The legislative landscape of U.S. clean energy incentives is continually evolving, including recent developments from the One Big Beautiful Bill Act (OBBBA) and guidance on Foreign Entity of Concern (FEOC) requirements.
This consistent evolution of rules and requirements emphasizes the importance of clearly understanding requirements, documenting benchmarking satisfaction, and executing compliance and reporting standards. Simultaneously, as the industry looks for creative and innovative financing and structuring alternatives not reliant on incentive-based returns, it’s imperative to consider modeling, structuring, forecasting and tax considerations.
Our discussion below focuses on FEOC requirements, Beginning of Construction (BOC) thresholds, and tax considerations for alternative financing and investing structures.
The FEOC restrictions, originally part of the Inflation Reduction Act and expanded by the OBBBA, are intended to disincentivize the investment in or sourcing of materials from certain foreign and foreign-influenced entities. Specific tax credits — Sections 45Y, 48E, 45X, 45U, 45Q and 45Z — allocated to FEOC investors are disallowed, and the use of FEOC sourced materials may disqualify these credits for entire projects (known as the Material Assistance Restriction).
The FEOC list targets a broad range of potential entities and organizations. However, the definition of a foreign-controlled entity, which includes any entity under the control of China, Russia, North Korea or Iran, is likely the most impactful. Clean energy developers must conduct extensive due diligence throughout their supply chain to identify the fraction of materials being sourced from disqualified organizations. Different components of each credit are subject to separate Material Assistance Cost Ratios (MACR). Different safe harbors are considered acceptable, depending on the component, tax credit and year construction begins. The IRS has been directed to establish safe harbor tables as well as certification requirements and exceptions for existing contracts by the end of 2026.
The FEOC requirements can be overwhelming and burdensome with significant consequences for non-compliance, making a compliance plan crucial. Work with your advisers to develop due diligence procedures, document requirements and analyze MACR testing results. Critical outside assistance also includes engaging an experienced accounting firm to perform agreed-upon procedures on the viability for information for investors. Additionally, developers must remain diligent in interpreting how to best apply any future guidance and limitations.
As certain tax credits are phased out under the OBBBA, developers must be cognizant of eligible projects that might meet newly established deadlines. The primary consideration should be how a project intends to meet new Beginning of Construction (BOC) requirements and understanding how different BOC rules may apply for different purposes. Under the OBBBA, Sec. 45Y and 48E tax credits must either be placed in service by December 31, 2027, or commence the BOC by July 3, 2026. Additionally, the BOC date will determine the FEOC MACR applied to the project; however, the two BOC dates may not be the same.
Historically, projects’ BOC date was the earlier of either meeting a physical work test requirement or meeting a 5% safe harbor test:
However, recently issued Notice 2025-42 has removed the ability of wind and solar facilities greater than 1.5 megawatts of alternating current (1.5MW(ac)) from using the 5% safe harbor. The notice also now requires a higher continuous program of construction requirement in lieu of the previous continuity requirements for projects that can still use the safe harbor. The changes from Notice 2025-42 are only applicable to test whether a project has met the July 3, 2026, BOC requirement; the 5% safe harbor is unchanged for determining required FEOC compliance.
As many projects will rely on meeting the physical work test, it’s crucial for developers to establish testing procedures. There is no bright line measurement of what is considered “physical work of a significant nature,” and most investors and purchasers of tax credits will require developers to understand and apply industry standards with proper documentation and support. As with FEOC compliance, agreed-upon procedures and examinations of meeting these requirements can be completed as support for positions and to provide investor transparency. Additionally, it’s important to properly document and meet industry standards for the continuity and continuous program of construction requirements.
Clean energy developers have long considered the financing opportunities provided by tax credits to be a temporary solution to the longer-term question of making projects economically viable. In an environment currently focused on phasing out certain credits and heightening the potential for disqualification, developers are looking at creative alternative arrangements to keep projects in the pipeline. These alternatives may include changes to material sourcing, energy production contracts, debt-financing arrangements and alternative equity structures focused on investment returns. Any or all these items could have significant tax implications.
Below are a few alternatives and their potential tax impact to consider:
The potential tax consequences of new or unique financing measures are too numerous and varied to list out in full. The impact and variability of these consequences require significant planning, projecting, and modeling with a qualified team to identify and avoid undesired results. Work proactively with your tax and advisory teams to be clear about potential benefits and burdens of structuring and contractual innovation.
Having tax, advisory and assurance teams in place that are familiar with the clean energy industry can help developers and investors navigate regulatory turbulence and implement a compliance plan to meet objectives and reduce risk. Use them to help you stay up to speed on industry developments and testing to determine what direction is right for your project.
Contact Jonathan Williamson or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.