Industry News
SUMMARY OF
ONE BIG BEAUTIFUL BILL ACT
SOLAR PROJECT IMPACTS
Prepared by Jeff Prutsman
Facility Innovations Group, Inc.
Following is our summary of the impacts of the One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, on current and future solar energy generation projects. Naturally, we recommend that you use this information as a starting point and seek advice and verification from your tax advisors.
The ITC is terminated for solar projects not placed in service by Dec 31, 2027, but only if construction begins after July 4, 2026.
Projects that start during the next 12 months have four years to be placed in service and receive the ITC.
Projects that start during the next 12 months have four years to be placed in service and receive the ITC.
“Placed in service” means a project is ready to operate. Utility interconnection is not required.
MACRS depreciation for solar energy property is eliminated but is replaced with permanent 100% bonus depreciation.
The IRC §48E Investment Tax Credit (ITC) remains intact for third-party leased commercial solar PV energy property.
New rules prohibit solar tax credit eligibility if “material assistance” is provided by a Chinese-owned entity, for projects that start construction after December 31, 2025.
Any new IRS guidance on the start of construction safe harbor, compelled by a White House executive order, is not likely to survive legal challenge if it adversely changes previously issued guidance.
Any new IRS guidance cannot override enacted law or apply retroactively to projects that have already started physical construction or met the 5% safe harbor.
To preserve ITC eligibility, contract and spend at least 5% of eligible project costs ASAP (e.g., engineering, permitting, surveys, interconnection studies) to preserve the current IRS start of construction safe harbor before new IRS guidance is published.
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The OBBBA explicitly exempts battery energy storage systems from the new December 31, 2027 placed in service deadline and the new investment and production tax credit termination dates.
For battery energy storage, prior law remains intact.
For battery energy storage, prior law remains intact.
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Battery energy storage is not affected.
OBBBA §70513(a)(2)(4)(A) terminates solar investment tax credits for eligible projects that are not placed in service by December 31, 2027, which is about two-and-a-half years from today.
However, OBBBA §70513(g)(5), “Effective Dates,” states that the termination of tax credits under OBBBA §70513(a) only applies to solar energy generation projects that begin construction 12 months after July 4, 2025. This means that OBBBA’s December 31, 2027 placed in service requirement does not apply to systems that start construction within the next 12 months. Under IRS Notice 2018-59, projects that start construction within the next 12 months have four years after construction start to be placed in service, assuming continuous progress after construction start (deadlines may be extended by any force majeure delays).
However, OBBBA §70513(g)(5), “Effective Dates,” states that the termination of tax credits under OBBBA §70513(a) only applies to solar energy generation projects that begin construction 12 months after July 4, 2025. This means that OBBBA’s December 31, 2027 placed in service requirement does not apply to systems that start construction within the next 12 months. Under IRS Notice 2018-59, projects that start construction within the next 12 months have four years after construction start to be placed in service, assuming continuous progress after construction start (deadlines may be extended by any force majeure delays).
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Termination of solar investment tax credits.
The IRS has issued guidance on several occasions since 2013 that define a solar project start of construction safe harbor by either of two methods: (1) start physical construction and maintain continuous progress, which cannot include time and delays for engineering and other soft cost activities, or; (2) spend at least 5% of total eligible project costs and maintain continuous progress, which can include time and delays for engineering, permitting, power grid impact studies and interconnection applications and approvals.
These construction start safe harbors are defined in IRS Notices 2013-29 and 2018-59. While not directly applicable to OBBBA §70513, the OBBBA explicitly codifies these two notices, “as well as any subsequently issued guidance clarifying, modifying, or updating either Notice,” (e.g., IRS Notice 2021-41), under §70512(c), implicitly recognizing and supporting IRS fiat guidelines.
These construction start safe harbors are defined in IRS Notices 2013-29 and 2018-59. While not directly applicable to OBBBA §70513, the OBBBA explicitly codifies these two notices, “as well as any subsequently issued guidance clarifying, modifying, or updating either Notice,” (e.g., IRS Notice 2021-41), under §70512(c), implicitly recognizing and supporting IRS fiat guidelines.
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“Start of construction” defined.
A project’s “placed in service” date is generally the date the solar project is completed and ready and available for its intended use, regardless of whether the interconnecting utility has completed its improvements or granted final permission to operate. See Treasury Regulation §1.46-3(d)(1)(ii), IRS Rev. Rul. 76-256, Private Letter Rulings 200334031 and 201310005, and Sealy Power, Ltd. v. Commissioner, 46 F.3d 382 (5th Cir. 1995). In other words, completion of solar project construction determines the placed in service date. Utility interconnection does not.
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“Placed in service” defined.
OBBBA §70509 terminates MACRS depreciation for solar energy property placed in service after December 31, 2024, which means that solar energy property will revert to 15-year property for racked rooftop and ground mounted, behind the meter equipment and 20-year property for front of the meter (e.g., utility-scale) solar equipment exporting 100% of solar production to the power grid. Fortunately, the OBBBA’s elimination of MACRS depreciation does not matter because asset classes with class lives of 20 years and less are now eligible for permanent 100% bonus depreciation.
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MACRS depreciation eliminated.
OBBBA §70301 allows businesses to depreciate 100% of Qualified Property with a recovery period of 20 years or less (IRC §168(k)(2)(A)(i)(I)), including solar equipment and perimeter security fencing (we distinguish perimeter security fencing only because the IRS has ruled that it does not meet the “functional interdependence” test for solar electricity generation and so is not an eligible cost for the IRC §48E Investment Tax Credit). A solar and battery energy storage project’s depreciable cost basis is total project cost less one-half the value of the investment tax credit. In other words, if the tax credit is 40%, the depreciable cost basis becomes 100% – (40% / 2) = 80% of total project costs.
Incidentally, while not part of the OBBBA, to the extent that non-cash depreciation charges against income generate net operating losses, such net operating losses do not carry back, but they do carry forward indefinitely. Losses carried forward may only be deducted up to 80% of each year’s future year income, until used in full (IRC §172).
Incidentally, while not part of the OBBBA, to the extent that non-cash depreciation charges against income generate net operating losses, such net operating losses do not carry back, but they do carry forward indefinitely. Losses carried forward may only be deducted up to 80% of each year’s future year income, until used in full (IRC §172).
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Permanent 100% bonus depreciation.
The OBBBA preserves the investment tax credit for a commercial business that leases solar energy property to third parties. This is important in states like Florida and North Carolina, which do not allow an independent power producer to sell electricity to third parties under a power purchase agreement within a regulated electric utility’s territory. The OBBBA termination of the IRC §48E Investment Tax Credit on leased solar property applies only to leases of solar water heating equipment and small wind energy systems installed on properties that are residential in character (i.e., that would otherwise be covered under IRC §25D if the system were owned by the lessee).
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Third-party leasing of solar energy property.
The OBBBA creates a plethora of new rules to discourage and reduce Chinese participation in the U.S. renewable energy industry. To briefly summarize these rules, new solar projects lose eligibility for the IRC §48E Investment Tax Credit and §45Y Production Tax Credit if they receive any “material assistance” from a Prohibited Foreign Entity (PFE). While the new PFE rules target China, Iran, Russia and North Korea, the government’s primary focus is to reduce Chinese involvement in the U.S. renewable energy industry.
“Material assistance” means a PFE has a meaningful role in a solar, wind, or energy storage project, through substantial manufacturing of equipment or supply of raw materials used in the project, transfer of intellectual property, direct technical assistance, direct or indirect beneficial ownership of the project, or lending funds to the project.
Unlike the “12 months after enactment” language applicable to other solar-related provisions of the OBBBA that affect tax credit eligibility, the new PFE provisions have a hard deadline applicable to “property the construction of which begins after December 31, 2025.”
While it is not completely clear, “material assistance” probably prohibits the use of Chinese solar modules and inverters, including solar modules and inverters manufactured by U.S. companies with Chinese ownership (e.g., Boviet, Jinko), for tax credit eligibility to be retained by solar projects that start construction after December 31, 2025.
“Material assistance” means a PFE has a meaningful role in a solar, wind, or energy storage project, through substantial manufacturing of equipment or supply of raw materials used in the project, transfer of intellectual property, direct technical assistance, direct or indirect beneficial ownership of the project, or lending funds to the project.
Unlike the “12 months after enactment” language applicable to other solar-related provisions of the OBBBA that affect tax credit eligibility, the new PFE provisions have a hard deadline applicable to “property the construction of which begins after December 31, 2025.”
While it is not completely clear, “material assistance” probably prohibits the use of Chinese solar modules and inverters, including solar modules and inverters manufactured by U.S. companies with Chinese ownership (e.g., Boviet, Jinko), for tax credit eligibility to be retained by solar projects that start construction after December 31, 2025.
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Prohibited Foreign Entity rules.
After passage of the OBBBA on July 4, 2025, the White House issued an executive order three days later that directs the IRS Commissioner to revisit and revise IRS guidance on current renewable energy start of construction policy, requiring new and revised guidance within 45 days of OBBBA enactment (i.e., by August 18, 2025). The directive appears to direct the IRS commissioner to eliminate the start of construction safe harbor guidance described above. If this is indeed the case, we believe the directives in this executive order will not be legally enforceable. Media news reports suggest the executive order fulfilled a promise to Republican holdouts in the House of Representatives, who had threatened to vote against the Senate-passed version of the OBBBA.
The IRS is authorized to interpret IRC provisions, but it must comply with the Administrative Procedure Act (APA). If the IRS substantially changes prior guidance, it is required by the APA to undertake notice and comment rulemaking. Courts would likely rule that a sudden elimination of the start of construction safe harbor policy without following APA procedure is arbitrary and capricious.
Overwhelming legal precedent invalidates new IRS regulations or guidance that unfairly penalizes taxpayers who reasonably relied on prior rules. Under the doctrines of equitable estoppel and reasonable reliance, a taxpayer who begins construction under valid safe harbor guidance can argue that they should not be penalized for a subsequent guidance change — especially where no abuse or manipulation occurred. That said, it is highly unlikely that most taxpayers will need to take legal action. This is because a probability approaching certainty exists that if new guidance comprising a radical departure from previous guidance is issued, a legal challenge will be filed by the owners of an adversely impacted utility-scale solar project… or their tax credit eligibility insurers.
The IRS has historically issued safe harbor guidance on when construction begins for energy projects eligible for the Investment Tax Credit (ITC) under IRC §48. Most recently, IRS Notices 2018-59, 2020-41 and 2021-41 allowed taxpayers who begin construction by incurring at least 5% of project costs, or by starting physical construction work, to preserve ITC eligibility, provided the project is completed within four years after construction start. This framework has been widely relied upon by solar developers, investors, lenders, and tax credit eligibility insurers.
A new IRS rule or notice that limits ITC safe harbor eligibility to projects placed in service by December 31, 2027 — regardless of construction start date — would be subject to legal challenge and would not likely be held legally valid and enforceable, especially if the new guidance tries to retroactively deny the legacy safe harbor rules to projects that have already met one of the two safe harbor requirements before any new guidance is issued.
The IRS is authorized to interpret IRC provisions, but it must comply with the Administrative Procedure Act (APA). If the IRS substantially changes prior guidance, it is required by the APA to undertake notice and comment rulemaking. Courts would likely rule that a sudden elimination of the start of construction safe harbor policy without following APA procedure is arbitrary and capricious.
Overwhelming legal precedent invalidates new IRS regulations or guidance that unfairly penalizes taxpayers who reasonably relied on prior rules. Under the doctrines of equitable estoppel and reasonable reliance, a taxpayer who begins construction under valid safe harbor guidance can argue that they should not be penalized for a subsequent guidance change — especially where no abuse or manipulation occurred. That said, it is highly unlikely that most taxpayers will need to take legal action. This is because a probability approaching certainty exists that if new guidance comprising a radical departure from previous guidance is issued, a legal challenge will be filed by the owners of an adversely impacted utility-scale solar project… or their tax credit eligibility insurers.
The IRS has historically issued safe harbor guidance on when construction begins for energy projects eligible for the Investment Tax Credit (ITC) under IRC §48. Most recently, IRS Notices 2018-59, 2020-41 and 2021-41 allowed taxpayers who begin construction by incurring at least 5% of project costs, or by starting physical construction work, to preserve ITC eligibility, provided the project is completed within four years after construction start. This framework has been widely relied upon by solar developers, investors, lenders, and tax credit eligibility insurers.
A new IRS rule or notice that limits ITC safe harbor eligibility to projects placed in service by December 31, 2027 — regardless of construction start date — would be subject to legal challenge and would not likely be held legally valid and enforceable, especially if the new guidance tries to retroactively deny the legacy safe harbor rules to projects that have already met one of the two safe harbor requirements before any new guidance is issued.
9
White House executive order on IRS start of construction guidance.
In the worst case, were the IRS to issue new guidance consistent with the OBBBA, projects starting construction within 12 months after July 4, 2025 should have four years to complete construction. It is possible that the IRS could impose a December 31, 2027 placed in service deadline, which is roughly two-and-a-half years from the date of this document, but this does not seem legally enforceable if subjected to a court challenge.
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IRS guidance cannot conflict with enacted law.
IRS Notice 2018-59, which updated the solar “start of construction” safe harbor, was issued roughly 4.5 months after the Bipartisan Budget Act of 2018 extended the ITC. In the aftermath of the Inflation Reduction Act, IRS Notice 2022-61 on prevailing wage and apprenticeship was issued in roughly 3.5 months. These and other examples suggest a range of three to five months for any guidance not requiring full APA rulemaking.
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Likely timelines for new guidance.
For companies committed to installing new solar projects, but with a desire to push the major expenditures for such projects into the next fiscal year, we recommend entering into a contract with a deposit payment of at least 5% of project costs as soon as possible, and in any case within the next 45 days, with the deposit funds to be expended on soft cost activities, which, if, necessary, can create “continuous progress” and establish the “start of construction” immediately, while pushing major equipment procurement expenditures at least 12 months into the future.
Immediate qualifying activities that are not equipment procurement or physical construction and that can be reasonably stretched out for up to 12 months include electrical and civil / structural engineering, utility interconnection application and grid impact studies, geotechnical studies
for ground mounted systems, and permit review and permitting by the applicable Authority Having Jurisdiction.
The goals of this approach are:
1. Preserve the 5% of total project costs safe harbor under IRS Notice 2018-59, before
the IRS can issue new guidance that might eliminate the safe harbor;
2. Avoid any potential PFE material assistance issues by commencing engineering and other activities that establish “start of construction” before December 31, 2025 under the current 5% safe harbor; and
3. Have over two years to complete construction, should the new IRS guidance eliminate start of construction safe harbor for new projects and default to the OBBBA’s hard stop, placed in service deadline of December 31, 2027 for tax credit eligibility.
Immediate qualifying activities that are not equipment procurement or physical construction and that can be reasonably stretched out for up to 12 months include electrical and civil / structural engineering, utility interconnection application and grid impact studies, geotechnical studies
for ground mounted systems, and permit review and permitting by the applicable Authority Having Jurisdiction.
The goals of this approach are:
1. Preserve the 5% of total project costs safe harbor under IRS Notice 2018-59, before
the IRS can issue new guidance that might eliminate the safe harbor;
2. Avoid any potential PFE material assistance issues by commencing engineering and other activities that establish “start of construction” before December 31, 2025 under the current 5% safe harbor; and
3. Have over two years to complete construction, should the new IRS guidance eliminate start of construction safe harbor for new projects and default to the OBBBA’s hard stop, placed in service deadline of December 31, 2027 for tax credit eligibility.
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