It’s been nearly a year since Congress enacted new restrictions on many clean energy credits through the One Big Beautiful Bill Act—and there are still as many questions as answers.
Some of the most encompassing and potentially impactful of those are the prohibitions on use of the credits by taxpayers connected to “foreign entities of concern”—entities based in or related to countries deemed to be national security threats such as China, Russia, Iran or North Korea. According to practitioners, the rules are broad enough to ensnare companies or organizations unaware of any connections to those jurisdictions. And even for those who aren’t, the rules can impose a prohibitive administrative burden.
One rule that has recently received increased focus is a provision that can connect a taxpayer to one of the prohibited countries through the taxpayer’s debt. Under the OBBBA’s framework, a taxpayer who has issued at least 15% of its debt to an entity connected to a jurisdiction designated as hostile–or a foreign national from one of those countries–is considered a “foreign-influenced entity” and is blocked from using the tax credits. This applies even if the debt is unconnected to the specific energy project using the incentive.
Given the complexity of many lending and debt arrangements, an expansive reading of the law could implicate many companies with little reason to suspect they’re connected to problematic foreign organizations. And in many cases, the taxpayers could have no realistic way to determine whether or not the debt might be tainted.
“Many of these projects are underwritten with insurance to mitigate risk, and the brokers are slowing to underwrite projects subject to these deals,” said Colette Gagnet, an Eide Bailly partner in the firm’s Energy Incentives practice. “We were seeing this renaissance in U.S. manufacturing, due largely to these incentives. Now we are seeing a good bit of the activity stall. Investors and
manufacturers want to make sure it’s still worth it.''
These rules apply to most of the energy credits enacted by the 2022 Inflation Reduction Act, including the advanced manufacturing production credit under Internal Revenue Code Sec. 45X, the advanced manufacturing investment credit under Sec. 48D, the clean electricity production credit under Sec. 45Y, the clean electricity investment credit under Sec. 48E, and the clean fuel production credit under Sec. 45Z.
One problematic result of a broad interpretation of the statute would be if school districts or other local governments are barred from using the credits, Gagnet said. Schools and governments often use municipal bonds to cover expenses, but have no realistic way to track all of the buyers when the debt is traded, or ensure that none of them are connected to one of the prohibited jurisdictions.
"Why is debt such a controlling factor?" Gagnet asked. "It would be different if it was investment-backed, and you have an investor that wants to see the return on investment and be involved."
While the Department of the Treasury has issued some rules related to the FEOC restrictions, it has not yet addressed the questions related to the 15% debt threshold.
"Examples would be super-helpful," she said. "How does this work in practice, what is the expectation to document these restrictions in a commercially reasonable way?"
Taxpayers are anxiously awaiting more guidance from Treasury as many important deadlines, including the July 4th date to begin construction for wind and solar projects. Taxpayers who do not meet the deadline face an earlier timeframe to put the facility into service, under the OBBBA rules.
The uncertainties have made it more difficult for many projects to secure financing and insurance. For taxpayers assessing the situation, becoming fully informed about the available information and potential questions is key, according to Gagnet.
“A lot of it is education,” she said. “We help manufacturers with production audits, to support them going to market to say that this product is compliant.”
The debt threshold is just one of many ways that a taxpayer can be connected to a foreign entity of concern and blocked from using the energy credits. Companies can also be considered foreign-influenced or foreign-controlled entities if key officers have family members in the prohibited countries, or through a contractual relationship with a tainted firm. The credits can also be barred from use on a project if a certain percentage of its funding or materials comes from a prohibited entity.
Eide Bailly’s Energy Incentives team can help clients take advantage of available energy credits while ensuring they are in compliance with the new requirements.
