Shared Earnings Arrangements Offer Flexibility for Startups, Investors

Shared Earnings Arrangements Offer Flexibility for Startups, Investors

An increasing number of startup founders are operating their companies as lifestyle businesses, prioritizing revenue and sustainable growth over scaling for sale or public offering. In the wake of this phenomenon, funders who have invested in such companies with traditional early-stage investment vehicles like SAFEs (Simple Agreement for Future Equity) or convertible promissory notes are left waiting for a liquidity event, such as further qualified financing or liquidation, in order to convert their investment into equity or secure a return on investment. With no clear conversion timeline, investors are left wringing their hands, waiting for the emerging company to grow quickly or applying pressure to the startup in order to trigger a conversion event.

In this place of limbo, alternative investment vehicles have slowly entered the scene, seeking to meet the priorities of both funders and slow-growth founders. Take, for instance, shared earnings arrangements.

What Is a Shared Earnings Arrangement?

A shared earnings arrangement is an alternative to traditional equity financing that allows investors to receive a percentage, often capped, of the company’s total earnings. The scope of earnings subject to sharing is typically negotiated and can include dividends and/or retained earnings, as well as adjustments for founder-specific expenses, such as founder salaries.

Investors make an upfront capital investment and then realize the return on investment upon receiving their agreed percentage of earnings. Shared earnings models that adjust for a negotiated threshold for founder salaries exclude the earnings needed to fund those salaries from the earnings investors participate in, allowing the founders to pay themselves a living wage first. Shared earnings are usually capped at two to five times the initial investment, after which payments cease and an equity stake may be retained, depending on the arrangement.

Why Use a Shared Earnings Arrangement?

  • Alignment: Establishes alignment between founders and investors to build profitable, sustainable businesses without the pressures inherent in traditional early-stage investment vehicles, which often lead to the need for additional funding or company sale.
  • Control: It gives founders greater control over business growth while balancing investors’ need for returns with founders’ need to keep options open, whether building a lifestyle company or a billion-dollar venture.
  • Sustainable: Unlike traditional early-stage investment structures, this arrangement doesn’t force founders into growth-at-all-cost scenarios and allows them to focus on building healthy, profitable companies that can thrive in the long term.
  • Quicker Return: Investors can start realizing a return much sooner than if they needed to wait for a conversion event.
  • Flexible: The arrangement can be nimble enough to allow investors to retain a small equity stake after the earnings cap is reached. That stake may be converted if the company is sold or raises further funds in a traditional, qualified financing event.

What Are the Potential Drawbacks?

For founders

  • Limit on Profit: Shared earnings arrangements require founders to share a portion of what would otherwise be retained earnings or founder income until the investors’ cap is met. This can feel inhibiting during profitable years, particularly if the cap is on the higher end.

For funders

  • Limited Upside: Shared earnings arrangements cap shared earnings returns, reducing pressure on founders for an exit event. This may deter traditional funders who rely on fast-scaling investment models with significant buyout events for a substantial return.
  • Unfamiliarity: These are new investment arrangements. Funders may be wary of entering into such an arrangement when the space is still in its early stages of development and there are few examples of success.

Ultimately, this growing investment vehicle is worth considering for both entrepreneurs seeking to prioritize revenue and a balanced lifestyle, as well as investors looking for a steady return on sustainable-growth startups.

If you would like to find out more about this arrangement or discover funding options for your venture, contact a member of Varnum’s Startup Practice Team.

2025 summer associate Tony Mayotte contributed to this advisory. Tony is currently a law student at the University of Michigan.

Ninth Circuit Limits Privacy Litigation for Web-Tracking Tools

Ninth Circuit Limits Privacy Claims Over Routine Web Tracking

As Varnum has previously reported, a surge of lawsuits and pre-suit demand letters has targeted companies that use routine analytics tools, such as session-replay scripts, pixels, and similar code, to understand how visitors interact with their websites. Plaintiffs typically allege violations of California privacy statutes and common-law torts, hoping the threat of costly discovery will produce a quick, nuisance-value settlement.

Recently, however, the 9th U.S. Circuit Court of Appeals dealt a significant blow to those tactics, ruling that ordinary web-tracking when standing alone, is neither sufficiently harmful nor “highly offensive” enough to support the statutory or tort-based claims based on website tracking.

In Popa v. Microsoft Corporation, Case No. 24-14, — F.4th –, 2025 WL 2448824 (9th Cir. 2025), the 9th Circuit made clear that the mere collection of website-interaction data does not, by itself, establish the “concrete harm” needed for Article III standing. The court also found that routine tracking falls well short of the “highly offensive” conduct required for claims such as intrusion-upon-seclusion or public disclosure of private facts. Instead, the Court likened monitoring user interactions to “a store clerk’s observing shoppers in order to identify aisles that are particularly popular or to spot problems that disrupt potential sales.” 

Implications for Businesses

Popa gives companies that deploy session-replay, pixel, or similar tracking technologies on their websites another defense against demand letters and complaints alleging privacy violations. By holding that routine web-tracking does not, without more, rise to the “highly offensive” level required for either intrusion-upon-seclusion or public disclosure of private facts, the Court narrowed the field of viable claims available to plaintiffs.

Companies can now cite Popa at the pleading stage to seek dismissal of claims based solely on the passive collection of interaction data. The decision should disrupt the prevailing plaintiff strategy of threatening costly discovery to wring out nuisance-value settlements. Defendants can credibly argue that dismissal is appropriate before merits-based discovery begins, particularly when plaintiffs cannot allege the collection of embarrassing, invasive, or otherwise private information.

Varnum is experienced in handling online privacy and web-tracking litigation. If you receive a demand letter or lawsuit, contact your Varnum attorney, Varnum’s Data Privacy Practice Team, or Varnum’s Litigation Practice Team.

NHTSA Adds Three Rulemakings That Will Impact Automated Vehicles

NHTSA Adds Three Rulemakings That Will Impact Automated Vehicles

On September 4, 2025, the National Highway Traffic Safety Administration (NHTSA) announced the addition of three rulemakings to the Spring 2025 Unified Agenda of Regulatory and Deregulatory Actions (Unified Agenda). The proposals seek to clarify the applicability, or lack thereof, of certain federal standards to automated vehicles (AVs). The rulemakings concern:

  • FMVSS No. 102, “Transmission shift position sequence, starter interlock and transmission braking effect.”  
  • FMVSS No. 103, “Windshield defrosting and defogging systems,” and FMVSS No. 104, “Windshield wiping and washing systems.”
  • FMVSS No. 108, “Lamps, reflective devices, and associated equipment.” 

Step Forward, But Not Full Relief

If finalized in accordance with Transportation Secretary Sean P. Duffy’s plan to modernize national vehicle standards, the proposals would relieve the AV industry from seeking exemptions for the four FMVSS covered by the rulemakings. While a step forward for the industry’s push for federal action to support the advancement of AV technology, this does not provide complete regulatory relief.

Unresolved Legal and Technical Questions

Significant legal, technical, and policy questions remain, including what information must be provided to AV passengers, how NHTSA will test braking systems without brake pedals, and how to reconcile non-traditional seating positions with crash test dummies designed for forward-facing seats.  

Part of a Broader Modernization Effort

Although these separate actions may be new to the Unified Agenda, NHTSA’s effort to modernize the FMVSS is not. Since 2018, NHTSA has maintained an omnibus rulemaking titled Facilitating New Automated Driving System Vehicle Designs for Crash Avoidance Testing 2127-AM00 The initiative follows NHTSA’s May 2019 advanced notice of proposed rulemaking, Removing Regulatory Barriers for Vehicles With Automated Driving Systems. In 2022, NHTSA finalized a rule updating crashworthiness standards to account for AVs, though it has limitations for today’s industry.

Opportunities and Risks of a Piecemeal Approach

Breaking regulatory updates into smaller rulemakings may accelerate progress by targeting standards that are easier to revise. This approach aligns with Executive Order 14192, Unleashing Prosperity Through Deregulation, which requires that for every new regulation, at least 10 existing ones must be identified for repeal.

However, a piecemeal strategy also carries risks. Each rulemaking must independently advance through the U.S. Department of Transportation and the Office of Management and Budget, where delays or bottlenecks may occur. The challenge is compounded by the fact that NHTSA currently has 70 rulemakings on the Unified Agenda, but only a fraction of its normal staff to advance them[1].

Varnum’s Vehicle Safety and Mobility Team will be closely monitoring these regulatory developments and is prepared to assist clients in navigating the complexities of emerging AV regulation. 

[1] Transportation U.S. auto safety agency shedding more than 25% of employees: Reuters

Doing Business in Mexico: What U.S. Companies Need to Know

Doing Business in Mexico: What U.S. Companies Need to Know

This advisory was prepared in collaboration with Alfonso González Uribe, founding member of Cornejo Méndez González and Duarte, SC (CMGD), who focuses his practice on labor law and social security, and José Luis Duarte Cabeza, who provides comprehensive counsel in tax, litigation, and corporate matters. 

Mexico is the United States’ largest trading partner, with total trade reaching $840 billion in 2024. This article offers practical guidance for U.S. companies seeking to do business in Mexico or manufacture products for sale in the United States. Attorneys from Varnum LLP and CMDG law firm in Mexico offer practical guidance and strategies for conducting business in Mexico.

Why Should U.S. Companies Consider Doing Business in Mexico?

With a population of 130 million, Mexico imports over $300 million in goods and services from the United States annually. Many U.S. companies also manufacture goods in Mexico for export back to the United States and to other countries.

Mexico’s proximity provides nearshoring opportunities to reduce global supply chain risks. The country also offers a large workforce at competitive labor costs. While free trade agreements have historically benefited U.S. companies, tariff levels remain uncertain as of August 2025.

What Are the Main Ways to Enter the Mexican Market?

  • Distributor or Agent: Best for testing the market. Contracts must be structured carefully to avoid unexpected labor, tax, or intellectual property liabilities.
  • Branch Office: Allows direct control but exposes the parent company to full liability for Mexican operations.
  • Mexican Subsidiary: The most common and recommended structure for long-term investment. These entities offer limited liability and favorable tax treatment but require more compliance.

What Should I Know About Hiring Employees in Mexico?

Mexico’s labor laws include employee protections and mandatory benefits that differ from those in the U.S. In contrast to the at-will employment system in the United States, Mexican law presumes an employment relationship whenever someone provides services under another’s control and is compensated.

Key Employee Rights Include:

  • Mandatory Severance: If an employer terminates an employee without cause, Mexican law mandates significant severance payments.
  • Minimum Wage: Employees must be paid at least the statutory minimum wage (for example, in Mexico City: 248.93 pesos/day).
  • Work Hours and Overtime: The maximum work week is 48 hours, with mandatory overtime pay for additional hours.
  • Paid Holidays and Vacation: Employees are entitled to paid holidays and at least 12 vacation days after one year of service.
  • Christmas Bonus: A mandatory annual bonus equivalent to 15 days’ wages.
  • Profit Sharing: Employees must receive 10% of the company’s pre-tax profits.
  • Social Security and Health Benefits: Employers must enroll workers in the Mexican Social Security Institute (IMSS) and contribute to the National Housing Fund (INFONAVIT).
  • Maternity Leave: Six weeks of paid leave before and after childbirth.
  • Mandatory Training: Employers are required to provide ongoing training.

Severance Costs:

One of the most significant risks and cost drivers for U.S. companies is the legal framework surrounding employee termination. In Mexico, unjustified termination triggers substantial severance obligations:

  • Severance Pay: Three months’ salary plus 20 days’ salary for each year of service.
  • Back Pay and Accrued Benefits: Employers may be liable for back pay and all accrued benefits from the date of dismissal until resolution.
  • Notice and Documentation: Employers must provide written notice of dismissal and maintain thorough documentation.

Terminating employees, especially without clear, documented cause, can be costly and legally complex. The risk of litigation and the potential for significant financial liability are much higher than in the United States.

Since Mexico enacted reforms in 2021, outsourcing is banned except for specialized services unrelated to a company’s core business. Any permitted outsourcing arrangements require registration with the Labor Ministry and full compliance with tax and labor regulations. This limits flexibility in workforce management and increases compliance costs.

What Are the Key Benefits of the IMMEX (Maquiladora) Program?

The IMMEX (Industria Manufacturera, Maquiladora y de Servicios de Exportación) program is a cornerstone of Mexico’s export-oriented manufacturing sector. Commonly referred to as the “maquiladora” program, it is designed to attract foreign investment by offering significant tax and customs benefits to companies manufacturing in Mexico for export.

Key Features of the IMMEX Program Include:

  • Temporary Importation of Goods: Raw materials, components, and machinery can be imported into Mexico without paying import duties or value-added tax (VAT), provided these goods are used to manufacture products for export.
  • Export Focus: The program is specifically tailored for businesses that export their finished goods. Maquiladoras must export all temporarily imported goods or convert them to permanent importation within specified timelines.
  • Tax Benefits: Companies operating under the IMMEX program can benefit from favorable tax treatment if they structure their operations properly. For example, certain tax incentives and exemptions may apply, and the program is compatible with international tax regulations, such as the U.S. “check-the-box” rules, which can help optimize the overall tax burden for U.S. parent companies.
  • Flexibility in Manufacturing and Services: The program is not limited to traditional manufacturing. It also covers companies providing export-related services, such as logistics, repair, and maintenance, broadening the scope of businesses that can benefit from IMMEX.
  • Strict Controls: Transfers of temporarily imported goods within Mexico are tightly regulated to ensure compliance with export requirements.

Legal counsel in Mexico can guide a U.S. company through the key steps to set up a maquiladora:

  • Establish a Legal Entity in Mexico: The U.S. company must first create a Mexican subsidiary or entity. The most common structures are the Sociedad Anónima (S.A.) or Sociedad de Responsabilidad Limitada (S. de R.L.), both of which offer limited liability and are suitable for long-term operations.
  • Register with Mexican Authorities: The Mexican entity must register with the Ministry of Economy to obtain IMMEX authorization. This involves submitting detailed information about the company’s operations, export plans, and compliance with program requirements.
  • Customs and Tax Compliance: The company must register as an importer and comply with all customs regulations, including maintaining accurate records of all imported and exported goods. Monthly VAT and customs returns must be filed, and all goods must be tracked to ensure they are either exported or properly converted to permanent importation.
  • Meet Export Requirements: To maintain IMMEX status, the company must demonstrate that it is exporting most of its production. There are strict timelines for exporting temporarily imported goods, and failure to comply can result in penalties or loss of IMMEX benefits.
  • Ongoing Regulatory Compliance: IMMEX companies are subject to regular audits and must comply with labor, tax, and environmental regulations. This includes proper registration of employees with the Mexican Social Security Institute (IMSS) and adherence to all labor laws.

What Taxes Will a U.S. Company Face in Mexico?

  • Federal Taxes: Corporate income tax (30 percent), VAT (16 percent), and specific taxes on goods/services (e.g., alcohol, tobacco). VAT is managed through a credit-and-debit system, with monthly filings required.
  • State & Local Taxes: Payroll tax (3-4 percent), property transfer tax, and land ownership levies.
  • Withholding Taxes: Services and royalties/technical assistance (25 percent), interest (up to 35%, but can be reduced by tax treaties).
  • Tariffs: As of August 2025, tariffs between U.S. and Mexico are in a state of change and negotiation.

How Can I Protect Intellectual Property in Mexico?

Mexico follows international IP standards. To secure your rights, register your patents, trademarks, and copyrights locally. This is essential for enforcement and protection under Mexican law.

What Should I Know About Buying Real Estate in Mexico?

  • Non-Residential Use: Foreign-owned Mexican entities can purchase property directly, with notification to the Foreign Affairs Ministry.
  • Residential Use: Must be held through a bank trust “fideicomiso” with the foreign investor as beneficiary.

What Cultural Differences Should I Be Aware Of?

When conducting business in Mexico, businesspeople should be aware that cultural norms and expectations can differ significantly from those in the United States. Mexican business culture places a strong emphasis on personal relationships, trust, and respect for hierarchy. Building rapport and establishing trust with local partners, clients, and employees is often a prerequisite to successful negotiations and long-term collaboration.

Meetings may begin with informal conversation, and decision-making processes can be more deliberate, involving multiple levels of management and requiring patience. Unlike the typically direct and time-sensitive approach favored in the U.S., Mexican counterparts may prioritize consensus and relationship-building over immediate results. Additionally, respect for authority and seniority is deeply ingrained, so it is important to address senior leaders appropriately and understand that decisions may ultimately rest with top executives rather than middle management.

Recognizing and adapting to these cultural nuances can help U.S. companies foster stronger partnerships and avoid misunderstandings when entering the Mexican market.

CMGD and Varnum LLP are independent firms that are members of the Ally Law global referral network. Ally Law enables member firms to connect with trusted counsel around the world. Contact your Varnum attorney for guidance on doing business in Mexico.

 

Preserving Your Family’s Cottage Legacy

Preserving Your Family’s Cottage Legacy

For many families, a cottage is more than just real estate; it’s a place of tradition, togetherness, and lasting memories. As time passes, cottage owners may want to consider the long-term future of their retreat. Thoughtful planning now can help ensure the property remains a source of joy for future generations while preserving the values and connections it represents.

Why Cottage Planning Matters

A cottage is often among a family’s most emotionally significant assets, and sometimes one of the most valuable. Deciding how it will be passed down can be challenging, requiring thoughtful consideration of family dynamics, tax implications, and how to manage shared use and responsibilities. Several legal strategies are available to help owners plan for the next chapter of their cottage’s story.

Common Strategies for Cottage Succession Planning

1. Qualified Personal Residence Trust (QPRT): 

This is an effective tool when estate taxes are the primary concern. A QPRT holds title to real property for a specified period, during which the grantor retains the exclusive right to use the property. Upon the term’s expiration, the property passes to the designated beneficiaries. This benefits the donor by reducing the gift tax value to the property’s fair market value minus the value of the retained interest. However, a QPRT does not address shared ownership and use after the trust terminates. Additionally, the trust termination may uncap property taxes.

2. Joint Ownership Agreements: 

Michigan law exempts certain transfers of jointly held property from uncapping. Adding a spouse, child, grandchild, parent, or sibling to the cottage title should not result in uncapping and may be part of a broader plan to transfer ownership to a younger generation. Yet, this arrangement comes with risks, including concerns regarding control of the property, increased liability exposure, and unintended gifting and tax consequences. A joint ownership agreement is essential to outline how decisions are made, costs are shared, and usage is managed.

3. Ownership by Trust or LLC: 

Transferring cottage ownership into a trust or limited liability company (LLC) can provide greater structure and protection. Trust Agreements and LLC Operating Agreements can include rules regarding property use, expense payment, dispute resolution, and transfers after an owner dies.

This approach avoids the pitfalls of “tenants-in-common” ownership, which becomes increasingly problematic as more descendants acquire fractional interests in the cottage. Trusts and LLCs also provide flexibility as family members’ involvement changes over time.

An LLC provides some liability protection for the cottage owner and allows the owner to manage the property while gradually transferring control. A drawback of the LLC structure is that property taxes will be uncapped after more than 50 percent of the beneficial interests of the LLC have changed owners (and again each time more than 50 percent of the beneficial interests of the LLC are transferred thereafter). As a result, families who have owned a cottage for decades sometimes find that property tax uncapping considerations alone drive the decision between a trust and LLC structure, as a property tax uncapping can make continued ownership cost-prohibitive.

Factors in choosing a trust vs. an LLC include:

  • Reducing estate and gift taxes for multiple generations
  • Preserving control vs. granting future flexibility
  • Gifting of cottage interests
  • Facilitating the use of the cottage by others, whether informally or by renters
  • Providing liability and creditor protection
  • Managing decision-making and expenses
  • Property tax considerations

4. Gifting LLC Interests Using Annual Exclusions: 

Owners can reduce their taxable estate by making “annual exclusion” gifts of membership interests in an LLC that holds a cottage. In 2025, individuals may give up to $19,000 annually (or $38,000 for a married couple) in assets to as many people as they wish without federal gift tax consequences.

Under current tax law, valuation discounts may apply to minority interests in an LLC, allowing a donor to give membership interests worth more than the stated gift tax value. Future legislation may change or eliminate the availability of these valuation discounts, so the donor should be aware of the law in effect before gifting interests.

Cottage Planning Achieves Family Goals

Without a succession plan, unresolved issues such as taxes, ownership disputes, and unclear expectations can erode the joy and meaning that family cottages bring. There is no “one-size-fits-all” approach. Family goals and personal relationships will influence the ultimate decisions.

To begin building a plan that fits your family’s unique needs, contact a member of Varnum’s Estate Planning Practice Team. With careful planning, your cottage can continue to be a source of memories, connection, and legacy for generations.

California Bill Aims to Limit Cookie Privacy Lawsuits

California Bill Aims to Limit Cookie Privacy Lawsuits

Varnum Viewpoints

  • Expect continued litigation risk in the near term. CIPA lawsuits targeting website cookies are widespread, with over 1,500 filed in the past 18 months.

  • Relief is on the horizon, but delayed. Senate Bill 690 would create a “commercial business purpose” exception, protecting routine business uses of cookies, but it won’t take effect until January 2026 and won’t apply retroactively.

  • Proactive steps are critical. Regardless of whether SB 690 is ultimately passed, businesses should be prepared for an increase in demand letters and lawsuits and should consult counsel to assess risk and develop response strategies.

Companies that use cookies on their websites have seen a flood of lawsuits and demand letters claiming the industry-standard software violates users’ privacy rights by collecting personal information.

Many of these claimants rely on theories of liability under California law, which they argue applies even if the company does not have a physical presence in the state. The claimant’s goal is often to extract a nuisance-value settlement, then move on to the next target. The California Invasion of Privacy Act (CIPA) is a particularly attractive statute for cookie litigants because it provides for statutory damages of $5,000 per violation.  

California lawmakers have taken notice of these CIPA-related “shakedown letters and lawsuits” observing that “[i]n the last 18 months, trial lawyers have sued over 1,500 business using [CIPA]’s private right of action, arguing that these typical business activities constitute ‘wiretapping’ or an illegal ‘pen register,’ necessitating ‘opt-in’ consent before the business can, for example, save an online shopping cart or show an ad.”

See Senate Committee on Public Safety Bill Analysis, Senate Bill 690, 2025-2026 Reg. Sess. (April 25, 2025). 

Legislative Response: Senate Bill 690

To combat these lawsuits, the California State Senate unanimously passed Senate Bill 690, which would substantially reform CIPA by creating a “commercial business purpose” exception. Specifically, SB 690 would:

  1. Exempt commercial business purposes from the general prohibition against eavesdropping or recording a confidential communication.
  2. Clarify that the civil action authorized under current law for a person injured by a CIPA violation does not apply to the processing of personal information for a commercial business purpose.
  3. Specify that a trap and trace device, as defined in the CIPA, does not include a device or process used in a manner consistent with a commercial business purpose.
  4. Specify that a pen register does not include a device or process used in a manner consistent with a commercial business purpose.
  5. Define “commercial business purpose” as the processing of personal information either to further a business purpose, as defined in the California Privacy Act, or subject to a consumer’s opt-out rights.

SB 690 is now in the California State Assembly. If passed, it will go to Governor Gavin Newsom for final approval. Based on bipartisan support, the bill appears poised for enactment in 2026.  

Implications for Businesses

While SB 690 would be a welcome change for businesses that have received CIPA-related demands, there is an important caveat: the bill would not apply retroactively and would not take effect until January 2026.

Regardless of whether SB 690 is ultimately enacted, its delayed effective date may prompt a new wave of cookie-based CIPA lawsuits in the months ahead, as claimants seek to file before the commercial-purpose exception becomes law.

Varnum is experienced in handling CIPA and online privacy litigation. If you receive a CIPA demand letter or lawsuit, contact your Varnum attorney, Varnum’s Data Privacy Practice Team, or Varnum’s Litigation Practice Team.

Summer Associate Alex Sax contributed to this advisory. Alex is currently a law student at Wayne State University Law School.

Florida Passes Major Reforms for Community Associations

Florida Passes Major Reforms for Community Associations

Update August 21, 2025: A provision added to Chapters 718 and 719, Florida Statutes, now requires all condominium and cooperative associations to create and maintain an online account with the DBPR on or before October 1, 2025. Associations will use this account to provide governance, building, and financial information as part of the state’s broader transparency and compliance initiative. Create an online account.

Florida’s most recent legislative session introduced a series of changes impacting condominium and cooperative associations aimed at increasing transparency, accountability, and safety.

Stricter Licensing Rules for Community Association Managers

Community association managers (CAMs) are now required to maintain an active license with the Department of Business and Professional Regulation (DBPR), which includes keeping their information up to date regarding the associations and firms they represent.

If a CAM’s license is revoked, they are prohibited from owning or working for a management firm for a period of ten years. Associations must verify that their CAMs are appropriately licensed and in good standing, marking a notable shift in compliance duties at the board level.

Expanded Building Safety and Reserve Oversight

The legislation reinforces requirements for milestone inspections and structural integrity reserve studies (SIRS). Associations must complete their first SIRS by December 31, 2025, and include a funding plan to support long-term structural needs.

Boards may pause or redirect reserve contributions in specific emergencies or inspections, but only with membership approval and in accordance with new statutory procedures. Board members must also sign an affidavit acknowledging receipt of completed SIRS, reinforcing their fiduciary responsibility.

New Standards for Meetings and Records

Operational procedures have also been modernized. Boards may now meet by video conference, but must follow new rules regarding meeting notice, access, recording, and retention of materials. Video recordings must be preserved as official records for a minimum of 12 months.

Additional changes to accounting and insurance appraisal requirements aim to ensure associations are appropriately documented and insured. By October 1, 2025, associations must also maintain an online account with the DBPR containing essential building, governance, and financial information.

Reserve Funding and Investment Options

The threshold for capital repairs requiring funding has increased from $10,000 to $25,000, with future adjustments tied to inflation. For items identified through a SIRS, funding must follow a baseline plan that ensures long-term adequacy.

Funding can be obtained through assessments, loans, or lines of credit, subject to member approval. Boards now have greater flexibility to invest reserve funds in insured financial institutions without a membership vote, provided that investments are made with sound judgment.

These updates aim to give boards stronger financial tools and greater responsibility in safeguarding the association’s long-term stability.

For questions about how these changes may impact your community or to ensure your association is fully compliant, contact Varnum’s Condominium and Homeowners Association Practice Team.

2025 summer associate Nolan Thomas contributed to this advisory. Nolan is currently a law student at the University of Miami.

This advisory was originally published on June 27, 2025, and updated on August 21, 2025.

How New Tax Legislation Impacts Clean Energy Tax Credits

How New Tax Legislation Impacts Clean Energy Tax Credits

On August 15, 2025, the Treasury Department released new guidance clarifying when a solar or wind project is deemed “under construction” for purposes of federal clean-energy tax credits. Under the prior rules, a project could satisfy the requirement by either (i) initiating physical work of a significant nature or (ii) incurring at least 5% of the total project costs and there is continuous work on the project. The new guidance removes the 5% safe harbor and provides that a project will only be considered under construction when “physical work of a significant nature” has commenced. Qualifying work may occur on-site or off-site, depending on the specific circumstances of the project.

On Friday, July 4, President Trump signed into law the budget reconciliation bill H.R. 1. (the Act), formerly known as or nicknamed the “One Big Beautiful Bill Act”. Among other substantial changes to the tax code, the Act significantly reduces tax incentives for clean energy practices, terminating many of the environmental and clean energy tax credits introduced by the Inflation Reduction Act (IRA) of 2022. Many of those credits were scheduled to remain in effect until 2032.

The Act impacts clean energy tax credits in two key ways:

  1. It accelerates the expiration and phasing out of certain credits.
  2. It prohibits specified foreign entities, foreign-influenced entities, and domestic entities that receive material assistance from specified foreign entities from claiming certain credits.

Credit Phase-Outs

Taxpayers currently engaged in clean energy projects should be aware of critical deadlines to begin construction or place projects in service to remain eligible for tax credits.

For example, solar and wind facilities must either:

  • Begin construction within one year of the Act’s enactment (i.e., before July 4, 2026), qualifying for a four-year continuity safe harbor; or

  • Be placed in service by December 31, 2027, to remain eligible for the Clean Electricity Production or Clean Electricity Investment credits before those credits are phased out.

These new deadlines do not apply to energy storage technologies, including those placed in service at wind or solar facilities, or certain other qualified technologies.

The Act also introduces a tiered adjustment for the domestic content bonus threshold under the Investment Tax Credit (ITC), similar to the structure used for the Production Tax Credit (PTC).

Foreign Entity Restrictions

In addition to timing changes, the Act imposes new limitations on foreign involvement in clean energy projects.

Many tax credits are now unavailable to “specified foreign entities” and “foreign-influenced entities.” Specified foreign entities include:

  • Chinese military companies

  • Entities of concern identified under the William M. Thornberry National Defense Authorization Act

  • Entities listed in Public Law 117-78

  • Entities specified under Section 154(b) of the National Defense Authorization Act

  • Foreign-controlled entities.

A foreign-influenced entity includes an entity under the direct authority of, or partially owned by, a specified foreign entity.

Summary of Key Energy Tax Credit Changes

Clean Vehicle Credits:

  • Previously-Owned Clean Vehicle Credit (25E), Clean Vehicle Credit (30D), and Qualified Commercial Clean Vehicles Credit (45W) expire for vehicles acquired after September 30, 2025, previously scheduled to expire on December 31, 2032.

  • Alternative Fuel Vehicle Refueling Property Credit (30C) expires on June 30, 2026, previously scheduled to expire on December 31, 2032.

Home Improvement Credits:

  • Energy Efficient Home Improvement Credit (25C) expires for property placed in service on or after December 31, 2025, previously scheduled to expire on December 31, 2032.

  • Residential Clean Energy Credit (25D) expires for expenditures made after December 31, 2025, previously scheduled to expire on December 31, 2034.

  • New Energy Efficient Home Credit (45L) expires for homes acquired after June 30, 2026, previously scheduled to expire on December 31, 2032.

Electricity Credits:

  • Clean Electricity Production Credit (45Y) phases out beginning in 2032, previously scheduled to phase out later in 2032 or the year in which greenhouse gas emissions from electricity production were reduced to a specified level.

  • Clean Electricity Investment Credit (48E) prohibits facilities from receiving material assistance from prohibited foreign entities if construction begins after December 31, 2025.

  • Wind and solar facilities must begin construction by July 4, 2026, or be placed in service by December 31, 2027, to remain eligible.

  • Clean Electricity Production Credit and Clean Electricity Investment Credit are unavailable to specified foreign entities and foreign-influenced entities.

Nuclear and Hydrogen Credits:

  • Zero Emission Nuclear Power Production Credit (45U) is unavailable to specified foreign entities; eligibility ends for foreign-influenced entities two years after enactment.

  • Clean Hydrogen Production Credit (45V) expires for facilities with construction beginning on or after January 1, 2028, previously scheduled to expire on January 1, 2033.

Manufacturing Credits:

  • Advanced Manufacturing Production Credit (45X) phases out beginning with critical minerals produced after December 31, 2030. Production of metallurgical coal produced after December 31, 2029, and production of wind energy components produced and sold after December 31, 2027, are not eligible for the credit.

  • The credit is unavailable to specified foreign entities and foreign-influenced entities. Eligible components used in a product sold before January 1, 2030, cannot receive material assistance from prohibited foreign entities.

Clean Fuel Credits:

  • Clean Fuel Production Credit (45Z) is extended to fuel sold on or before December 31, 2029, previously scheduled to expire on December 31, 2027. The credit is unavailable for fuel derived from feedstock sourced outside the U.S., Mexico, or Canada starting December 31, 2025. It is also unavailable to foreign entities on that date and two years after enactment for foreign-influenced entities.

Carbon Capture Credits:

  • Carbon Oxide Sequestration Credit (45Q) is unavailable to prohibited foreign entities and foreign-influenced entities.

On July 7, 2025, President Trump issued an Executive Order requiring the Treasury and Interior Departments to strengthen provisions in the Act that eliminate tax credits for solar and wind energy projects. Specifically, the order requires the Treasury Department to “issue new and revised guidance… to ensure that policies concerning the ‘beginning of construction’ are not circumvented.” Moving forward, developers should carefully document construction start dates on solar and wind projects to ensure eligibility for ITC and PTC tax credits. Varnum attorneys will continue to monitor developments and provide updates as additional Treasury guidance becomes available.

Individuals and businesses involved in or considering clean energy projects should consult with an attorney in Varnum’s Environmental and Renewable Energy practice to ensure current projects meet the new deadlines and eligibility for tax credits. Taxpayers operating within affected industries, particularly wind and solar, should consult with one of our attorneys to understand the full implications of the Act.

2025 summer associate Julia Sommerfeld contributed to this advisory. Julia is currently a law student at Ohio State University Law School.

This advisory was originally published on July 11, 2025, and updated on August 20, 2025.