In another positive development, H.R. 1 provides additional bonus depreciation for certain factories built or refurbished in the US. The legislation allows the structures themselves to qualify for expensing to the extent they meet the definition of a production facility — nonresidential real property manufacturing, producing or refining tangible personal property. The Treasury Department will need to clarify several areas of this policy to provide guidance for the manufacturing sector to effectively use this incentive.
Manufacturing will also benefit from H.R. 1’s shift back to EBITDA — earnings before interest, tax, depreciation and amortization — when calculating the amount that can be deducted for business interest expenses. The TCJA changed this calculation, beginning in 2022, to exclude depreciation and amortization, which had a punitive effect for companies investing in capital and other depreciable and amortizable investments and those that finance their capital investments with debt. This change back to EBITDA reduces the impact of this provision for manufacturers and companies investing in the US.
Finally, after TCJA, companies had to amortize their R&D expenses over five years in the US (15 years outside the US). H.R. 1 reinstates full expensing for domestic R&D, encouraging US innovation by helping up-front cash flow and increasing after-tax returns on investment.
H.R. 1 does not stop there. The legislation permanently extends the 20% pass-through deduction (Section 199A) and increases from $1 million to $2.5 million the Section 179 expensing provisions for small businesses, both of which will benefit small manufacturers and pass-through businesses. H.R. 1 also increased the semiconductor manufacturing credit for chip fabrication facilities (Section 48D) from 25% to 35%.
Challenges for the clean energy sector
The notable setback in the bill for manufacturing applies to the clean energy sector. In 2022, the IRA took a novel, comprehensive approach to providing tax incentives across the entire clean energy supply chain. The legislation extended and expanded demand-side incentives and created new incentives for companies to invest in the manufacturing and production of the components and critical minerals that comprise the clean energy technologies themselves. The IRA expanded and extended the clean electricity incentives for zero-emission technologies for more than 10 years, encouraging companies to build wind, solar, geothermal, nuclear and hydropower as well as battery storage. For electric vehicles, the IRA included incentives for the purchase of both passenger and commercial vehicles, and, for the first time, provided targeted credits all the way up the supply chain.
These supply- and demand-side incentives had begun working in tandem with final rules from the Treasury Department, giving the US a competitive edge in the global clean energy supply chain. However, H.R. 1 eliminates almost all of these incentives. The biggest changes are:
- Repeal or early phase-down of the clean electricity tax credits as well as early termination of the EV and energy efficiency incentives
- New foreign entity of concern (FEOC) restrictions applied to many of these policies that will create new compliance costs for taxpayers
- Continued uncertainty in the implementation phase of H.R. 1 as the administration continues to target the clean energy sector
There is no clean energy alternative to these technologies and investments, and energy demand is on the rise. Other technologies will take more time to deliver the additions needed to meet the demands of the grid, especially as the US adds data centers and tries to capitalize on an AI future.
In contrast to the business certainty the permanent extension of TCJA tax cuts provides, the approach of H.R. 1 to clean energy may challenge companies that have already invested in the sector and have capital at risk and that were relying on these incentives for their long-term financial commitments. Under the banner of an “all-of-the-above” approach to energy, Republican policymakers have advocated for policies that encourage all types of technologies — from traditional energy, including oil and gas, to more recent and nascent technologies, including hydrogen and nuclear power. Contrary to this policy, H.R. 1 targets specific clean energy technologies for early repeal, which will undermine manufacturing and economic growth in this sector.
The IRA and H.R. 1 preserved the longstanding rules, established across Democratic and Republican administrations, for determining when a project has “begun construction” — rules originally developed as part of sub-regulatory guidance in IRS Notices 2013-29 and 2018-59. These notices, which were prospective in nature, provided flexibility for developers, offering two clear pathways: (1) incurring 5% of project costs or (2) starting physical work of a significant nature. The IRA applied this guidance to several new credit provisions, including Sections 45Y, 48E, 45Q, 45V, and the CHIPS Act applied it to 48D. H.R. 1 further enshrined these safe harbors in law for purposes of the new FEOC restrictions.
Just three days after H.R. 1 was signed into law, President Trump issued an executive order (EO) directing the Treasury Department to issue guidance within 45 days aimed at strictly enforcing the “beginning of construction” requirements for clean energy tax credits — specifically targeting wind and solar projects. The EO signals a sharp shift in how the administration may seek to interpret and enforce clean energy tax incentive rules.
The EO explicitly singles out wind and solar projects in Sections 45Y and 48E. If the administration attempts to create a narrower interpretation for these code sections alone, much less these technologies alone, it risks violating the Administrative Procedure Act (APA). Taxpayers may look to challenge the Treasury Department’s actions of selectively targeting solar and wind as “arbitrary and capricious.” Courts would also consider the decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), which has been viewed as reducing the power of federal agencies to interpret laws. Treasury does have flexibility in issuing guidance, but the codification of the safe harbors might limit its options, particularly if guidance provides that the same facility is both under construction and not under construction for different purposes of the code.
Understanding the effects of H.R. 1 on the clean energy sector
H.R. 1 includes significant policy benefits rewarding manufacturing. Uncertainty is poison to investment and project finance, and permanent extension of key incentives targeting US capital investments is a clear win. But for manufacturers involved in the clean energy sector, the rapid phase-down and repeal of certain incentives will be harmful. The new EO creates even more uncertainty, particularly for the wind and solar industries, but also for other technologies and credits that are subject to the longstanding rules that determine the beginning of construction. Industry actors, forced to plan for the worst, may delay investment or seek higher returns to compensate for perceived risk. Ultimately, the courts may be left to determine the viability of the administration’s reinterpretations of existing rules, but in the meantime, affected taxpayers in the clean energy space will have to factor some uncertainty into their near-term manufacturing decisions.
