Trump Administration Announces Clean Energy Tax Credit Enforcement Ramp Up

On July 4th, President Trump signed into law the One Big Beautiful Bill Act (the “Act”), which included a phaseout of incentives for solar and wind generation projects. Projects must either begin construction within one year or be placed in service by 2027 to qualify for the Section 45Y Clean Electricity Production Tax Credit or the Section 48E Clean Electricity Investment Tax Credit. The House’s version of the legislation required a more accelerated phaseout than the Act and only allowed projects that began construction within 60 days of enactment of the bill to be eligible for the tax credits.  In discussions last week with House conservatives who favored the faster phaseout of solar and wind tax credits, which was not adopted in the Act, President Trump promised strict enforcement of the rules, including the beginning of construction requirements, for solar and wind projects to qualify for energy tax credits.

On July 7^th, President Trump issued an Executive Order (“EO”) titled “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources. In the EO, the Trump Administration directs the Treasury Secretary to “take all action as the Secretary of the Treasury deems necessary and appropriate to strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities” within 45 days following the enactment of the Act.

Beginning of Construction Rules

Specifically, the EO directs the Treasury Department to issue new and revised guidance for the beginning of construction requirements, which it states should prevent the “artificial acceleration or manipulation of eligibility” and “restrict the use of broad safe harbors unless a substantial portion of a subject facility has been built.”

Many House conservatives disfavor the current IRS guidance provisions: the Five Percent Safe Harbor and the Physical Work Test. The Five Percent Safe Harbor allows energy projects to demonstrate “beginning of construction” by incurring at least five percent of the total project cost, even if the project isn’t completed within the same tax year. The Physical Work Test allows a taxpayer to establish “beginning of construction” by beginning physical work of a significant nature.

These “beginning of construction” tests are set forth in IRS Notices. Because IRS Notices are informal guidance and not formal guidance, the IRS may withdraw, amend, or issue notices at any time. Taxpayers may rely on the existing IRS Notices 2013-29 and 2018-59, both specifically referenced in the Act, until Treasury and the IRS withdraw and/or issue new guidance.

The “beginning of construction” rules are important not only to retain eligibility for the credits past the termination date for the credit, but also to determine whether a project must meet the foreign entity of concern requirements set forth in the Act.

Foreign Entity of Concern Requirements

The EO also directs the Treasury Secretary to take “prompt action” to implement the enhanced foreign entity of concern (FEOC) restrictions in the Act within 45 days following enactment. The complex FEOC provisions included in the Act limit the ability of “prohibited foreign entities,” as defined in the Act, to claim tax credits for qualified facilities, qualified interconnection property, and energy storage technology that begin construction after December 31, 2025. Taxpayers cannot claim these credits if they engage in sourcing (including, “material assistance”), licensing, or payments to a prohibited foreign entity. The material assistance restriction renders a taxpayer ineligible for the credit if a certain percentage of the value of a project is sourced from one or more prohibited foreign entities. A taxpayer needs to have a ratio higher than the thresholds set forth in the Act to qualify for the credit.

There are some exceptions, including for certain foreign-controlled publicly traded companies. There are also exceptions for certain manufactured products and eligible components acquired pursuant to a binding written contract entered into before June 16, 2025, and that are placed into service before January 1, 2030 (or for wind and solar facilities before January 1, 2028) in a facility the construction of which begins before August 1, 2025.

Key Takeaways

Project developers, particularly of wind and solar projects, should pay close attention to the beginning of construction rules and carefully document steps taken towards compliance. Ensuring that substantiation and documentation requirements are met at the outset will allow for better results during an IRS examination. Tax credit buyers and investors should continue to carefully diligence projects to ensure that energy tax credit requirements are met.

While the focus of the July 7^thEO and promises made in connection with the passages of the Act appear to focus on the new requirements set forth in the Act, the statute of limitations for the IRS to audit tax years dating back to the passage of the Inflation Reduction Act in 2022 remains open, so taxpayers should ensure that they have audit files at the ready to prepare for possible IRS enforcement activity.