the most important information for buyers—namely that there is no proposed retroactive change to the law.

The advanced manufacturing production credit under Section 45X would end for all solar and storage components after Dec. 31, 2031. Transferability for the Section 45X credit would be repealed for components sold after Dec. 31, 2027. Further, an eligible component can’t be made subject to a licensing agreement with a specified foreign entity or foreign-influenced entity worth more than $1 million. These restrictions are further specified in the text as detailed and complex.

The House bill contains several complex and potentially unworkable Foreign Entity of Concern restrictions on Sections 45Y and 48E, which could be applied at the ownership and component level. These restrictions include taxpayers that are a “specified foreign entity” or a “foreign-influenced entity,” and taxpayers that receive “material assistance from a prohibited foreign entity.”

This means that if you have direct or indirect foreign ownership or even debt to a foreign company, these should all be fully vetted before jumping into a major green energy project. FEOC restrictions would have an immediate impact and could stop investment from foreign entities such as Canada and Mexico.

Clean fuel production credits under Section 45Z would be extended through Dec. 31, 2031, with several new transferability limitations. Section 45Q carbon sequestration would remain mostly intact, with some similar transferability restrictions.

The outlook, however, is still optimistic. This is the 55th repeal attempt of the Biden administration’s landmark tax-and-climate measure. Over the previous attempts, 29 made it to the floor of the House, and the other 25 died in committee. The 29 floor votes failed with at least an eight-vote margin.

When looking at congressional districts, overall, about 72% of all job creation and 86% of all private investment in green energy projects have been in Republican districts. So although the partial repeal of green energy credits might be Republican-led, they may not get enough support from own party since the proposed cuts would hurt their own constituents.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Ian Boccaccio is a principal and income tax practice leader at Ryan LLC in New York focused on green energy investing and tax credit transfer monetization.

Scott Stogsdill is national leader of Ryan LLC’s green energy incentives practice in Dallas.

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