Tax Implications Under The One Big Beautiful Bill
On July 4, 2025, President Trump signed into law the tax and spending bill colloquially known as the “One Big Beautiful Bill” (OBBB) (and officially as “an Act to provide for reconciliation pursuant to title II of H. Con. Res. 14”). The OBBB, which represents the most significant overhaul of federal tax law since passage of the 2017 Tax Cuts and Jobs Act (TCJA) during President Trump’s first administration, makes permanent and enhances many of the tax-reduction provisions contained in the TCJA that were scheduled to sunset at the end of 2025. Set forth below is a high-level summary of certain key provisions of the OBBB affecting individuals, businesses, employers, international taxpayers and the energy sector. Unless otherwise indicated, Section references herein are to the Internal Revenue Code of 1986, as amended.
It is worth noting that the OBBB does not include any changes to the carried interest rules, nor does it adopt (i) a so-called Revenge Tax (proposed Section 899) that would have imposed additional U.S. tax on U.S. source income derived by taxpayers resident in countries the United States determined imposed unfair taxes on U.S. taxpayers (namely, the OECD Pillar Two 15% minimum tax and digital service taxes) or (ii) an additional tax on the profits derived from litigation finance companies.
KEY TAX IMPACTS TO INDIVIDUALS
Permanent Extension of Individual Tax Rate Cuts (Section 1)
The OBBB makes permanent the individual income tax rate reductions established under the TCJA, averting the scheduled sunset of those reductions at year-end. Thus, the top individual tax rate will remain at 37%.
Temporary Increase in SALT Cap (Section 164)
In one of the more controversial provisions of the TCJA, the deduction (applicable to individuals) for state and local taxes (SALT) was capped at $10,000. Under the OBBB, the SALT cap is temporarily increased to $40,000 ($20,000 in the case of married taxpayers filing separately) for tax years 2025–2029 but reverts to $10,000 after 2029. Additionally, the higher cap under the OBBB is phased out (but not below $10,000) for income over $500,000. State-law “pass-through entity tax” regimes, enacted as a work-around to the original $10,000 SALT cap under the TCJA, are expected to remain relevant for partners and shareholders of S corporations whose income exceed $500,000.
Permanent Extension and Increase of Estate and Gift Tax Exemption Amount
The OBBB makes permanent and increases the estate and gift tax exemption amount established under the TCJA, averting the scheduled sunset of the exemption amount at year-end, which would have resulted in the exemption amount reverting back to its pre-TCJA amount of $5 million (or an estimated $7 million once adjusted for inflation). Under the OBBB, the exemption amount is permanently increased to $15 million (or $30 million for a married couple), indexed for inflation.
Senior Tax Relief
Seniors (65+) receive a new $6,000 bonus deduction ($12,000 in the case of a joint return), on top of the standard deduction.
KEY TAX IMPACTS TO BUSINESSES
Section 199A Qualified Business Income Deduction Enhanced and Made Permanent
The OBBB makes permanent the 20% “qualified business income” deduction that was scheduled to expire at the end of 2025 under the TCJA. The deduction is available to proprietorships, partners and S corporation shareholders on their (or their share of) non-service business income. The deduction was originally added by the TCJA to provide eligible business owners an effective tax rate on their qualified business income that was closer to the 21% corporate tax rate enacted under the TCJA. The phase-out threshold based on taxable income is also increased from $50,000 to $75,000 ($100,000 to $150,000 in the case of a joint return).
Section 179 Increase in Asset Expensing
The OBBB increases the maximum amount (from $1 million to $2.5 million) a taxpayer may expense (rather than capitalize) for purchases of eligible depreciable property (Section 179 Property) placed in service during the taxable year (Maximum Section 179 Expense Amount). The OBBB also increases the phase-out threshold (from $2.5 million to $4 million) for a taxpayer’s total cost of Section 179 Property placed in service during the taxable year, above which the Maximum Section 179 Expense Amount is reduced on a dollar-for-dollar basis. For example, if a taxpayer’s total cost of Section 179 Property placed in service during the taxable year is $5.5 million, it would be allowed to expense only $1 million of the cost (with the remaining portion depreciated under the normal tax accounting rules.)
Permanent Reinstatement of Section 168(k) 100% Bonus Depreciation for Qualified Property
The OBBB permanently reinstates 100% bonus depreciation for qualifying property, including property with a recovery period of 20 years or less, such as certain machinery and equipment, that is acquired and placed in service after January 19, 2025, with a transitional election to utilize reduced percentages for property acquired prior to that date and placed in service during a taxable year ending after that date. There are no retroactive changes to bonus depreciation for the 2023 and 2024 tax years. The TCJA had reduced the portion of qualifying property that was eligible for bonus deprecation.
In addition to bonus depreciation, another elective 100% depreciation allowance is added for qualified production property (QPP) placed in service through 2030. QPP covers newly constructed and certain existing non-residential real estate used for manufacturing, production, or refining of certain tangible personal property in the US. This new depreciation allowance generally applies to property (1) the construction of which begins after January 19, 2025, and before January 1, 2029, or (2) the acquisition of which occurs after January 19, 2025, although in both cases there are additional requirements that must be met.
Permanent Reinstatement of Section 174A/174 Domestic Research and Development Expenditures
The OBBB permanently reinstates immediate expensing of certain domestic research and experimental (R&D) expenditures (including for the development of software) paid or incurred in taxable years beginning after December 31, 2024, under new Section 174A. The TCJA had required such domestic expenditures to be amortized over five years rather than being immediately deductible as permitted under the OBBB. Under Section 174, as amended by the OBBB, foreign R&D expenditures are generally required to be amortized over a 15-year period.
In addition to the expensing changes noted above, there are also favorable tax credits for qualifying R&D activities and small businesses. These include allowing businesses to claim a larger credit for qualifying R&D activities, which now includes a broader definition of eligible expenses, such as software development and certain types of engineering and design work. The OBBB also allows small businesses and startups to receive refundable credits, meaning companies can receive cash returns even if they have not yet generated taxable income.
Excess Business Losses (Section 461(l))
The OBBB makes permanent the excess business loss limitation, which limits the amount of allowable aggregate business deductions for a noncorporate taxpayer to the amount of aggregate gross income or gain attributable to trades or businesses of the taxpayer plus a threshold amount. The threshold amount is indexed for inflation ($313,000 for 2025). The OBBB also changes how aggregate business deductions are calculated by including any “specified loss”—that is, any excess business loss disallowed under Section 461(l) for taxable years beginning after December 31, 2024—in the total deduction amount.
KEY INVESTOR-RELATED IMPACTS
Expansion of Qualified Small Business Stock Gain Exclusion (Section 1202)
The OBBB amends Section 1202(a) to provide a sliding scale of gain exclusion based on a taxpayer’s holding period for qualified small business stock (QSBS) acquired after the OBBB’s date of enactment (July 4, 2025), as follows:
3 years 50% exclusion
4 years 75% exclusion
5 years $100% exclusion
The OBBB does not change the gain exclusion percentage or maximum exclusion amount for QSBS acquired on or before the OBBB’s date of enactment.
For QSBS acquired after the OBBB’s date of enactment, the maximum amount of gain that can be excluded under Section 1202 is increased from $10 million to $15 million, indexed for inflation. The OBBB does not change the alternative maximum exclusion amount based on 10 times a taxpayer’s tax basis in the QSBS.
The OBBB also increases the maximum amount of gross assets a QSBS issuer may own from $50 million to $75 million, indexed for inflation.
Renewal of the Qualified Opportunity Zone Program
The Qualified Opportunity Zone (QOZ) program was established to encourage economic growth in distressed communities by offering tax incentives to investors who reinvest deferred capital gains in QOZs. The OBBB makes significant changes to this program, including making it permanent, introducing rolling ten-year QOZ designations, tightening eligibility, and expanding reporting requirements.
Rolling Ten-Year QOZ Designations
Permanent Program: The OBBB makes the QOZ program permanent, with new QOZs designated every ten years.
Decennial Designation Dates: Starting July 1, 2026, Governors will designate new QOZs, effective for ten years (e.g., January 1, 2027, to December 31, 2036).
Ongoing Renewal: Every ten years, new designations will occur, ensuring continuous opportunity for new zones (e.g., designations on or before July 1, 2036, are effective from January 1, 2037, through December 31, 2046).
Eligibility Changes: The definition of a low-income community is narrowed, making it more selective. Special designation benefits previously available to Puerto Rico have been eliminated.
Tax Incentives for Investors
Deferred Gain Deadline: Deferred capital gains invested in QOZs before January 1, 2027, must be recognized by December 31, 2026. This deadline has not been extended.
Post-2027 Investments:
Capital gains invested in a Qualified Opportunity Fund (QOF) on or after January 1, 2027, are deferred until the earlier of the investment’s disposition or five years from the investment date.
After five years, investors receive a 10% basis increase, meaning only 90% of the deferred gain is taxed if held for at least five years.
For investments in newly created qualified rural opportunity funds, 30% of the deferred gain is added to basis.
Long-Term Exclusion: If a QOF investment is held for at least 10 years (and up to 30 years), no tax is imposed on any gain realized upon sale or exchange of the investment.
Enhanced Reporting and Compliance
Expanded Requirements: The OBBB introduces comprehensive tax return and information reporting requirements for both new and existing QOFs and OZ businesses.
Increased Penalties: Stricter penalties are imposed to ensure compliance with the new rules.
Outstanding Questions
The OBBB leaves some issues unresolved, including:
i. Whether and how existing OZ businesses and projects will be grandfathered when QOZ designations expire.
ii. Additional guidance may be needed to clarify the transition for current participants.
LOW INCOME HOUSING; NEW MARKETS; AND INTEREST EXCLUSION ON RURAL & AGRICULTURAL REAL PROPERTY
Expanded Availability of Low-Income Housing Credits
The low-income housing credit was adopted to incentivize the construction and rehabilitation of affordable rental housing for low-income families. The federal government allocates tax credits to state housing agencies, which then award credits to private developers for construction of affordable rental housing projects. The OBBB includes provisions to reform the credit and its eligibility requirements, which expand the tax credits that can be issued.
Increase State Housing Credit Ceiling Amount: By increasing the credit ceiling, the OBBB increases the amount of available credits.
Modify tax-exempt bond financing requirement: The OBBB allows additional buildings financed with tax-exempt bonds to qualify for housing credits without receiving a credit allocation from the State housing credit.
Permanent Extension of New Markets Tax Credit
Current law includes a New Markets Tax Credit (NMTC). The NMTC permits individual and corporate investors to receive a credit against their federal income taxes for making certain equity investments in qualified Community Development Entities (CDEs). CDEs provide investment capital for low-income communities. The NMTC is set to expire at the end of 2025. The OBBB permanently extends the NMTC.
Exclusion of Interest on Loans Secured by Rural or Agricultural Real Property
Partial Tax Exclusion for Interest Income: The OBBB excludes from gross income 25% of interest income from qualified real estate loans received by FDIC insured banks, domestic entities owned by a bank holding company, state or federally regulated insurance companies, domestic subsidiaries of insurance holding companies or Federal Agricultural Mortgage Corporation.
Expansive Scope of Qualified Real Estate Loans: The partial exclusion applies to loans secured by (1) domestic farms and ranches substantially used to produce agricultural products, (2) domestic land substantially used for fishing or seafood processing, (3) any domestic aquaculture facility, or (4) any leasehold mortgage for such property.
KEY EMPLOYER-RELATED IMPACTS
Employer Tax Reporting for Qualified Tips
The OBBB adds a new Section 224, which temporarily (through the end of 2028) allows an employee to deduct up to $25,000 in “qualified tips” from the employee’s gross income. (Note, Section 224 also applies to non-employee individuals who receive qualified tips.) The deduction, however, is subject to reduction to the extent the employee’s “modified adjusted gross income” exceeds $150,000 ($300,000 in the case of a joint tax return). New Section 224 is effective for taxable years beginning after December 31, 2024. It should be noted that qualified tips are still subject to Social Security tax and Medicare tax.
Under Section 224(d)(1), the term “qualified tips” means tips paid in cash, by card, or through tip-sharing (but excludes non-cash tips, such as a gift basket) received by an individual “in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the [Treasury Department]” (emphasis added). Notably, “qualified tips” only applies to voluntary, non-mandatory tips—mandatory service charges or required gratuities do not qualify. For example, banquet service charges and service charges added for large parties do not qualify.
Not later than 90 days after the enactment of the OBBB (October 2, 2025), the Treasury Department is required to publish a list of occupations which customarily and regularly received tips on or before December 31, 2024.
Employers will be required to separately report on IRS Form W-2 (i) the total amount of tips received by an employee (as reported by the employee to the employer as required under Section 6053(a)) and (ii) the occupation of the employee described in Section 224(d)(1).
Notwithstanding that the exemption for qualified tips is implemented as an employee deduction (presumably to be claimed on the employee’s personal tax return, after taking into account any required reductions based on the employee’s modified adjusted gross income), the OBBB requires the Treasury Department to modify the withholding procedures prescribed in Treasury Regulations promulgated under Section 3402(a) for taxable years beginning after December 31, 2025 to take into account the deduction allowed under Section 224. Although not clear, this language suggests that the modified withholding procedures may authorize employers to reduce or eliminate withholding on the qualified tips received by its employees. For the time being, however, employers should continue to withhold on all tips as required under pre-OBBB law.
Employer Tax Reporting for Qualified Overtime Compensation
The OBBB added a new Section 225, which temporarily (through December 31, 2028) allows an employee to deduct up to $12,500 ($25,000 in the case of a joint tax return) of “qualified overtime compensation” received during the taxable year. If an employee is married, the employee must file a joint tax return with the employee’s spouse to claim the deduction under Section 225. Moreover, the duction is subject to reduction to the extent the employee’s “modified adjusted gross income” exceeds $150,000 ($300,000 in the case of a joint tax return). New Section 225 is effective for taxable years beginning after December 31, 2024. It should be noted that qualified overtime compensation is still subject to Social Security tax and Medicare tax.
The term “qualified overtime compensation” means overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate at which the individual is employed but does not include qualified tips received by the individual.
Employers will be required to separately report on IRS Form W-2 the total amount of qualified overtime compensation tips received by an employee.
Notwithstanding that the exemption for qualified overtime compensation is implemented as an employee deduction (presumably to be claimed on the employee’s personal tax return, after taking into account any required reductions based on the employee’s modified adjusted gross income), the OBBB requires the Treasury Department to modify the withholding procedures prescribed in Treasury Regulations promulgated under Section 3402(a) for taxable years beginning after December 31, 2025, to take into account the deduction allowed under Section 225. Although not clear, this language suggests that the modified withholding procedures may authorize employers to reduce or eliminate withholding on qualified overtime compensation received by its employees. For the time being, however, employers should continue to withhold on all overtime compensation as required under pre-OBBB law.
KEY EMPLOYEE BENEFITS IMPACTS
The OBBB includes a handful of provisions affecting retirement and welfare benefit plans, which include:
Treatment of Direct Primary Care Service Arrangements in Health Savings Accounts
Effective for months beginning after December 31, 2025, direct primary care service arrangements are not considered health plans and thus will not exclude an employee from qualifying for an HSA. A direct primary care service arrangement is medical care by primary care practitioners in exchange for a fixed periodic fee of no more than $150 per month per employee ($300 if multiple individuals are covered). Services excluded from this arrangement are procedures requiring general anesthesia, prescription drugs and laboratory services. In addition, fees paid under a direct primary care service agreement are treated as medical expenses and thus exempt from the prohibition that HSAs cannot pay for insurance.
Changes to Health Savings Accounts Concerning Bronze and Catastrophic Plans
Also effective for months beginning after December 31, 2025, health savings accounts will treat bronze level and catastrophic health plans as high-deductible health plans. As HDHPs, participants in such plans now qualify for HSA plans.
Enhancements and Extension of Paid Family and Medical Leave
The OBBB makes permanent paid medical leave and the tax credit under the Internal Revenue Code (the Code) Section 45S, initially put in place by the TCJA. Employers that choose to offer paid family and medical leave can offset the costs of this benefit with credits against wages up to a percentage of the employee’s wages covered by the employer. If the employer has an insurance policy for such benefits, the credit is the percentage of the benefit applied against total premiums paid for such insurance. To qualify, an employer must have a written family leave policy, but the employer will remain eligible if it has a “substantial and legitimate business reason” for failing to have a written policy in place. Also, family leave benefits which are either mandated by State or local law or paid by State or local government cannot be considered for purposes of the credit under Code Section 45S, nor can the employer take both a business deduction for family leave insurance premiums and apply the credit under 45S. This provision is effective for taxable years beginning after December 31, 2025.
Requiring Verification of Eligibility under the Affordable Care Act (ACA) Exchanges
Effective for taxable years beginning after December 31, 2027, individuals acquiring health insurance through an Exchange are subject to pre-enrollment verification of the individual’s eligibility to enroll in the plan and to receive advance premium payments. Coverage for prior months is available in limited circumstances. Also, unless the applicant is enrolling during a special enrollment period because of a change in family size, verification includes the months prior to the date of application if the applicant applied for advance premium payments for the prior period. Information provided by the individual must include affirmations of household income and family size, whether the individual is an eligible alien, health coverage and eligibility status, and place of residence. Failure to meet verification and affirmation requirements does not make the individual ineligible to enroll in an Exchange plan, only ineligible for ACA premium assistance. In addition, by August 1 of each year, an Exchange must provide verification of the individual’s eligibility to re-enroll in the following year. Finally, the Act gives the Exchange permission to use reliable third-party sources to collect verification information.
Disallowing Premium Tax Credits for Certain Coverage Enrolled in During Special Enrollment Periods
Effective for plan years beginning after December 31, 2025, under the ACA a qualified health plan will not include a plan enrolled in during a special enrollment period provided by the Exchange on the basis of the individual’s expected household income in relation to a certain percentage of the poverty line, and which is not connected to an event or change in circumstances specified by the Secretary for Health and Human Services.
Eliminating the Limitation on the Recapture of Advance Payment of Premium Tax Credit
Effective for taxable years beginning after December 31, 2025, the OBBB removes the limitation on the amount of tax imposed for excess tax credits under the ACA (for example, in the event of increased household income). Under the amendment to the Code, an individual’s tax liability would increase by the excess, if any, of the sum of the advance payments made on behalf of the taxpayer over the sum of the credits the taxpayer would actually be eligible for based on the taxpayer’s income.
Enforcement Provisions With Respect to COVID-Related Employee Retention Credits
Effective as of the date of enactment, the OBBB modifies IRS enforcement of COVID-related employee retention credits (ERC) regarding the advice given, refunds, assessments, and claims on credits. Two important ERC provisions are:
Denial of Refunds Filed After January 31, 2024: The OBBB provides that ERC claims filed after January 31, 2024, are disallowed, regardless of whether such claims were timely and validly filed under existing law. The earliest date the statute of limitations expired for filing ERC claims was April 15, 2024, thus, bona fide claims filed by businesses and tax-exempt organizations related to both calendar years 2020 and 2021 will be denied.
Extension of Statute of Limitations: The OBBB also extends the statute of limitations on IRS assessments relating to the ERC to six (6) years for all applicable calendar quarters. The six (6) year period runs from the latter of (i) the date the original return was filed, (ii) the date the return is treated as filed under Code § 6501(b), or (iii) the date on which the claim for credit or refund for the ERC was made. While some employers claimed the ERC on their original quarterly Form 941, a substantial number of employers claimed the ERC by subsequently filing an amended Form 941-X for the applicable calendar quarter(s) in which they qualified. Accordingly, the OBBB substantially extends the statute of limitations for the majority of employers who claimed the ERC.
Student Loan Repayment Assistance Made Permanent
The OBBB makes permanent the ability for employers to offer tax-free student loan repayment assistance under a §127 qualified educational assistance program. It also indexes the $5,250 qualified educational assistance limit—which includes student loan repayment assistance—starting in 2026. This limit has been fixed at $5,250 since 1979.
“Trump Accounts” With $2,500 Tax-Free Employer Contribution Option
Prior to the OBBB, there was a large push by various groups to create the concept of “Invest America” accounts. The idea has been to provide a financial stake in the capital markets for all children starting at birth so they will learn about investing, benefit from compound growth, and share a common interest in the broad success of American industries.
These “Invest America” accounts have been codified in the OBBB under the new naming convention as “Trump Accounts”. There is a $5,000 contribution limit per child annually. Children born in 2025-2028 will receive a $1,000 contribution courtesy of Uncle Sam. Trump Accounts function similarly to Individual Retirement Accounts (IRAs), whereby investments grow tax-deferred. They will be available starting in 2026.
Trump Accounts will also now be available as an employee benefit. Employers may contribute up to $2,500 per year (indexed for inflation) to the Trump Accounts of employees or their dependents on a tax-free basis. This will require a written plan document, and the program will have to comply with similar nondiscrimination rules that apply to dependent care FSAs.
KEY INTERNATIONAL IMPACTS
Extension and Modification of Tax Cuts and Jobs Act Provisions
The OBBB modifies and makes permanent expiring tax provisions in the TCJA for the “global intangible low-taxed income” (GILTI) – renamed, as the “Net CFC Tested Income” (NCTI), and the “foreign-derived-intangible-income” (FDII) – renamed as the Foreign-Derived Eligible Income (FDDEI). For tax years beginning after December 31, 2025, the OBBB sets the NCTI deduction percentage at 40% and the FDDEI deduction percentage at 33.34%, respectively. Additionally, the OBBB establishes a 10.5% rate for the base erosion anti-abuse tax (BEAT).
Other Noteworthy U.S. International Tax Provisions in the OBBB
The OBBB reinstates Section 958(b)(4), which was repealed in the TCJA. The rule was designed to block downward attributions such that a foreign corporation is not automatically attributed to a U.S. parent. Section 958(b)(4) was reinstated to avoid unintentional creation of additional controlled foreign corporations (CFC) and unnecessary subpart F filings.
The OBBB also includes a remittance transfer tax at a reduced rate of 1% that imposes an excise tax on certain cross-border remittance transfers, effective for transfers sent after December 31, 2025. The tax applies to both U.S. and non-U.S. citizens.
Additionally, the OBBB: (i) includes a new Section 951B, which introduces a new tax regime titled “Foreign Controlled U.S. Shareholders”; (ii) amends Section 863(b) sourcing rules for property produced by a taxpayer in the U.S. but sold outside the U.S. and attributable to a foreign office or fixed place of business; (iii) permanently extends Section 954(c)(6)(C) CFC look-through exception; and (iv) amends Section 960(d)(1) to increase the deemed paid credit for subpart F inclusions from 80% to 90% (the provisions are effective for taxable years after December 31, 2025).
KEY ENERGY AND CLEAN TECHNOLOGY IMPACTS
Foreign Entity Definitions
The OBBB restricts access to certain credits from certain Foreign Entities of Concern (FEOC) and those who receive material assistance from such entities. A Prohibited Foreign Entity (PFE) includes Specified Foreign Entities (SFE) and Foreign Influenced Entities (FIE), each of which are defined below:
An SFE includes the following:
An entity designated as a foreign terrorist organization by the Secretary of State under Section 219 of the Immigration and Nationality Act (8 U.S.C. 1189);
An entity included on the list of specially designated nationals and blocked persons maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC);
An entity alleged by the Attorney General to have been involved in activities for which a conviction was obtained under certain national security laws;
An entity identified as a Chinese military company operating in the United States pursuant to 1260H of the 2021 NDAA;
An entity included on the Uyghur Forced Labor Prevention Act list;
Certain Chinese battery manufacturers; or
A foreign controlled entity (FCE).
A FIE is an entity, excluding certain public corporations, in which:
A SFE has direct or indirect authority to appoint a covered officer (such as a member of the board or an executive officer) of such entity;
A single SFE owns at least 25% of such entity;
Multiple SFEs combined own at least 40% of such entity;
At least 15% or more of the entity’s debt is held in aggregate by one or more SFEs; or
An “applicable payment” to an SFE is made pursuant to a contract, agreement, or other arrangement granting the SFE effective control over qualified facility or energy storage technology or production of eligible components.
Material Assistance from a Prohibited Foreign Entity
Under OBBB, a project’s eligibility for key energy credits turns on whether it receives “material assistance” of goods or service used within a facility. To measure this, the statute uses the Material Assistance Cost Ratio (MACR), which is calculated by subtracting the cost of PFE‑sourced goods from the total cost of goods, and then dividing that result by the total. A project must meet or exceed certain MACR thresholds, which vary by technology and construction year, to remain eligible for the credits.
The MACR calculation differs by credit type. To help taxpayers navigate the MACR test, the Treasury Department is required to release safe harbor cost tables no later than December 31, 2026. Until then, and for a brief period after the tables are released, taxpayers can rely on existing guidance under IRS Notice 2025-08 to estimate the total cost of eligible components and manufactured products. Taxpayers may also rely on certifications from suppliers confirming that the product or any of its components were not sourced from a PFE.
To enforce these requirements, the statute allows the IRS to assess any deficiency tied to an incorrect MACR calculation for up to six years after a return is filed. If a taxpayer overstates the MACR and receives a disallowed credit, a 20% accuracy-related penalty may apply. In the case of direct pay for applicable entities under § 6417, the disallowed credit triggers an excessive payment penalty of 20%. Suppliers that submit false certifications may also face penalties if the error results in a disallowed credit and the tax understatement exceeds certain thresholds.
Accelerated/Bonus Depreciation
Property that qualifies for the Clean Electricity Production Credit (Section 45Y) and the Clean Electricity Investment Credit (Section 48E) will continue to be treated as five‑year MACRS property under Section 168(a). By contrast, any “energy property” as defined in Section 48(a)(3)(A)—including wind, solar, and standalone storage—with construction beginning after December 31, 2024, is removed from the five‑year class designation. These assets may nonetheless qualify for 100 percent bonus depreciation (restored under OBBB) if acquired and placed in service after January 19, 2025 (subject to the utility‑owned property exclusion). In the absence of explicit guidance, taxpayers can rely on Rev. Proc. 87‑56 and the general MACRS‑classification rules to establish an appropriate recovery period, or they may elect the Alternative Depreciation System under Section 168(g) for a 12‑year straight‑line schedule.
Investment Tax Credits (ITC)
Clean Electricity Investment Credit (Section 48E)
Under current law, Section 48E provides a base investment tax credit of 6% for expenditures on zero‑emission electricity or standalone energy‑storage facilities. If prevailing‑wage and apprenticeship requirements (or applicable exceptions) are satisfied, the credit rises to 30%.
Enacted Changes
OBBB terminates the eligibility of wind and solar projects placed in service after December 31, 2027, for Section 48E credits, with an exception for wind and solar projects that begin construction within twelve months of enactment of the legislation. By contrast, other qualifying facilities, such as nuclear, geothermal, and clean‑hydrogen projects, remain on the original statutory timeline, phasing down after 2032 at 100% in 2033, 75% in 2034, 50% in 2035, and 0% in 2036.
The OBBB also disallows the credit for residential solar‑water‑heating or small wind installations leased to third-party customers. Taxpayers who begin construction on qualified facilities after December 31, 2025, are not permitted to receive material assistance from a PFE (as defined above). Taxpayers that are considered a PFE are no longer eligible for § 48E for tax years beginning after enactment. Finally, the OBBB adjusts the domestic content percentages that qualified facilities and energy storage technology must satisfy to qualify for the domestic content bonus as follows:
40% (20% for an offshore wind facility) if construction began before June 16, 2025;
45% (27.5% for an offshore wind facility) if construction begins on or after June 16, 2025, and before January 1, 2026;
50% (35% for an offshore wind facility) if construction begins during the calendar year of 2026; and 55% if construction begins after December 31, 2026.
These percentages are consistent with the current domestic content requirements under current Section 45Y.
Qualifying Advanced Energy Project Credit (Section 48C)
Under Section 48C as previously enacted, taxpayers may claim a 30% investment credit for certified “advanced energy” projects. Congress capped total allocations at $10 billion, including $4 billion reserved for projects in low‑income or disadvantaged areas, and required applicants to secure Treasury certification within two years and place their project in service within two years thereafter.
Enacted Changes
OBBB stipulates that any Section 48C allocation withdrawn for missing the two‑year in‑service deadline will be permanently retired from the $10 billion pool, rather than reissued to another project.
Production Tax Credits
Clean Electricity Production Credit (Section 45Y)
Section 45Y provides a production tax credit of 0.3 ¢ per kWh for electricity generated by zero‑emitting facilities for ten years after they’re placed in service. Meeting prevailing‑wage and apprenticeship rules raises the rate to 1.5 ¢ per kWh.
Enacted Changes
Wind and solar projects that begin construction more than one year after enactment must be placed in service by December 31, 2027, to claim any § 45Y credit. Accordingly, those wind and solar facilities that start construction within the first post‑enactment year do not face a placed in-service deadline. Wind and solar projects starting on January 1, 2025, until July 4, 2025, (i.e., the date of enactment) will receive credits at the full rate. Non‑wind/solar facilities follow the existing post‑2033 phase‑out: 100% credit for 2033 starts, 75% for 2034, 50% for 2035, and zero thereafter. The credit no longer applies to residential solar‑water‑heating or small wind installations leased to third parties. Additionally, new measurement methods for capacity additions grant developers greater flexibility in calculating eligible output. Taxpayers who begin construction on qualified facilities after December 31, 2025, are not permitted to receive material assistance from a PFE (as defined above). Taxpayers that are considered a PFE are no longer eligible for § 45Y for tax years beginning after enactment.
Advanced Manufacturing Production Credit (§ 45X)
§ 45X offers a production tax credit for manufacturing certain eligible components and critical minerals within the United States. Credit amounts differ by component type. Under current law, component credits phase down after 2029 on a five‑year schedule (100% for sales before 2030; 75% in 2030; 50% in 2031; 25% in 2032; and 0% thereafter), while credits for critical mineral extraction remain available indefinitely.
Enacted Changes:
Critical Mineral Phase Out: The permanent credit for critical minerals (other than metallurgical coal) would instead taper off beginning in 2030 as follows:
2030 – 100%; 2031 – 75%; 2032 – 50%; 2033 – 25%; 2034 – 0%
Wind Component Sunset: All wind‑related component credits would be eliminated for items produced and sold in 2028 and beyond.
Metallurgical Coal: OBBB treats metallurgical coal as an eligible component under § 45X. However, metallurgical coal produced after December 31, 2029, would not be eligible for the credit.
Integration Rule Repeal: The option to claim a credit on components incorporated into a larger eligible product sold to an unrelated buyer would be removed.
Foreign‑Entity Exclusions: Any component made with material assistance from a prohibited foreign entity after December 31, 2025, is ineligible, and taxpayers classified as specified foreign entities or foreign‑influenced entities lose § 45X eligibility for tax years beginning after enactment.
Clean Hydrogen Production Credit (§ 45V)
Qualified clean hydrogen produced by the taxpayer is eligible for a per kilogram credit percentage of $0.60 that ranges from 20% to 100% depending on the lifecycle greenhouse gas emissions rate that occurs in the process. The credit applies to the hydrogen produced during the ten-year period that the facility is placed in service.
Enacted Changes: Facilities that commence construction after December 31, 2027, would no longer be eligible for any § 45V credit. No new FEOC rules would apply to § 45V.
Zero-Emission Nuclear Power Production Credit (§ 45U)
Electricity produced by existing nuclear power plants is eligible for a credit equal to 0.3¢ per kWh or, if prevailing wage and apprenticeship requirements or exceptions in constructing, repairing, or altering the facility are met, 1.5¢ per kWh with the credit being reduced as power prices rise above $25 per MWh.
Enacted Changes: Beginning in 2028, taxpayers must certify that any nuclear fuel they use was not sourced from “covered nations” or covered entities—unless acquired under a binding contract in force prior to January 1, 2023. In addition, OBBB bars SFEs from claiming § 45U for tax years beginning after enactment and disqualifies FIEs from claiming § 45U for tax years beginning two years after enactment.
Clean Production Fuel Credit (§ 45Z)
Certain transportation fuel is eligible for a credit equal to the applicable amount multiplied by an emissions factor. The applicable amount for transportation fuel is $0.20 per gallon, and the applicable amount for sustainable aviation fuel is $0.35 per gallon. If prevailing wage and apprenticeship requirements or exceptions are met, the credit is increased by a factor of five ($1 per gallon for transportation fuel and $1.75 per gallon for sustainable aviation fuel). The credit applies to fuel sold before 2028.
Enacted Changes: The proposed legislation extends the availability of the § 45Z credit through the end of 2029 but introduces a suite of significant eligibility and calculation changes starting in 2026. Most notably, the credit would no longer be available for fuel derived from feedstocks sourced outside of the United States, Mexico, or Canada, narrowing the geographic scope of eligible inputs. Additionally, the credit value for fuels derived from foreign feedstocks would be reduced by 20% beginning in 2026. The enhanced rates for sustainable aviation fuel are eliminated for fuel sold after December 31, 2025. In a move to standardize emissions accounting, the proposal bars the use of negative lifecycle emissions rates for most fuels starting in 2026, except in the case of animal-manure-based fuels. For those fuels, the Treasury Department is directed to issue specific lifecycle greenhouse gas emissions rates tailored to the type of manure feedstock (e.g., dairy, swine, or poultry). Further, lifecycle emissions calculations would be required to exclude emissions attributable to indirect land use changes, thereby aligning more closely with international sustainability standards. To prevent double-dipping, the credit is reduced by the amount of any excise tax credit under § 6426(k)(1) for fuel sold after 2024, and the § 6426(k)(1) credit itself would sunset on September 30, 2025. OBBB also directs Treasury to issue guidance clarifying how related-party sales of qualifying fuel should be treated under § 45Z. Finally, the credit would no longer be available to SFEs for tax years beginning after the date of enactment. FIEs would lose eligibility for § 45Z in tax years beginning two years after enactment. These changes reinforce broader FEOC compliance themes present throughout the legislation and could significantly affect multinational producers and joint ventures operating in the biofuels space.
Carbon Oxide Sequestration Credit (§ 45Q)
§ 45Q provides a federal tax incentive for projects that capture carbon dioxide or carbon monoxide emissions and either permanently store them in secure geological formations or utilize them in specific commercial applications such as enhanced oil recovery or chemical production. The credit is designed to encourage decarbonization across heavy industry and power generation by reducing the effective cost of deploying carbon capture, utilization, and storage technology. Eligibility generally hinges on placing qualified capture equipment in service and beginning construction by a statutory deadline. Once in operation, eligible facilities can claim the credit for a 12-year period. The amount of the credit per metric ton varies depending on whether the carbon is permanently sequestered or utilized and can be significantly increased for projects that comply with prevailing wage and apprenticeship standards.
Enacted Changes: OBBB simplifies the credit structure by equalizing the rates for sequestration and utilization for qualified facilities placed in service after a certain date, with the base and enhanced rates fixed across project types. The base rate is now $17 per metric ton of carbon and the rate for qualified facilities placed in service after 2022 is $36. Additionally, the legislation imposes foreign-entity restrictions to prevent credits from flowing to entities tied to certain adversarial governments. Specifically, SFEs become ineligible for the credit in tax years beginning after OBBB’s enactment. Foreign-influenced entities FIEs, including those with material ownership or control links to SFEs, lose eligibility two years later. These restrictions apply regardless of whether the foreign involvement is direct or contractual and are aligned with similar limitations adopted for other clean energy incentives.
Clean Vehicle Credits
Taxpayers may claim a credit for previously owned clean vehicles (§ 25E), new clean vehicles (§30D), and qualified commercial clean vehicles (§ 45W).
Enacted Changes: OBBB eliminates these clean-vehicle credits for vehicles acquired after September 30, 2025, and taxpayers may only claim them for purchases completed by that date.
Residential Energy Credits
Taxpayers may claim several credits or a deduction related to residential clean energy expenditures. The currently available tax incentives are the Energy Efficient Home Improvement Credit (§ 25C), the Residential Clean Energy Credit (§ 25D), the Energy Efficient Commercial Buildings Deduction (§ 179D), and the New Energy Efficient Home Credit (§ 45L).
Enacted Changes: The § 25C and § 25D credits terminate for property placed in service or cost paid after December 31, 2025. The § 179D deduction now terminates for property the construction of which begins after June 30, 2026. The § 45L credit terminates for qualified property acquired after June 30, 2026.
Transferability
Section 6418 preserves the ability to transfer credits, including those under §§ 45Q, 45U, 45X, 45Y, 45Z, and 48E, without imposing a new sunset on transfer elections, but it explicitly prohibits any transfer of these credits to an SPE. Under OBBB, taxpayers would still be free to sell their credits broadly—subject only to the FEOC’s prohibitions on certain purchasers—without any added constraints. In addition, the measure introduces a twelfth sellable credit: the biodiesel incentive under section 40A for small agricultural producers, which had lapsed after 2024. OBBB would resurrect that incentive through the end of 2026 and increase the subsidy from ten cents to twenty cents per gallon. While this maintains transferability in principle, clients should note that the overall value of these elections may be diminished by the accelerated phase‑outs and placed‑in‑service deadlines embedded elsewhere in OBBB. Moreover, OBBB additional foreign‑entity restrictions onto §§ 45Y, 48E, and 45X, rules that do not extend to credits under §§ 45U, 45Q, 45Z, or the broader § 48 investment credits, further complicating structuring for affected taxpayers.
Penalties
Taxpayers who choose to avail themselves of the energy tax credits must be diligent in ensuring compliance with the requirements and restrictions of the sought-after credits. Noncompliance may be accompanied by strict penalties. Taxpayers who understate income by 1% or more due to disallowed energy credits (§§ 45X, 45Y, or 48E) are hit with a penalty equal to 20% of the understatement under a change to § 6662. Credits disallowed due to FEOC or foreign-sourcing restrictions may contribute to a taxpayer’s understatement, so it is critical that clients are diligent in ensuring compliance through their supply chains. Misstatements on certifications made by suppliers regarding domestic content or foreign sourcing after 2025 will be subject to a penalty that is the greater of $5,000 or 10% of credit amount claimed by the taxpayer relying on the misstated certification.
******
Elizabeth Delnegro (elizabeth.delnegro@pierferd.com) and Gregory McKenzie (gregory.mckenzie@pierferd.com) would be pleased to assist in addressing any questions relating to the tax provisions of the OBBB. We welcome the opportunity to provide tailored guidance and support for your needs.
This publication and/or any linked publications herein do not constitute legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, the author(s) and PierFerd assume no liability whatsoever in connection with its use. Pursuant to applicable rules of professional conduct, this publication may constitute Attorney Advertising. © 2025 Pierson Ferdinand LLP.
