CLIENT ALERT / US POLICY
July 25, 2025
Read time: 9 min
On July 23, 2025, the White House released “Winning the Race: America’s AI Action Plan,” a document outlining nonbinding policy goals for federal regulation and support of artificial intelligence (AI). The action plan mirrors many of President Trump’s existing policy aims, including a focus on US manufacturing, deregulation, trade, and content restrictions. This On the Subject summarizes the main objectives set forth in the action plan and provides key takeaways for AI developers, deployers, and consumers.
Key Takeaways
- Emphasis on speed: Federal agencies are directed to accelerate AI innovation by removing regulations that may impede the speed of AI development and by expediting permits for data centers and other AI infrastructure. The administration directs the Office of Science and Technology Policy to launch a request for information from AI developers, deployers, and consumers in order to identify and address regulations that may hinder AI development or deployment. This effort would include identifying and revising or repealing regulations and subregulatory guidance.
- Domestic AI infrastructure: The action plan recommends a variety of approaches to expand AI infrastructure in the United States, including through the use of CHIPS Program Office, US Department of Energy (DOE), US Department of Defense (DOD), and National Science Foundation (NSF) funds to support chip production, grid upgrades, secure data centers, and AI-skilled workers in the United States.
- AI exports, diplomacy, and security: The action plan supports exporting AI technology (hardware, models, software, and standards) to allies and partners in order to promote US values and national security.
Industry Priorities
While the action plan is broadly structured to focus on key “pillars” that represent overarching policy goals, each pillar contains distinct action items in a wide range of industries. The following is a brief summary of key objectives in the action plan, organized by industry.
AI developers
Many aspects of the action plan support AI development and deployment. Two of the more interesting aspects of the action plan that directly implicate AI developers are that it:
- Encourages developers to release AI models that are open-source and open-weight.
- Puts into place certain policies to encourage model development that promotes “free speech” and “American values” and counters influence from foreign adversaries such as China.
The AI action plan specifically requires the US Department of Commerce (DOC) to revise the National Institute of Standards and Technology (NIST) AI Risk Management Framework (RMF) to eliminate references to misinformation; diversity, equity, and inclusion; and climate change. AI developers and other stakeholders that have implemented AI governance frameworks based on the NIST AI RMF, particularly those with contractual obligations to do so, should monitor for updates to the NIST AI RMF and adjust their AI governance accordingly.
By encouraging more open-source and open-weight AI models, the administration appears to be seeking ways to improve access to large-scale computing power for startups and academics. AI developers are also encouraged to partner with the National AI Research Resource so start-ups and academics can rent large-scale AI development infrastructure without entering into long-term contracts. The administration expressed support for National Telecommunications and Information Administration-led programs to help small and mid-sized businesses adopt open-source AI models. Importantly, the action plan makes it clear that the decision “to release an open or closed model is fundamentally up to the developer.”
Semiconductor industry
The action plan expresses support for continued CHIPS-funded manufacturing of semiconductors in the United States. The administration also states that certain environmental laws that may present barriers to new manufacturing opportunities should be removed or revised to advance manufacturing objectives.
Next-generation manufacturing and robotics
The administration explains that in order to support “next-generation manufacturing,” it will mobilize the DOD, DOC, DOE, NSF, and others to invest, via existing grant funding opportunities, in foundational and translational technologies for next-generation robotics, drones, autonomous systems, and related supply chains. The action plan states that the DOC should convene stakeholders to identify and resolve supply chain bottlenecks in US robotics and drone production.
Energy, data centers, and grid infrastructure
The administration outlines support for updating the US electric grid to enable more powerful AI data centers, through both stabilization of the existing grid and use of new energy generation technology such as enhanced geothermal, nuclear fission, and nuclear fusion.
High-security and government data centers
The action plan indicates the administration’s intent to develop federal standards for classified, attack-resistant AI data centers (led by the DOD, the Intelligence Community, the National Security Council, and NIST) and to fast-track agency adoption of those secure compute environments.
Healthcare, energy, agriculture, and other regulated industries
Within specific sectors of the economy that might otherwise be slow to adopt AI, such as the healthcare, energy, and agriculture industries, the administration proposes to launch domain-specific regulatory sandboxes/centers of excellence to allow firms to safely test AI tools and publish shared results with fewer regulatory considerations. The action plan also discusses multi-stakeholder efforts to set AI performance standards and measure productivity gains in sectors such as healthcare, energy, and agriculture.
Defense and national security
In a fast-moving geopolitical environment, the administration states that it will establish an “AI and autonomous systems virtual proving ground,” create a streamlined process to pinpoint and automate priority workflows, and negotiate agreements with cloud and other compute providers that guarantee DOD priority access to large-scale computing in a national emergency. The administration also proposes to transform senior military colleges into centers of AI research, development, and instruction, embedding AI skills and curriculum across degree programs.
Scientific research and datasets
The administration proposes to direct the NSF, DOE, NIST, and other partners to invest in automated, cloud-enabled laboratories across engineering, materials science, chemistry, biology, and neuroscience, and to use long-term agreements to support focused-research organizations that combine AI with high-throughput experimentation.
The action plan charges the National Science and Technology Council’s Machine Learning & AI Subcommittee with setting minimum data-quality standards, requiring federally funded researchers to disclose nonproprietary datasets, creating secure compute environments at the National Science Foundation and DOE and an online portal for the National Secure Data Service, and exploring a whole-genome sequencing program for life on federal lands.
AI assurance, evaluation, and interpretability
The administration proposes to convene a cross-sector consortium (led by NIST and the DOC) to establish new measurement science and interoperable metrics for AI systems. They would also publish Center for AI Standards and Innovation-supported guidelines and resources so every federal agency can run mission-specific model evaluations and confirm legal compliance. The action plan discusses funding testbeds where multi-stakeholder teams can pilot AI in controlled settings across sectors such as agriculture, transportation, and healthcare.
Cybersecurity and critical infrastructure
The action plan calls for a US Department of Homeland Security-led AI Information Sharing & Analysis Center to circulate AI security threat intelligence across critical infrastructure sectors. The Department of Homeland Security will keep current private-sector guidance on remediating AI-specific vulnerabilities, and the Cybersecurity and Infrastructure Security Agency must update its incident and vulnerability response playbooks to weave in AI scenarios and coordination with chief AI officers.
Workforce and skills
The action plan prioritizes AI skill-building across career and technical education, apprenticeships, and employer training, with US Department of the Treasury guidance enabling tax-free reimbursement for AI courses. The plan calls for a national initiative to map high-priority trades (such as electricians and HVAC techs) for AI-infrastructure build-out and fund employer-driven training and apprenticeships.
Biosecurity and life sciences safety
The administration proposes to mandate that federally funded labs use synthesis providers with robust sequence screening and customer verification and develop data-sharing networks to spot malicious orders.
Government operations and procurement
Within the federal government, the action plan calls for:
- Codifying the Chief Artificial Intelligence Officer Council as the government’s main coordination hub for AI adoption and linking it with existing executive branch councils such as the President’s Management Council and Chief Data Officer Council.
- Creating a rapid-detail program so data scientists, software engineers, and other AI specialists can rotate to agencies that need them most.
- Crafting a uniform, government-wide catalog that lets any agency select, customize, and compare compliant AI models and see how peers are using them.
- Launching a General Services Administration-run initiative to move proven AI capabilities and use cases across agencies.
International trade and export controls
With regard to global trade, the action plan proposes that the DOC solicit proposals from industry consortia and, together with the US Department of State, EXIM Bank, Development Finance Corporation, and other agencies, broker export packages that bundle US-origin hardware, models, software, and standards for willing allies. An interagency group would explore using new and existing on-chip location-verification features and stand up a joint DOC – Intelligence Community effort to monitor diversion and expand end-use checks for AI-grade chips. Finally, the action plan tasks DOC with drafting new export controls on currently uncontrolled subsystems of semiconductor manufacturing equipment to close loopholes in the existing regime.
What’s next
While the AI action plan is nonbinding, AI developers and deployers should pay close attention to the wide-ranging and specific policy objectives that the administration sets forth. Binding executive orders related to AI are expected in the coming days and are likely to closely track the policy goals in the AI action plan.
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Our cross-practice team continues to closely monitor developments in AI. Reach out to one of the authors of this client alert or your regular McDermott lawyer to discuss the potential legal implications for your business.
Budget reconciliation’s effect on New York’s Medicaid and Essential Plan funding
CLIENT ALERT / US POLICY
July 23, 2025
Read time: 9 min
The budget reconciliation process resulting in the One Big Beautiful Bill Act, which was enacted on July 4, 2025, contains many significant changes to the Medicaid program. Many of the changes, such as those related to work requirements, provider taxes, and state directed payments, will have nationwide implications. New York will be significantly impacted by these changes: the Kaiser Family Foundation estimates that New York will lose between $90 billion and $150 billion in its federal Medicaid funding over 10 years. The act’s increased scrutiny on managed care organization (MCO) taxes and limitations on premium tax credits for certain immigrants also will affect New York’s funding in a manner that other states are less likely to experience.
With New York’s legislature out of session for the remainder of the year and many provisions in the act not coming into effect until 2026 or later, it remains to be seen how New York will address the changes to its funding.
Managed care organization taxes
New York’s fiscal year (FY) 2025 budget introduced an MCO provider tax, and its FY 2026 budget finalized many of the tax’s details. The tax is intended to be revenue neutral on MCOs. Each MCO pays a per-member monthly tax to the New York Department of Health, which deposits the payments into a “healthcare stability fund.” At the same time, New York increased its capitation payments to MCOs. These increased payments to MCOs prompted an increase in federal matching funds from the Centers for Medicare & Medicaid Services (CMS), the proceeds of which were also deposited into the healthcare stability fund. The increased capitation rates are paid out of the healthcare stability fund, and New York’s FY 2026 budget projected $3.7 billion in state savings remaining in the healthcare stability fund.
Existing federal law requires that MCO taxes, such as New York’s, be uniform and broad based, meaning that they must be applied uniformly to all MCOs in the state, not just Medicaid MCOs. States can, however, apply to CMS for a waiver of that requirement if the state can demonstrate that the net impact of the tax is generally redistributive and the tax amount is not directly correlated to Medicaid payments. New York is one of seven states that obtained a waiver from CMS to implement an MCO tax. In its approval letter to New York (and California), CMS indicated that it would introduce new regulatory requirements to test whether a tax would be “generally redistributive.”
The One Big Beautiful Bill Act implements such a test, stating that a tax will not be considered generally redistributive in three possible scenarios:
- If, within a permissible class, the tax rate imposed on the taxpayer or tax rate group explicitly defined by its relatively lower volume or percentage of Medicaid taxable units is lower than the tax rate imposed on any other taxpayer or tax rate group explicitly defined by its relatively higher volume or percentage of Medicaid taxable units
- If, within a permissible class, the tax rate imposed on any taxpayer or tax rate group based upon its Medicaid taxable units is higher than the tax rate imposed on any taxpayer or tax rate group based upon its non-Medicaid taxable unit
- If the tax excludes or imposes a lower tax rate on a taxpayer or tax rate group based on or defined by any description that results in the same effect as described above
CMS also recently proposed the rule Medicaid Program; Preserving Medicaid Funding for Vulnerable Populations-Closing a Health Care-Related Tax Loophole. This proposed rule makes similar changes to Medicaid managed care taxes in relation to the generally redistributive test.
However, the One Big Beautiful Bill Act has a different transition period for states to adopt changes. The act allows CMS to provide a transition period not to exceed three fiscal years, whereas the proposed rule would only provide a transition period to states whose waivers were approved more than two years before the final rule’s effective date. States such as New York would not fall under the transition period in the proposed rule, which would put New York in severe financial distress. It remains to be seen how CMS finalizes the proposed rule and how the transition period will apply in light of the act.
Provider taxes
The act makes significant changes to provider taxes beyond the MCO tax. Effective immediately, the act prohibits any new provider taxes and does not allow increases to any existing provider taxes. Beginning in FY 2028, expansion states’ provider tax limits will be reduced from the current level (6%) by 0.5% each year until all expansion states reach a 3.5% limit in 2031. New York, like most states, uses provider taxes to finance state share of Medicaid payments.
The Kaiser Family Foundation reports that New York has three or more provider taxes, of which taxes on hospitals fall between 4.01% and 5%. Since New York is an expansion state, any provider tax (except for provider taxes on nursing facility services and intermediate care facility services, which are exempt from the expansion state phase-down) will have to decrease to 3.5% by 2031. Since New York’s hospital provider tax is reportedly between 4% and 5%, the state will not have to address the phase-down for several years.
Limiting premium tax credits for certain immigrants
New York is one of the few states that operates a basic health plan under the Affordable Care Act. The Essential Plan, as it is known in New York, is intended to be a bridge for individuals with incomes too high to meet Medicaid requirements, but who may otherwise have difficulty affording an exchange plan, even with subsidies. New York operates under a waiver, allowing it to provide coverage under the Essential Plan for individuals with incomes between 138% and 250% of the federal poverty level (FPL).
The federal government funds a significant portion of all enrollees in the Essential Plan. It pays New York 95% of the premium tax credit that individuals would have received if they purchased an exchange plan.
While the Essential Plan covers “lawfully present” individuals with income from 138% to 250% of the FPL, it also provides coverage – and federal payments – for lawfully present individuals with income less than 100% of the FPL who are ineligible for Medicaid due to their immigration status. About half a million individuals qualify for the Essential Plan in such a manner, and New York collects federal premium subsidies for those individuals. The Essential Plan and its federal subsidies have proven to be cost effective for New York, allowing it to pay relatively high rates in the Essential Plan and generating excess funding the state has redirected to other healthcare needs.
New York also provides Medicaid coverage to individuals who are not lawfully present. Funding for those individuals cannot include federal dollars, and they are on what is referred to as state-only Medicaid coverage. A New York Court of Appeals decision, Aliessa v. Novello, determined that the state’s constitution requires New York to provide health coverage to such individuals.
Effective for calendar year 2027, the act severely limits the definition of lawfully present aliens such that only aliens with permanent residence, certain aliens from Cuba, and individuals who reside in the United States under the Compact of Free Association will qualify. It also repeals premium tax credit eligibility for lawfully present aliens of any type with income below 100% of the FPL. The result for New York is that a significant portion of individuals currently enrolled in the Essential Plan will lose eligibility and federal funding, and due to the Aliessa decision, will be forced to move to state-only Medicaid coverage with no federal funding.
The result will not only affect New York’s healthcare funding, but providers’ revenue as well. The Essential Plan pays significantly higher rates than Medicaid, and providers’ reimbursement will be negatively impacted as a significant portion of Essential Plan enrollees move to Medicaid coverage with lower reimbursement.
New York’s 1115 redesign waiver
On January 9, 2024, the Centers for Medicare and Medicaid Services (CMS) approved the New York State 1115 Medicaid waiver, “Medicaid Redesign Team” (MRT). The MRT is a long-standing waiver in New York that has continuously evolved. The approved waiver represents the next step in Medicaid redesign in New York and builds on the previous delivery system reform incentive payment program. Initially New York requested $13.52 billion in federal funding for the waiver, but the final waiver was approved for $6 billion in federal funding.
The One Big Beautiful Bill Act codifies the existing CMS requirement that Section 1115 waivers be budget neutral. It specifies that CMS cannot approve an application, renewal, or amendment of a Section 1115 waiver unless budget neutrality is certified. CMS must develop methods to consider savings in subsequent approval periods if expenditures were less under the waiver than they would have been absent the waiver. In the case of a waiver renewal, the budget neutrality certification must be based on data from the duration of the preceding waiver. The act includes $5 million per year for FYs 2026 and 2027 for US Department of Health and Human Services implementation. This policy will be effective starting in January 2027. The MRT waiver will be effective through March 31, 2027, and as a result potential future versions of the waiver will likely be subject to more stringent methods of proving budget neutrality.
Conclusion
All states will be examining the act’s effects on their Medicaid funding and considering how to address decreased funding and increased oversight and management requirements. New York is particularly susceptible to changes implemented by the act because of state policy decisions that are directly addressed by the act. How New York addresses these unique issues remains to be seen but will likely be the topic of much political debate as the provisions take effect.
Corporate taxpayers: Key One Big Beautiful Bill Act changes to international and domestic taxes
CLIENT ALERT / US POLICY
July 15, 2025
Read time: 9 min
On July 4, 2025, US President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law. The legislation introduces significant changes to both international and domestic business tax rules for US taxpayers. While some provisions reflect long-anticipated reforms, others represent major departures from prior law and potential traps for the unwary. In this article, we summarize the most consequential changes affecting multinational enterprises and domestic corporations, including modifications to the foreign tax credit (FTC) regime, the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) regimes’ new looks, and changes to interest expense deductions. We also note key proposals that were considered but ultimately excluded from the OBBBA’s final version.
Unless otherwise noted, all provisions described below are effective for taxable years beginning after December 31, 2025, and are permanent.
(Mostly) helpful changes to foreign tax credit rules
The OBBBA makes several welcome changes to the FTC rules, making it more likely that US companies will be able to use credits.
First, the Section 960(d) haircut that applies to FTCs for foreign taxes imposed on tested income subject to the GILTI regime of Section 951A is reduced from 20% to 10%.
Second, research and experimental (R&E) and interest expenses – and other expenses that are not directly related to Section 951A income – will no longer be allocated to Section 951A income for purposes of Section 904.
The Section 78 gross-up for foreign taxes deemed paid under Section 960(b) with respect to previously taxed earnings and profits (PTEP) distributions is also eliminated.
In a less welcome change, the OBBBA extends the Section 960(d) haircut to foreign taxes imposed on distributions of PTEP attributable to Section 951A inclusions, effective for amounts included after June 28, 2025.
GILTI becomes NCTI and bears more tax
The OBBBA introduces a rebranded version of the prior GILTI regime, now known as net CFC tested income (NCTI). Differentiating NCTI from GILTI, the 10% deemed return on tangible property is eliminated. Elsewhere, the Section 250 deduction is reduced from 50% under prior law to 40%, resulting in an effective tax rate (ETR) of 12.6%, rather than 10.5%.
When factoring in the 10% FTC haircut noted above, the ETR on NCTI will now be up to 14%, an increase from the 13.125% ETR when factoring in the 20% FTC haircut under prior law. These changes increase the residual US tax burden on non-Subpart F controlled foreign corporation (CFC) income but simplify the calculation by eliminating the 10% deemed return on tangible property.
FDII becomes FDDEI in a mixed bag for taxpayers
As a result of the OBBBA, the Section 250 deduction that previously applied to FDII now applies to foreign derived deduction eligible income (FDDEI) and is modified to provide a 14% effective rate.
Two key changes expand the scope of income eligible for the deduction. First, unlike FDII, FDDEI is not reduced by a deemed 10% return on tangible property. Second, interest and R&E expenses are no longer allocated to FDDEI.
In a less welcome change aimed at discouraging offshoring intangible property, FDDEI now excludes any income and gain from the sale or other disposition (including pursuant to a transaction subject to Section 367(d)) of Section 367(d)(4) intangible property and any other property subject to depreciation, amortization, or depletion by the seller. This new exclusion is effective for any sale or other disposition that occurs after June 16, 2025.
Other international provisions
BEAT rate increase to 10.5%
The OBBBA increases the Base Erosion and Anti-Abuse Tax (BEAT) rate from 10% to 10.5%, reversing the scheduled increase to 12.5% for taxable years beginning after December 31, 2025. The legislation also retains the add-back of general business credits under Section 38 for BEAT purposes, which had been scheduled to sunset for taxable years beginning after December 31, 2025.
Elimination of CFC tax year election
The OBBBA eliminates the ability of foreign corporations to elect under Section 898 a US tax year beginning one month earlier than the majority US shareholder’s year. This change, effective for foreign corporation tax years beginning after November 30, 2025, may require short-year filings and could affect FTC allocation.
Changes to pro rata share determinations for Subpart F and NCTI
In a notable change to Subpart F and NCTI inclusion rules, a US shareholder must now include its pro rata share of income for any portion of the year it owns CFC stock, regardless of whether it held the stock on the last day of the CFC’s tax year. Pre-OBBBA law looked at the US shareholder only as of the end of the last day of the CFC’s tax year. Regulations may permit or require a closing of the CFC’s tax year to facilitate compliance.
Elimination of prohibition on downward attribution
After its elimination as part of the Tax Cuts and Jobs Act, Section 958(b)(4) is back and prevents the downward attribution rule of Section 318(a)(3) from causing foreign corporations to be CFCs by way of attribution of stock from a foreign person to a US person. In certain limited fact patterns (particularly with respect to foreign parented groups), downward attribution still could be relevant in situations under the new Section 951B regime if a US corporation has direct or indirect ownership of a foreign corporation that would be a CFC applying downward attribution.
Permanent extension of CFC look-through rule
After several decades of suspense, the OBBBA permanently extends the Section 954(c)(6) CFC look-through rule, providing taxpayers welcome certainty.
Sourcing of certain income from the sale of inventory produced in the United States
The OBBBA extends a new sourcing rule for inventory produced in the US and sold through a foreign branch, which allows up to 50% of such income to be foreign sourced for purposes of the Section 904 foreign tax credit limitation.
Domestic tax provisions
Full expensing for domestic R&E expenditures
On the domestic front, the OBBBA introduces Section 174A, which allows full expensing of domestic R&E expenditures incurred in taxable years beginning after December 31, 2024. Taxpayers may alternatively elect to amortize such expenses over five years. R&E balances from 2022 to 2024 may be amortized under the original five-year schedule, fully deducted in 2025, or split across 2025 and 2026, providing options for taxpayers based on their current tax profile.
The return of the “DA” and some less favorable Section 163(j) changes
The OBBBA also makes significant changes to the prior Section 163(j) interest deduction limitation. Depreciation and amortization (the “DA”) have now returned to the Section 163(j)(8) definition of adjusted taxable income (ATI), which forms the basis for calculating a taxpayer’s business interest expense limitation. Accordingly, ATI is now based on earnings before interest, taxes, depreciation, and amortization rather than earnings before interest and taxes for taxable years beginning after December 31, 2024, with the Section 163(j) business expense limitation remaining 30% of that updated ATI.
However, effective for taxable years beginning after December 31, 2025, Subpart F, GILTI, Section 78, and related deductions will be excluded from Section 163(j) ATI. The OBBBA also introduces coordination rules that subject capitalized interest (under Sections 263 and 263A) to the Section 163(j) business interest expense limitation before any noncapitalizable business interest expense can be deducted. Any Section 163(j) deferred business interest expense carryforward will be treated as not subject to capitalization in future years, resulting in future capitalized interest still being offset prior to any noncapitalized interest carryforward.
100% bonus depreciation extended permanently with temporary bonus depreciation domestic factory property
Elsewhere, under Section 168(k), the OBBBA restores 100% bonus depreciation for property acquired after January 19, 2025. Taxpayers may elect 40% (or 60% for long production property) expensing for the first tax year ending after that date. The OBBBA also introduces a new deduction under Section 168(n) for investments in domestic factory property, though further guidance will be needed to determine its exact scope and interaction with other provisions. For Section 168(n) to apply, construction of the domestic factory property must begin after January 19, 2025, and prior to January 21, 2029, and must be placed in service before January 1, 2031.
Research credit restrictions
On the research credit front, the OBBBA updates the language in Section 280C(c)(1) in a manner that appears to foreclose the opportunity for a double benefit through Section 59(e) amortization with respect to domestic R&E. Similarly, the OBBBA clarifies that R&E expenses must, rather than the prior may, qualify as Section 174A expenses to be creditable for research credit purposes.
New charitable contribution cliff and executive compensation control group
Other notable changes include a 1% floor on corporate charitable contribution deductions and an expansion of the Section 162(m) $1 million executive compensation deduction limit to apply on an aggregated controlled group basis. The 1% floor on corporate charitable contributions could create a harsh cliff effect for corporations falling just shy of the 1% mark in any taxable year, though other deductions may be available.
Proposals not included
Likely as significant as what the OBBBA does is what it does not do. Several high-profile proposals were considered but ultimately excluded from the final version of OBBBA, including:
- The Section 899 retaliatory tax
- A high-tax exception to BEAT
- Anti-roundtripping rules
- An increased stock buyback excise tax
- A corporate state and local tax deduction cap
- A preferential 15% rate for manufacturing income.
The exclusion of the Section 899 retaliatory tax comes as a result of the Trump administration’s ongoing negotiations with foreign countries and the Organisation for Economic Co-operation and Development, which had either enacted digital services taxes (DSTs) or Pillar 2 qualified domestic top-up taxes (QDMTTs) that could have applied to US multinational corporations (US MNCs). On the tentative basis that such regimes will not be applied to US MNCs, Congress removed the Section 899 retaliatory tax from the OBBBA. It remains to be seen what the exact scope and mechanisms will be for the exemption of US MNCs from foreign DSTs and QDMTTs.
Modified QOZ program delivers new investor incentives and permanence
CLIENT ALERT / US POLICY
July 14, 2025
Read time: 7 min
The One Big Beautiful Bill Act (OBBBA) significantly modified the Qualified Opportunity Zone (QOZ) program via a set of comprehensive reforms aimed at improving accountability, long-term impact, and geographic equity. The new rules will take effect after the expiration of the current program on December 31, 2026. The changes fall into three main categories. First, the legislation introduces a decennial re-designation process, requiring the geographic designations of all opportunity zones to be reevaluated every 10 years to ensure they continue to serve economically distressed areas. Second, the OBBBA makes the QOZ program permanent and enhances investor incentives, including a 10% basis step-up for investments held at least five years and expanded benefits for investments in rural opportunity zones. Investments sold after a 10-year holding period will continue to be free from US federal income tax. Third, the act imposes robust new reporting and transparency requirements on both opportunity funds and the businesses they invest in, enabling regulators and the public to better assess the program’s economic and social impact.
The re-designation process
The OBBBA made a major change to the QOZ program by introducing a system for re-designating zones every 10 years. Instead of relying on a one-time snapshot of economic conditions from 2017, the law now requires states and territories to revisit and regularly update their opportunity zone selections. The first re-designation will occur on July 1, 2026, with subsequent reviews every 10 years. The goal is to ensure that the program remains focused on communities that continue to face economic challenges. Even though the re-designation will take place on July 1, 2026, only investments made on January 1, 2027, or later can utilize the new designated zones.
Each zone designation will now have a defined lifespan. Once a census tract is selected and certified, its designation will take effect on the following January 1 and will remain in place for 10 years. After that, it must be re-designated to retain its status. This creates a more flexible system that can adjust as neighborhoods improve or conditions shift while also giving investors a clear timeline for how long a zone will qualify for tax benefits.
The OBBBA also eliminates certain legacy provisions from the original legislation. Most notably, it repeals the automatic treatment of all low-income census tracts in Puerto Rico as opportunity zones. Starting at the end of 2026, Puerto Rico will follow the same rules as the states, including the cap on the number of tracts that can be designated. This change brings consistency to the program and ensures that all designations are made using the same criteria.
The new permanent program
The OBBBA delivers on a key promise to make the QOZ program more attractive for long-term investors by making it permanent and restoring one of the most popular tax benefits: the basis step-up for capital gains. Under the revised rules, investors who hold their qualified opportunity fund (QOF) investment for at least five years will now receive a 10% increase in basis, effectively reducing the amount of deferred capital gain ultimately subject to tax. This provision, which was phased out under the original statute, is now a permanent feature of the program and intended to reward long-term commitments to underserved communities. Under the new framework, the deferral period ends either five years after the investment in the QOF is made or the date the investment is sold (whichever occurs first). The amount of gain included at the end of the deferral period is the lesser of the amount of gain excluded by investment in the QOF or the fair market value of the investment as determined as of the date the deferral period ends over tax basis (which may have increased by 10% or 30%, as discussed below).
The program’s permanence is a major shift from the original framework, which included a sunset in 2026. Investors can now enter the program with confidence that the key tax deferral and exclusion benefits will remain in place beyond that deadline. In addition to the 10% basis step-up at five years, the law preserves the original rule allowing for the full elimination of post-investment gains on investments held for 10 years or more and clarifies that this exclusion is available for up to 30 years after the initial investment.
One of the most notable enhancements is a new incentive specifically targeted at rural opportunity zones. Investors who hold their investment in a qualified rural opportunity fund for at least five years are eligible for a 30% basis step-up, triple the amount available for urban or mixed-area zones. This additional tax benefit is designed to direct more capital to rural areas, which often struggle to compete for investment because of limited infrastructure or market size.
The law defines a “rural opportunity zone” as any census tract located in a QOZ that lies outside cities or towns with populations over 50,000 and is not part of an adjacent urbanized area. In practical terms, these are small towns and rural regions that often fall outside traditional economic development corridors. By offering a more generous incentive, the OBBBA aims to level the playing field and draw more investment to areas that need it most.
The legislation also encourages investment in rural areas by easing the substantial improvement test for existing structures. For rural opportunity zones, investors only need to improve property by 50% of its adjusted basis rather than doubling the basis as required in other zones. This makes it more feasible to rehabilitate older buildings, especially in areas where property values are lower and major capital expenditures may be harder to justify.
By reinstating and expanding the basis step-ups and offering tailored benefits for rural investments, the OBBBA strengthens the appeal of opportunity zones while pushing capital toward the communities that have historically been left behind. However, the main benefit of the QOZ program remains the US federal tax-free exit after a 10-year holding period. This not only allows for a tax-free exit on the appreciation in the investment but also the depreciation recapture. Moreover, during the 10-year holding period, debt-financed distributions remain available.
The new reporting regime
The OBBBA introduces a major change to the QOZ program’s transparency and oversight by requiring detailed annual reporting from both QOF and the businesses they invest in. QOFs must file returns disclosing the value and type of assets they hold, the locations of their investments, the industries involved, and employment-related metrics such as the number of full-time equivalent employees supported by their projects. In turn, the underlying businesses are also required to provide information to the QOFs to help fulfill these reporting obligations. These measures aim to give regulators and the public a clearer picture of where opportunity zone capital is going and how it’s being used.
To enforce compliance, the OBBBA introduces meaningful penalties for failing to meet the new reporting standards. QOFs that fail to file complete and accurate reports can face daily fines, with higher limits applied to large funds. The act also mandates that reports be filed electronically, ensuring that data can be more easily aggregated and analyzed. These provisions respond directly to long-standing criticisms that the QOZ program lacked visibility into its benefits for local communities.
Beyond fund-level reporting, the OBBBA tasks the US Department of the Treasury with producing public reports on the QOZ program’s effectiveness, starting with aggregate data such as the number of funds, total investments, and geographic distribution. Over time, the Treasury will also publish more in-depth analyses measuring the economic impacts of opportunity zone investments, including job creation, poverty rates, new business starts, and housing outcomes in designated zones. These reports are designed to help policymakers, investors, and the public assess whether the program is meeting its goals and to guide future improvements.
Key One Big Beautiful Bill Act implications for family offices and high-net-worth investors
CLIENT ALERT / US POLICY
July 11, 2025
Read time: 5 min
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA), the most significant US tax overhaul since the 2017 Tax Cuts and Jobs Act (TCJA). The OBBBA includes critical changes impacting family offices, closely held businesses, and high-net-worth individuals.
Income tax and investment structuring
Permanent extension of individual rates: The OBBBA permanently extends the individual income tax rates from the TCJA (notably retaining the top rate of 37%), reducing prior uncertainty regarding future rate hikes. It also leaves unchanged the federal corporate tax rate, which remains permanently fixed at 21% as established under the TCJA. This clarity enables more confident long-term investment and estate planning decisions.
Expanded state and local tax (SALT) deduction and pass-through entity tax (PTET): The SALT deduction cap temporarily increases to $40,000 for married joint filers through 2029 before reverting to $10,000 thereafter. Importantly, the widely used PTET workaround remains fully preserved, benefiting many family offices, especially in high-tax states. Family offices should strategically evaluate state tax payments and PTET elections to maximize temporary benefits.
Enhanced pass-through deduction (Section 199A): The OBBA makes permanent the existing 20% qualified pass-through deduction, with several beneficial enhancements. The income thresholds for phase-ins now begin at $75,000 for single filers and $150,000 for joint filers, with a new $400 deduction floor for actively participating owners. These enhancements offer substantial after-tax opportunities for qualifying flow-through businesses.
Qualified small business stock (QSBS) enhancement: QSBS tax advantages are significantly improved. The 100% capital gains exclusion is retained for five-year holdings, with new partial exclusions (50% at three years, 75% at four). The per-issuer gain exclusion cap rises to the greater of $15 million (indexed for inflation from 2026) or ten (10) times the taxpayer’s aggregate adjusted basis. The gross asset test increases to $75 million. These updates facilitate greater flexibility and tax-efficient investment opportunities in early-stage companies. Family offices can leverage QSBS through strategic gifting and trust planning, enhancing multigenerational wealth transfer.
Enhanced and expanded opportunity zones (OZs): The OZ program is permanently expanded with recurring 10-year designations beginning July 2026. Investments held at least five years qualify for enhanced basis step-ups (10% standard, 30% for rural opportunity funds), and rural zone improvement requirements are eased. However, deferred gains from the original OZ program must be recognized by the end of 2026. Family offices should proactively consider tax-mitigation strategies such as loss harvesting, charitable remainder trusts, or bonus depreciation strategies.
Restored 100% bonus depreciation: The 100% bonus depreciation is permanently reinstated for qualified property placed in service after January 19, 2025. This provision significantly enhances the attractiveness of capital-intensive investments, notably real estate, infrastructure, and business aviation.
Enhanced interest expense deduction: The earnings before interest, taxes, depreciation, and amortization (EBITDA)-based limitation on interest expense deductions is permanently reinstated, increasing upfront deductibility relative to prior earnings before interest and taxes (EBIT)-based limits. This provision especially benefits leveraged investment structures such as private equity and real estate, as well as tax-sensitive vehicles like leveraged blockers.
Immediate research and development (R&D) expense deduction: Effective after December 31, 2024, domestic R&D expenditures become immediately deductible. Small businesses (under $31 million in gross receipts) may retroactively elect immediate expensing for R&D expenditures from 2022 – 2024, potentially unlocking substantial tax savings. Family offices investing in innovation-driven sectors should leverage this provision strategically.
Limitation on excess business losses (EBLs): The OBBBA permanently extends the limitation on EBLs, disallowing business losses exceeding annually adjusted thresholds ($313,000 single/$626,000 joint, indexed annually). Thus, the EBL limit in most cases remains a one-year deferral rather than a permanent disallowance. Importantly, disallowed losses continue converting into net operating losses (NOLs) carried forward indefinitely to offset up to 80% of future taxable income. Investors in active trading strategies and leveraged investments will appreciate the clarity provided, enabling strategic planning to optimize utilization of these carryforward losses.
Estate and gift tax provisions: The federal estate and gift tax exemption permanently increases to $15 million per individual ($30 million per married couple), indexed for inflation beginning January 2026. This expansion enhances multigenerational wealth transfer opportunities, particularly through sophisticated trusts such as grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), and dynasty trusts. Family offices should proactively adjust estate plans to fully leverage these expanded exemptions.
Other important provisions
Important exclusions: The final OBBBA notably preserves favorable tax treatment for carried interest, private placement life insurance (PPLI), private placement variable annuities (PPVA), and private foundations. The controversial “Section 899” surtax was ultimately excluded, significantly clarifying and simplifying international tax planning for global family offices and multinational investors. Additionally, earlier proposals targeting the taxation of private foundations, litigation finance investments, and amortization deductions for owners of professional sports franchises were ultimately omitted.
Market insight and strategic considerations
In recent months, the OBBBA’s passage through Congress coincided with significant market responses, notably a steep decline in the US dollar (the sharpest first-half drop in more than 50 years) and fluctuations in Treasury yields. Some market observers believe these trends may reinforce the growing importance of geographic diversification, currency exposure management, and proactive risk mitigation strategies. This updated tax landscape presents compelling strategic opportunities for family offices and high-net-worth investors.
One Big Beautiful Bill Act brings major changes to Section 1202 capital gains exclusion
CLIENT ALERT / US POLICY
July 10, 2025
Read time: 5 min
The recently passed One Big Beautiful Bill Act (OBBBA) makes significant and immediate changes to the tax rules surrounding qualified small business stock (QSBS) under Section 1202 of the Internal Revenue Code. These rules have long provided one of the most powerful tax breaks available to founders, early employees, and investors. While the core benefit – excluding gain from US federal income tax after a multiyear holding period – remains in place, the new law reshapes how much of the gain can be excluded, the timeline, and who qualifies and under what circumstances.
Background: Section 1202 pre-OBBBA
Prior to the OBBBA, Section 1202 permitted noncorporate taxpayers to exclude up to 100% of the gain realized on the sale or exchange of QSBS held for more than five years, subject to certain limitations. These included:
- A cap on the excluded gain per corporation, generally the greater of:
- $10 million (or $5 million for married taxpayers filing separately), reduced by prior exclusions with respect to the same corporation, or
- 10 times the taxpayer’s aggregate adjusted basis in QSBS of the corporation disposed of in the same year.
- A requirement that the issuing corporation’s tax basis in aggregate gross assets not exceed $50 million at any time before or immediately after the issuance of the QSBS.
What changed?
- Tiered gain exclusion based on holding period. For stock acquired after July 4, 2025, shareholders no longer need to wait a full five years to see tax benefits. Instead:
- If the stock is held for at least three years, the shareholder may exclude 50% of the gain.
- If the stock is held for at least four years, the shareholder may exclude 75% of the gain.
- If the stock is held for at least five years, the shareholder may exclude 100% of the gain.
This introduces more flexibility for exits before the five-year mark, which could be especially relevant for founders or investors in earlier-stage companies where exits tend to happen sooner. Businesses operating as partnerships planning a near-term exit may want to consider converting the partnership to a C corporation to take advantage of the Section 1202 benefits.
- Bigger lifetime caps on gains up to $15 million. Previously, the lifetime cap for the QSBS exclusion was typically $10 million per issuer. That limit is still in place for stock acquired before July 4, 2025, but for new stock purchased after that date, the cap increases to $15 million, indexed annually for inflation.Caution: If you exceed the $15 million cap in any year for a particular company, you cannot claim additional exclusions for that company in future years based on the inflation-adjusted amount.
- Higher company size thresholds up to $75 million. The maximum asset threshold for a company to issue QSBS increases from $50 million to $75 million. This is a big win for startups raising larger seed or Series A rounds, especially in capital-intensive industries such as technology, life sciences, and manufacturing. This increased threshold may also have an impact on how mergers and acquisitions (M&A) transactions are structured. For example, in lower mid-market M&A deals, private equity buyers might be more inclined to structure their acquisition vehicle as a C corporation as opposed to a partnership.The $75 million threshold is based on a corporation’s “aggregate gross assets,” which are composed of the corporation’s cash plus aggregate adjusted bases of other property. This increased threshold combined with the OBBBA’s new allowance of immediate expensing of business and research and experimental expenditures will allow a corporation to maintain its qualified small business (QSB) status even when it has raised more than $75 million of capital, potentially significantly above the new threshold.
Example: A robotics company raises $60 million in venture capital on July 6, 2025. The corporation spends $40 million on research and experimental expenditures by December 31, 2025. Due to the immediate expensing provisions of Section 174 and Section 174A of the OBBBA, the corporation’s aggregate gross asset should be $20 million on January 1, 2026. Therefore, it may raise up to an additional $55 million of capital in 2026 or thereafter without losing QSB status.
What has not changed?
- QSBS still must be held for at least five years to receive the full 100% exclusion.
- The definition of qualified trade or business has not been modified.
- As under prior law, excluded gain under Section 1202 is not treated as a preference item for alternative minimum tax purposes, preserving a valuable benefit for high-income taxpayers.
- Eligibility still requires stock to be acquired at original issuance (not purchased on the secondary market), and the company must be a domestic C corporation engaged in active business.
- The QSBS regime may still be applicable in conjunction with the Qualified Opportunity Zone program.
No state AI law moratorium in One Big Beautiful Bill Act
CLIENT ALERT / US POLICY
July 8, 2025
Read time: 3 min
On July 4, 2025, US President Donald Trump signed into law the budget reconciliation bill, known as the One Big Beautiful Bill Act, after the US Senate voted to remove language that would have prohibited states from enforcing any law or regulation governing artificial intelligence (AI) models, AI systems, or automated decisions systems for a period after the bill’s enactment.
Failed effort to deregulate
The version of the bill passed by the US House of Representatives on May 22, 2025, would have placed a 10-year moratorium on any state enforcing any law or regulation affecting “artificial intelligence models,” “artificial intelligence systems,” or “automated decision systems,” in an effort to remove legal impediments to the deployment or operation of AI.
While senators attempted to revise the moratorium to meet budgetary rules and make it more palatable for certain factions of the Republican party, ultimately the Senate voted almost unanimously to remove the moratorium from the bill. The House did not attempt to reintroduce the moratorium and eventually passed the Senate version of the bill on July 3, 2025.
State AI Regulation: Present and future
With the moratorium failing to pass and little indication of federal interest in meaningful AI regulation, state AI regulation is likely here to stay. According to the National Conference of State Legislatures, as of 2025 all 50 states, Puerto Rico, the Virgin Islands, and Washington, DC, have introduced legislation to regulate AI. Significant state AI legislation will go into effect in 2026, including:
- California’s Assembly Bill 2013, which mandates comprehensive transparency in AI training datasets
- Colorado’s Senate Bill 205, which requires detailed disclosures and guardrails against discrimination for “high-risk” AI
- The recently enacted Texas Responsible AI Governance Act, which categorically restricts deployment of AI for certain purposes
In addition to state legislative action, developers and deployers of AI should continue to pay close attention to state enforcement action. California’s attorney general issued two legal advisories in January 2025 making it clear that his office would seek to use existing laws, such as the California Consumer Privacy Act, to protect consumers in the AI space. Similarly, Oregon’s attorney general stated in a December 2024 guidance document that his office would utilize laws such as the Oregon Consumer Privacy Act to do the same.
What’s next?
AI developers and deployers should pay close attention to both state and federal action in the coming years. While the moratorium failed, there is bipartisan support for safety and privacy regulation of AI, and that likely will continue to grow in the years to come.
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To discuss the potential legal implications of state AI regulation for your business, reach out to one of the authors of this article or your regular McDermott lawyer.
The One Big Beautiful Bill Act: Navigating clean energy tax credits in a new era
CLIENT ALERT / US POLICY
July 7, 2025
Read time: 16 min
On July 4, 2025, US President Donald Trump signed into law a budget reconciliation bill known as H.R.1: the One Big Beautiful Bill Act (OBBBA). The OBBBA generally accelerated phase-outs to the Inflation Reduction Act of 2022 (IRA) energy tax credits, dictated shortened deadlines for project credit qualification (particularly targeting solar and wind facilities), broadened domestic content restrictions, and most prominently, restricted credit availability to “prohibited foreign entities” of concern (FEOCs) – all of which raises important project planning considerations for developers, energy producers, and investors in the US renewables energy space.
The legislative precept of restricting FEOCs is not new. Its roots can be found in legislation stemming back to the Embargo Act of 1807, and it reappears in tax legislation as recently as 2022. The OBBBA continues this legacy approach by implementing a regime that restricts interactions with FEOCs in the US renewables energy space by curbing availability to IRA energy tax credits.
On a more positive note, the OBBBA retains transferability of credits, provides a new location-based bonus credit for certain nuclear facilities, offers new life to fuel cell credit eligibility, and extends the Section 45Z clean fuel production credit’s availability, among other potential nuggets of positivity. Under this backdrop, in this article we explore the new provisions and significant amendments made by the OBBBA and highlight key takeaways for developers, energy producers, and investors in the US renewables energy space.
The OBBBA’s enormous impact requires immediate and significant rethinking on the existing development and infrastructure of renewable energy projects, especially with respect to solar and wind facilities. Consistent with promises made by the president, the OBBBA portends a campaign to eventually eliminate the IRA energy tax credits while disrupting procurement and supply chain structures via the FEOC rules. The myriad delegations of rulemaking to the US Department of the Treasury adds fuel to this campaign. In light of such specters, we outline some paramount considerations:
Globally applicable changes
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FEOC rules:
- The FEOC rules effectively operate under three categories: (i) the specified foreign entity (SFE)/foreign influenced entity (FIE) prohibition, which bars tax credit eligibility where the project is owned by an SFE or FIE, (ii) the effective control rule, which prevents the SFE from exercising “effective control” over the project, and (iii) the material assistance rule, which prevents material reliance on products/materials sourced by an SFE or FIE.
- Although the definitions are complicated in scope, for practical purposes, “SFE” [1] generally means (i) parties specifically identified on a list of concerning actors and (ii) companies and persons (including their subsidiaries) from China, North Korea, Iran, and Russia. A “FIE” [2] generally means parties with material legal and/or financial relationships with such SFEs.
- The FEOC rules apply broadly to almost all the energy tax credits, as discussed below.
- The effective dates of the FEOC rules depend on the type of tax credit at issue (see tax credit specific discussions below).
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SFE/FIE prohibition:
- IRA energy tax credits are generally unavailable to any SFE or FIE. This includes potential tainting by up-the-chain ownership where ownership thresholds are met.
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Effective control:
- The effective control rule prohibits any payments made by the project owner (or its affiliates) to an SFE in a contractual agreement or arrangement where the SFE would be entitled to exercise effective control over the project or production of eligible components.
- Effective control generally means specific authority over key aspects of the production of eligible components or energy generation in a project, which are not included in measures of control through authority, ownership, or debt. This includes licensing agreements that would allow the SFE to source items (components, subcomponents, critical minerals), direct operations, use intellectual property, and receive royalties – excepting bona fide purchases or sale of intellectual property under certain circumstances.
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Material assistance:
- The material assistance rule operates to limit sourcing of equipment from China (and, less significantly, North Korea, Iran, Russia, and the other concerning parties identified as SFEs). The costs of this foreign equipment must account for less than a specified percentage of total equipment costs, with the percentage depending on the type of tax credit.
- The material assistance rule prescribes a “material assistance cost ratio” that determines a threshold percentage that takes into account total direct costs for a manufactured product or total material costs that are paid or incurred for production of eligible components. The non-SFE or non-FIE cost percentage cannot be below the prescribed threshold percentage. Threshold percentages are prescribed for qualified facilities, battery energy storage systems (BESS), and (in the case of Section 45X) certain types of eligible components, each of which varies by the year of begin construction (or, in the case of Section 45X, year of sale). An election may be available to exempt products/materials for which a written, binding contract was entered into prior to June 16, 2025, provided certain begin construction and placed in service conditions are met.
- By no later than December 31, 2026, the Treasury is to issue “safe harbor” tables that may be applied for the determination of the costs attributed to an SFE or FIE. Until then (and for a facility or BESS that begins construction on or before the date that is 60 days after the date of issuance of such tables), taxpayers may generally rely on the tables under Internal Revenue Service (IRS) Notice 2025-08 and valid certifications from suppliers to confirm that goods or components are not attributable to an SFE or FIE (e.g., that the direct costs are not attributable to an SFE or FIE). Practically, this appears to mean that a project achieving, for example, a domestic content percentage of 40% under the safe harbor in IRS Notice 2025-08 under Sections 48E and 45Y should likewise be treated as having at least a 40% threshold for purposes of the material assistance rule (subject to substantiation requirements under the FEOC rules). Further, until the IRS issues the new safe harbor tables, it appears that for purposes of Sections 45Y and 48E, the safe harbor tables under IRS Notice 2025-08 would dictate the level of components or subcomponents required to be domestic content. Conversely, for purposes of Section 45X, the applicable supplier certification appears to require language that each “constituent element, material, or subcomponent” must also be accounted for, suggesting that notwithstanding IRS Notice 2025-08, a look-through approach up the supply chain is necessitated.
- The material assistance rule carries a six-year statute of limitations and increased tax penalties, including penalties imposed on suppliers for non-complying certifications.
- Solely for purposes of the FEOC rules, the OBBBA expressly codifies the begin construction rules under IRS Notices 2013-29 and 2018-59 (as well as any subsequently issued guidance clarifying, modifying, or updating either such Notice), as in effect on January 1, 2025.
- Taxpayers should review ownership chains and related party statuses for SFE or FIE implications, including with respect to their counterparties (e.g., investors, lenders, and suppliers).
- The effective control rule suggests that taxpayers should be very careful in structuring payment arrangements with manufacturers and suppliers that may have SFE implications. Taxpayers should also reassess procurement and safe harboring strategies in light of the material assistance rule and consider whether existing due diligence processes and procedures need to be revised with respect to manufacturer, supplier, and vendor certifications. Even where taxpayers are comfortable with the non-SFE and non-FIE status of their counterparties, taxpayers need to ensure they obtain required evidence and certifications.
- The codification of the begin construction rules strikes a cautionary note. Careful reassessment of begin construction strategies is in good order. For purposes of the FEOC rules, begin construction may be relevant for determining the relevant “material assistance” percentage and for whether a project is grandfathered out of the FEOC rules.
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Section 6418 transferability and Section 6417 direct pay:
- Transferability is generally preserved. In other words, as long as credits remain available under the newly accelerated timeline, they are generally eligible for transfer. However, generally effective for tax years beginning after amendment, transfers to an SFE are prohibited under Sections 48E, 45Y, 45Q, 45U, 45X, and 45Z. Notably, the prohibition does not appear to apply to Section 45V.
- Likewise, Section 6417 direct pay is preserved. Accordingly, it remains a planning option for credits under Sections 45X and 45V to the extent those credits are otherwise available under the OBBBA.
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Depreciation:
- Five-year Modified Accelerated Cost Recovery System (MACRS) designation is removed for Section 48 energy property beginning construction after December 31, 2024.[3] However, the five-year MACRS designation is retained for Section 45Y and 48E property. A revisit on the applicability of bonus depreciation may be merited for projects acquired and placed in service after January 19, 2025.
IRA tax credit code section specific changes
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Sections 48E and 45Y | Clean energy investment tax credit (ITC) and production tax credit (PTC):
- Wind/solar repeal: The credit terminates for solar and wind facilities that (i) begin construction 12 months after enactment (i.e., July 4, 2026) and if (ii) placed in service after December 31, 2027. In other words, a wind or solar project that begins construction on or before July 4, 2026, is not subject to the statutory end-of-2027 cliff while wind and solar projects beginning construction after July 4, 2026, would in all cases need to be placed in service by the end of 2027. The changes highlight the importance of reassessing safe harboring strategies in conjunction with a careful review of existing begin construction guidance.
- Other technologies: All other qualified facilities/BESS are generally subject to pre-OBBBA Section 48E and 45Y begin construction (generally by 2033) and phase-outs provisions. Notably, however, the “later of” phase-out from the IRA has been struck (i.e., where the phase-out would not take effect until the later of 2033 and hitting national emissions targets).
- Residential solar leasing: In a shift from previous proposals, leased residential solar electric property retains eligibility for Section 45Y and 48E credits. Prior drafts had proposed eliminating tax credits for residential solar projects using this structure. In the final OBBBA, the leasing restriction is limited to solar water heating and small wind energy property.
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Section 45Y only:
- Nuclear: A new nuclear energy community bonus credit is available for advanced nuclear facilities located in a metropolitan statistical area that has (or, at any time after December 31, 2009, had) 0.17% or greater direct employment related to the advancement of nuclear power.
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Section 48E only:
- Fuel cell: Fuel cell property is newly eligible for Section 48E tax credits. Under prior law, fuel cell property was eligible for the Section 48 credit so long as it began construction before 2025 but was ineligible for credits under Section 48E unless it met the emissions neutral requirements of that section. Under the OBBBA, fuel cell property is entitled to the Section 48E credit regardless of emissions. The credit rate is fixed at 30% for Section 48E fuel cell property beginning construction after December 31, 2025. Accordingly, fuel cell property beginning construction during 2025 is not credit eligible (unless it is emissions neutral).
- Domestic content drafting fix: Effective on or after June 16, 2025, the domestic content adder thresholds for manufactured property are revised to be in parity with Section 45Y. For facilities/BESS that begin construction before June 16, 2025, the threshold remains at 40%. For such property beginning construction on or after June 16, 2025, and before January 1, 2026, the threshold is increased to 45%, with increases in future years in line with Section 45Y. This change is not wholly unexpected, given that the IRA drafting error had been flagged by the Joint Committee on Taxation. Taxpayers who had taken a protective approach in anticipation of the parity correction may have already accounted for the increased step-up in their domestic content strategies.
- Section 48E 10-year FEOC recapture: There is a new 100% credit recapture for a 10-year recapture period beginning on the date the project is placed in service if any payments are made to SFEs that exercise effective control, applying to any tax year beginning two years after enactment.
- Timing and applicability of the FEOC rules to Sections 48E and 45Y:
- SFE/FIE prohibition: Applies to tax years beginning after enactment.
- Effective control rule: Applies to tax years beginning after enactment.
- Section 48E 10-year recapture applies to tax years beginning two years after enactment.
- Material assistance rule: Applies to tax years beginning after enactment for facilities that begin construction after December 31, 2025. Facilities beginning construction before 2026 are exempt from the material assistance rule.
- Wind/solar repeal: The credit terminates for solar and wind facilities that (i) begin construction 12 months after enactment (i.e., July 4, 2026) and if (ii) placed in service after December 31, 2027. In other words, a wind or solar project that begins construction on or before July 4, 2026, is not subject to the statutory end-of-2027 cliff while wind and solar projects beginning construction after July 4, 2026, would in all cases need to be placed in service by the end of 2027. The changes highlight the importance of reassessing safe harboring strategies in conjunction with a careful review of existing begin construction guidance.
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Sections 48 and 45 | Legacy ITC and PTC:
- For Section 48, taxpayers should note the termination of the 2% energy credit for any energy property beginning construction on or after June 16, 2025. Only ground or groundwater thermal projects beginning construction on or after January 1, 2025, remain eligible for the Section 48 6% legacy credit. Absent this revision, Section 48 might have provided an ongoing legacy credit of 10% for certain technologies, even where Sections 45Y and 48E became unavailable.
- Sections 45 and 48 are otherwise untouched by the OBBBA. Accordingly, facilities that continue to qualify for and claim Section 45 or 48 can completely avoid the FEOC rules, which will significantly simplify transacting. As a reminder, Sections 45 and 48 are generally only available for projects beginning construction before 2025.
- Timing and applicability of the FEOC rules to Section 48:
- SFE/FIE prohibition: N/A
- Effective control rule: N/A
- Material assistance rule: N/A
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Section 45Q | Carbon sequestration:
- Base credit rate parity is adopted by equalizing the amount irrespective of the end-use of the sequestered carbon (e.g., regardless of enhanced oil recovery, use, storage). Taxpayers may want to reassess existing carbon sequestration and use operations in relation to credit eligibility and rates.
- Timing and applicability of the FEOC rules to Section 45Q:
- SFE/FIE prohibition: Applies to tax years beginning after enactment.
- Effective control rule: Applies to tax years beginning after enactment.
- Material assistance rule: N/A
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Section 45U | Nuclear PTC:
- Taxpayers should note that the termination date was not changed. Credit terminates for electricity produced and sold after December 31, 2032.
- Timing and applicability of the FEOC rules to Section 45U:
- SFE/FIE prohibition: SFE prohibition applies to tax years beginning after enactment. FIE prohibition applies to tax years beginning two years after enactment.
- Effective control rule: Applies to tax years beginning after enactment.
- Material assistance rule: N/A
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Section 45V | Hydrogen:
- Taxpayers should note the revised termination date. Credit terminates for facilities that begin construction after December 31, 2027. This is an improvement to previous proposals, which had the Section 45V credit expiring at the end of 2025.
- Timing and applicability of the FEOC rules to Section 45V:
- SFE/FIE Prohibition: N/A
- Effective Control Rule: N/A
- Material Assistance Rule: N/A
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Section 45X | Manufacturing PTC:
- Taxpayers should carefully review the credit phase-out schedules with respect to their specific eligible components and critical minerals. Eligible components and critical minerals (other than metallurgical coal) are subject to differing phase-out schedules. “Metallurgical coal” is added as a critical mineral. Notably, however, credits are terminated for wind energy components produced and sold after December 31, 2027. Phase-out schedules for other types of eligible components, such as solar modules, have not changed.
- Battery modules need to be comprised of all other essential equipment needed for battery functionality, such as current collector assemblies and voltage sense harnesses, or any other essential energy collection equipment.
- The related person election appears intact. However, for tax years beginning after December 31, 2026, sales of integrated components qualify only if the “primary component” is generally incorporated into a “secondary component” that (i) is produced within the same manufacturing facility as the primary component, (ii) sold to an unrelated person, and (iii) for which not less than 65% of the total direct material costs are attributable to the domestic primary component.
- Timing and applicability of the FEOC rules to Section 45X:
- SFE/FIE prohibition: Applies to tax years beginning after enactment.
- Effective control rule: Applies to tax years beginning after enactment.
- Material assistance rule: Applies to tax years beginning after enactment.
- Taxpayers should carefully review the credit phase-out schedules with respect to their specific eligible components and critical minerals. Eligible components and critical minerals (other than metallurgical coal) are subject to differing phase-out schedules. “Metallurgical coal” is added as a critical mineral. Notably, however, credits are terminated for wind energy components produced and sold after December 31, 2027. Phase-out schedules for other types of eligible components, such as solar modules, have not changed.
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Section 45Z | Clean fuel PTC:
- The credit is extended by two years for qualifying fuel sold by December 31, 2029. Emissions rates would exclude any emissions attributed to indirect land use change. The Treasury is to provide distinct emissions rates for fuel derived from animal manure, including dairy, swine, and poultry (which may be prescribed with negative emissions rates). No double credit is allowed for fuel produced from a fuel that generated a credit under Section 45Z. Taxpayers, especially US ethanol producers, may want to reassess their strategies on optimizing the benefits made by the amendments.
- Beginning after December 31, 2025, fuel produced (i) must be derived from feedstock produced or grown in the US, Mexico, or Canada, (ii) cannot have negative emissions rates (unless otherwise prescribed by the Treasury), and (iii) the increased credit rate for sustainable aviation fuels cannot be applied.
- Many clean fuel producers, particularly those engaged in renewable natural gas production, structure calculations in reliance on the applicable GREET model and guidelines promulgated thereunder. The OBBBA amendments provide welcomed clarity in sync with such guidelines.
- While the OBBBA does not provide any clarifying intermediary sales provisions, the Treasury is now authorized to promulgate rules for related persons whom the taxpayer has reason to believe will sell fuel to an unrelated person, suggesting forthcoming clarifications on intermediary sales.
- Timing and applicability of the FEOC rules to Section 45Z:
- SFE/FIE prohibition: SFE prohibition applies to tax years beginning after enactment. FIE prohibition applies to tax years beginning two years after enactment.
- Effective control rule: Applies to tax years beginning after enactment.
- Material assistance rule: N/A
Beginning of construction guidance
Many provisions under the IRA and the OBBBA turn on when a project or facility has begun construction. Significantly, eligibility for the legacy ITC and PTC under Sections 45 and 48, the new OBBBA 2027 cliff for solar and wind under Sections 45Y and 48E, and application of the material assistance rules in many cases turns on the date construction begins. The IRS previously issued guidance pursuant to a series of notices, laying out very specific rules and tests for determining when a project begins construction, including the Five Percent Safe Harbor and the Physical Work Test (both of which are beyond the scope of this update). In 2022, the IRS confirmed that the principles of those notices continue to apply for the determination of when construction begins for purposes of the energy tax credits. The OBBBA codified those IRS notices as they exist as of today’s date, but the codification was limited to the FEOC rules. On the day the US House of Representatives voted in favor of the OBBBA, reports emerged that certain House members had received assurances from the executive branch that it would enforce a more restrictive definition of “beginning construction” than the rules in the existing IRS guidance. On July 7, President Trump issued an Executive Order directly addressing this issue, including a mandate that the Treasury issue guidance to ensure that the begin construction rules are not circumvented. McDermott will be following this issue closely in the coming days, and taxpayers are cautioned to carefully assess their beginning of construction strategies in light of this Executive Order.
Conclusion
The sun is yet to rise on the OBBBA, and more guidance should be forthcoming from the Treasury and the IRS. Taxpayers and their tax advisors are left to decipher fundamental questions of tax law and interpretation that US Congress, seemingly in part, left to the Treasury to address.
McDermott energy tax lawyers are available to assist. If you have any questions about the tax implications of the OBBBA or other concerns, including project development or related investment structuring, please contact the authors of this article or your regular McDermott lawyer(s)
Antitrust Under Trump: June 2025 Updates
ARTICLE / CLIENT ALERT / US POLICY
June 13, 2025
Read time: 6 min
As the Trump administration’s antitrust landscape continues to develop, companies should stay alert to key changes in merger filing requirements, remedy expectations, agency personnel, and more. The Federal Trade Commission (FTC) is considering further staff cuts and has criticized the use of innovation as a justification for proposed mergers. Additionally, the FTC and Department of Justice (DOJ) continue to seek ways to expedite the merger review process for unproblematic deals, including divestiture consent decrees.
Below is a high-level review of recent developments that could impact business strategy, dealmaking, and compliance.
The Return of Structural Remedies
- The FTC and DOJ have made good on their promise to accept structural remedies to address antitrust concerns, and they have announced consent decrees involving requirements to divest specific product lines to experienced divestiture buyers in two transactions in the technology industry. The agencies emphasized the importance of “clean” divestitures and strong divestiture buyers in discussing the settlements.
- The two consent decrees stand in contrast to the Biden administration (which had not accepted a prelitigation divestiture since 2022) and its policies disfavoring antitrust remedies.
Agencies Support Resolution of Merger Concerns Through Transparent Settlements
- A representative from the DOJ emphasized the agency’s preference for settlements under the Tunney Act at a conference on June 4. Such settlements involve the agency filing a public complaint and a statement of how the proposed remedy would resolve anticompetitive issues.
- The DOJ representative went on to explain that the transparency involved in Tunney Act settlements is beneficial to the public and that proposed fix-it-first settlements also should be approached with transparency to allow the public to comment on the deal and to provide clear guideposts for parties. The representative emphasized the DOJ’s interest in encouraging transparency in all parts of the merger review process and criticized Biden-era procedures under which the agency allowed parties to resolve matters with divestitures outside of the formal consent order process.
- An FTC representative at the same conference laid out the principles the Trump administration will apply in examining divestiture proposals, explaining that the agency prefers divestiture of standalone businesses.
Commissioner Holyoak Is Skeptical of Lackluster Merger Remedy Proposals
- Despite statements from the antitrust agencies that strong divestiture proposals would be well-received, FTC Commissioner Melissa Holyoak emphasized in a speech that the FTC will not hesitate to litigate against the fix when a proposal is inadequate.
- Holyoak pointed to recent divestiture remedies to explain that the FTC would be taking its time to evaluate proposed merger remedies and would add additional requirements to ensure the ultimate remedy is effective.
- Holyoak also discussed the important aspects the FTC may consider when determining whether a divestiture buyer is suitable, including experience with the industry, financial soundness, existing relationships with customers of the divestiture assets, and a track record of successful acquisitions.
DOJ Intends to Provide Clarification for the 2023 Merger Guidelines
- Principal Deputy Assistant Attorney General of the DOJ Antitrust Division Roger Alford has stated that there is a need for clarity on the 2023 Merger Guidelines, pointing out the uncertainty of how the guidelines would be applied by the courts and whether the administration could enforce them.
- Speaking at a May 21 event, Alford explained that providing more clarity regarding market thresholds that trigger a presumption of merger illegality is one of the provisions that may require further explanation. These thresholds of concern were lowered in the 2023 Merger Guidelines, which substantially lowered the threshold for transactions being deemed presumptively unlawful.
Commissioner Meader Is Skeptical of Innovation as a Defense for Tech Deals
- FTC Commissioner Mark Meador expressed apprehension over antitrust defenses typically presented by merging parties to justify their proposed transactions at a recent antitrust conference.
- Meador criticized the use of “innovation” as a broad-strokes argument to justify vertical mergers that present anticompetitive concerns, claiming that innovation is “a floating abstraction” and a “kitchen sink ‘innovation defense’” that helps merging parties avoid scrutiny.
- Meador went on to emphasize the importance of the antitrust agencies taking the time to distinguish genuine product improvements through innovation from conduct that excludes rivals or forecloses competition.
DOJ Continues to Promote Reaching Merger Decisions Quickly
- Assistant Attorney General Gail Slater highlighted the early responses to the Trump administration, including 36 early terminations since March 1, at the International Competition Network Annual Conference.
- Slater also mentioned that the DOJ has been looking for additional ways to speed up the merger review process outside of the reintroduction of early termination, and she restated the new administration’s openness to approving robust settlements that include structural remedies.
FTC Plans to Cut Workforce Again
- FTC Chair Andrew Ferguson told the House Appropriations Committee on May 15 that FTC staff need to be cut further to bring the total staff down to around 1,100 employees, pointing to the fact that the agency had been paying employee salaries using carryover funds.
- These cuts would return the FTC workforce to the same number of workers it had before the Biden administration and would represent a 15% reduction in employees.
- Ferguson also discussed the FTC’s planned cost-saving cuts to non-staff-related expenditures, including real estate and facilities.
As the Trump administration’s approach to antitrust takes shape through political appointments, policy statements, speeches, and enforcement actions, McDermott’s antitrust team continues to track new developments. We are providing important updates on issues pertinent to clients. Stay tuned for more at-a-glance reviews of relevant policy as it is being created.
View our earlier insights on antitrust under the Trump administration.
House Budget Reconciliation Bill Would Delay State AI Regulation
CLIENT ALERT / US POLICY
June 10, 2025
Read time: 7 min
On May 22, 2025, the US House of Representatives passed the budget reconciliation bill, known as the “One Big Beautiful Bill Act,” which includes language that would prohibit any state from enforcing any law or regulation regulating artificial intelligence (AI) models, AI systems, or automated decisions systems for a 10-year period after the bill’s enactment.
This article examines the potential impact of this moratorium on AI regulation at the state level and what it would mean for developers and deployers.
AI Regulation: The Current Landscape
The AI landscape has been fast evolving, and the technology has a wide range of use cases that touch almost every aspect of individuals’ lives. The federal government’s response to this new technology’s implications, on the other hand, has been mixed. Different administrations, from Obama through this second Trump administration, have been largely circumspect, relying on broad policies slanted more or less toward principles of “responsible AI.” Instead of coming to a consensus on a set of requirements to provide guardrails for developers and deployers, Congress and the executive branch have limited their legislative and regulatory activities, called for research into AI, and generally directed regulatory bodies to consider ways to advance and regulate the technology. Even former US President Joe Biden’s executive orders, including the Blueprint for an AI Bill of Rights, were little more than unenforceable guiding principles.
Absent clear federal guidance, state legislatures have filled the void through piecemeal legislation. As a result, the current AI regulation landscape involves different legal requirements from one state to the next. While the existing regulation is limited to a handful of states, continuing down the path of overlapping state legal requirements will make it difficult for AI developers and deployers to efficiently comply with AI regulation across the country.
House Republicans Look to Delay Regulation
In the absence of federal laws or regulations and in light of the piecemeal approach that state legislatures have taken, the House of Representatives passed the Artificial Intelligence and Information Technology Modernization Initiative as part of the House reconciliation bill. The initiative would place a 10-year moratorium on state enforcement of any law or regulation governing “artificial intelligence models,” “artificial intelligence systems,” or “automated decision systems.” The initiative explicitly states that its primary purpose is to remove legal impediments to facilitate the deployment and operation of AI.
The moratorium imposed by the initiative does not apply to state laws or regulations:
- The primary purpose and effect of which is to make it easier to deploy and operate AI.
- That does not impose certain “substantive” requirements on AI models unless the requirements are imposed under federal law or generally applicable to other models and systems the perform similar functions.
- That impose only reasonable fees and bonds on AI models and treat other similar models the same.
The moratorium’s carve-outs are vague and broad. The bill does not define which requirements would be considered “substantive.” This could make it easy for AI developers and deployers to argue that a state law or regulation is subject to the moratorium because it imposes a “substantive requirement.” However, it could also lead to more broad-sweeping state laws and regulations that attempt to cover far more technology than just AI models to be “generally applicable to other models” and avoid the moratorium.
The bill, including the initiative, passed the House of Representatives mostly along party lines with Republicans in support.
What Does It Mean for AI Developers and Deployers?
If signed into law, the initiative would fundamentally alter the regulatory landscape for AI developers and deployers. Any law purporting to regulate AI specifically would clearly be unenforceable under this bill (assuming it survives legal challenge). What is less clear is whether laws that may be used to restrict the development or deployment of AI tools, but which are not written specifically in relation to AI, would similarly be unenforceable. Some states have previously hinted at regulatory levers that may be utilized even absent state legislation that explicitly regulates AI.
On January 13, 2025, California Attorney General Rob Bonta released two legal advisories reflecting the view that AI may be regulated under existing laws, even if those laws do not directly reference AI. For example, Attorney General Bonta noted that the California Consumer Privacy Act prevents AI developers from processing personal information for nondisclosed purposes. He also explained that the California Invasion of Privacy Act restricts recording communications without the consent of the parties, which could impact AI training efforts. (For more information on the California attorney general advisories, see our On the Subject).
Similarly, the Oregon Attorney General released a guidance document on December 24, 2024, applying Oregon’s Consumer Privacy Act to AI. The attorney general explained that AI developers that use personal data to train AI systems must clearly disclose this use in an accessible and clear privacy notice, and they must obtain affirmative consent to use such personal data and provide an opportunity to revoke that consent.
These statements from the Oregon and California attorneys general underscore the ambiguity in the bill’s language. A more recent letter from 40 state attorneys general to the majority and minority leaders of the House and the US Senate highlights the likelihood of state efforts to enforce state laws, and the ongoing need for AI developers and deployers to be mindful of the range of implicated state laws. In the letter, the attorneys general noted that “[i]mposing a broad moratorium on all state action while Congress fails to act in this area is irresponsible and deprives consumers of reasonable protections.”
If enacted, the laws would also be subject to challenges in courts, which could interpret the moratorium’s provisions more broadly or, more likely because the moratorium would preempt state law, more narrowly. States may test the boundaries of the moratorium by enacting laws that, for example, on their terms apply to an industry broadly but which practically apply more narrowly, or by attempting to skirt the definitions used in the moratorium. Regardless of how states respond legislatively, however, AI developers and deployers would be wise to expect state attempts to continue enforcing their existing laws, which could significantly restrict the application of the moratorium. Developers and deployers should focus on governance and risk assessment mechanisms that will help prevent algorithmic discrimination, the acquisition and use of private information without appropriate authorization, and other violations of consumer protection laws and principles.
What’s Next?
The initiative must now get through the Senate. It remains unclear whether the moratorium on state AI is permissibly included in the bill because it is potentially “extraneous” to the federal budget, and it faces opposition, as indicated by the action of most state attorneys general. Additionally, since the bill passed in the House, some Congress members who supported it have begun speaking out against this provision. Therefore, AI developers and deployers should not celebrate yet and should pay close attention to the initiative over the coming weeks as the “One Big Beautiful Bill Act” suffers through the inevitable legislative process.
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To discuss the initiative’s potential legal implications for your business, reach out to one of the authors of this article or your regular McDermott lawyer.