Key insights
- While the new tax law restricts and repeals some energy credits, state and local governments can still use some of the significant benefits if they act quickly.
- State and local governments can still claim direct pay credits for qualifying energy projects if they follow the updated timelines.
- New rules require state and local governments to vet their suppliers and vendors to verify they don’t violate Foreign Entity of Concern rules.
Take steps now to use energy credits before they expire.
The new tax law known as the One Big Beautiful Bill Act ushered in sweeping reforms to the clean energy credits established by the Inflation Reduction Act (IRA).
While the new law restricts and repeals some of the credits, state and local governments still have meaningful opportunities — if they act strategically. Explore the energy credit options still available to governments.
What energy credits are still available to governments?
Despite some rhetoric, the new tax law doesn’t eliminate all clean energy credits. Many credits remain intact but are now subject to accelerated phase-outs, stricter eligibility, and new compliance hurdles.
For state and local governments, the key mechanism — direct pay (Section 6417) — can still be used.
What is direct pay for state and local governments?
Direct pay allows state and local governments and other tax-exempt entities to receive cash payments from the IRS equal to the value of certain clean energy tax credits.
State and local governments can still claim refundable credits for qualifying energy projects. This is especially relevant for:
- Geothermal and energy storage systems under Sections 48E and 45Y, which remain eligible under original IRA rules with phase-outs beginning in 2033.
- Electric vehicles (EVs) under Section 30D and charging infrastructure under Section 30C, which must meet new deadlines: EVs must be purchased by September 30, 2025, and charging stations must be placed in service by June 30, 2026.
The new stricter rules for solar and wind projects
Solar and wind projects under Section 48E and Section 45Y now face harsher treatment:
- Projects must begin construction by July 5, 2026 to qualify under IRA rules.
- If construction starts later, the project must be placed in service by December 31, 2027 to remain eligible.
New compliance rules related to Foreign Entities of Concern
The new tax law introduced Foreign Entity of Concern (FEOC) rules. These prohibit tax-credit eligibility for projects with:
- Ownership or control by entities from countries like China, Iran, North Korea, or Russia
- Supply chains relying heavily on materials or components from these countries
State and local governments must now scrutinize their vendors and suppliers more carefully than ever before.
What state and local governments should do about energy credits
- Act quickly — Many credits are still available, but deadlines are tighter.
- Vet your supply chain — Verify compliance with FEOC rules to avoid disqualification.
- Leverage direct pay — This tool remains powerful for state and local governments.
- Engage professionals — CLA’s energy credit professionals are actively guiding government officials through these changes.
How CLA can help governments with energy credits
CLA offers a comprehensive suite of services to help state and local governments navigate and capitalize on energy credits. Reach out today to help increase your chances of benefiting before credits expire.