How the OBBBA Transforms the Energy Tax Credit Transfer Market

Initially intended for companies developing alternative energy assets, energy tax credits became available to any business after the enactment of the Inflation Reduction Act (IRA) and subsequent regulations created opportunities for businesses to lower their federal tax liability by buying and selling energy tax credits in a credit transfer market. Now these credits are an essential part of many businesses' tax strategies. 

In fact, the 2025 BDO Tax Strategist Survey found that 51% of middle-market tax leaders plan to take advantage of energy tax incentives this year. But 36% of tax leaders anticipate that changes to certain IRA energy subsidies will present significant challenges in the next 12 months, making it critical for businesses to monitor regulatory developments and adjust their tax credit strategies accordingly.

The One Big Beautiful Bill Act (OBBBA) introduced changes that phase out certain types of energy tax credits and place new restrictions and compliance requirements on projects. Three major changes make energy tax credit planning more complex. Businesses planning to take advantage of energy tax credits – including buyers and sellers – must understand how the changes affect credit transactions and project planning. If they don’t, they risk implementing energy projects that aren’t eligible for tax credits or planning for a transaction that never materializes. 

Read on to learn more about these changes.

1. Wind and Solar Credits Face Accelerated Phaseout

Under the IRA, the Section 45Y wind and solar production tax credit and the Section 48E investment tax credit were available until 2032. However, under the OBBBA, solar and wind projects must now begin construction by July 4, 2026, and be placed in service within four years of the start of construction to be eligible for the credit. If construction begins after that date, a project must be placed in service by December 31, 2027. Otherwise, the project is ineligible for the tax credit. 

Sellers planning or already implementing solar or wind projects need to be aware of the new timeline parameters so that their projects comply with all new requirements and maintain credit eligibility. Buyers interested in purchasing an energy tax credit also need to be aware of the wind and solar phaseout dates, which can impact the selection of a credit seller and the timing of a transaction.

Buyers planning to take advantage of transferable energy credit purchases should plan ahead to secure credit capacity. Though many types of energy credits remain transferable, the supply of available wind and solar credits will tighten in the coming years due to the accelerated phaseout. 

2. New FEOC Rules Complicate Project Supply Chains

The OBBBA introduced new foreign entity of concern (FEOC) rules designed to secure domestic supply chains and reduce U.S. dependence on adversarial countries for critical clean energy materials and technology. These rules significantly increase compliance requirements for projects. They apply to projects that begin construction after January 1, 2026, so their effects will be felt imminently. The FEOC rules create new restrictions at both the entity and project levels: 

• At the entity level, taxpayers cannot claim the tax credits if a project is owned or controlled by a prohibited foreign entity (PFE) as defined under the FEOC rules.
• At the project level, projects cannot receive “material assistance” from a PFE under the FEOC rules as set by a material assistance cost ratio calculation.

The material assistance cost ratio rule requires businesses to trace the origin and cost of every component and material used in their projects, verify whether any suppliers are linked to prohibited foreign entities, and maintain extensive documentation. Navigating these requirements can be particularly challenging for corporate tax teams, especially those already overburdened and under-resourced. Some companies may need to shift sourcing of materials to meet the cost ratio threshold. When they do, they may face supply chain disruptions or higher material costs that increase expenses or delay project timelines. The IRS is expected to release further guidance on the implementation of FEOC rules in 2026, adding to the uncertainty around planning for its impact. 

3. Narrowed Definition of Beginning of Construction Affects Project Planning and Timelines

The IRS has recently tightened the criteria to determine how solar and wind energy development projects can establish construction start dates to qualify for investment or production tax credits. This adjustment may create challenges for some developers. When planning for a transaction, energy credit buyers and sellers need to understand how changes to the beginning of construction rules could impact transaction diligence and timelines. They also need to consider how those timelines impact the applicability of other rules, such as the FEOC rules, and how credit eligibility might be affected.

The beginning of construction was previously determined under either the 5% safe harbor test or the physical work test, but guidance issued under the OBBBA now allows only the physical work test, with an exception for low output solar projects. Developers who previously relied on an equipment procurement strategy to establish beginning of construction dates will now have to demonstrate that significant physical work related to energy property is being performed on an appropriate timeline. They will also need to either make sure facilities are covered under the four-year continuity safe harbor, or to place facilities in service by the end of 2027 to remain eligible for the credit. 

Strategic Recommendations for Credit Buyers and Sellers

Businesses should not be deterred from considering a tax credit purchase strategy by the new rules and complexities introduced by the OBBBA. Energy tax credits remain a highly beneficial tax planning tool. The key to successfully using these credits is long-term planning. Some key considerations for credit buyers and sellers include:

Buyers: Determine projected tax liability for 2026 and engage with sellers early, as tightening compliance requirements could reduce the pipeline of credits available for purchase in the coming years. Discuss the unique benefits of production and investment credits; pricing and payment terms can vary significantly between the two. Consider exploring multiterm commitments to purchase production tax credits from a single facility, as they allow the purchase of tax credits for several years and can be a more strategic approach, depending on a business’s goals.

Sellers: Consider how new rules introduced under the OBBBA may affect project planning. Be prepared for more stringent compliance requirements and potential audits. Understand how these changes impact your project timeline, credit monetization strategy, and potential market demand.

Energy credit buyers and sellers should also consider engaging with an advisor for support. An advisor can help with:

• Beginning of construction compliance and FEOC material assistance analysis
• Prevailing wage and apprenticeship compliance
• Cost segregation and credit calculations
• Transaction facilitation and credit transaction advisory