New rules for solar and wind construction
One of the most consequential administrative developments following the enactment of the OBBBA was IRS Notice 2025-42, which provided updated guidance on what it means to “begin construction” for purposes of claiming the clean electricity credits under Sections 45Y and 48E. This guidance, required by Executive Order 14315 (July 7, 2025), is especially important in light of the OBBBA’s accelerated termination of the credits for solar and wind projects placed in service after Dec. 31, 2027, unless construction begins prior to July 5, 2026.
The IRS previously issued several notices that allowed taxpayers to establish the beginning of construction date using either the Physical Work Test or the Five Percent Safe Harbor, provided they also met a continuity requirement. These rules have been widely used in the renewable energy industry to secure credit eligibility while allowing flexibility in project timelines.
Notice 2025-42 significantly narrows the options available to solar and wind developers establishing the beginning of construction for purposes of Sections 45Y and 48E by eliminating the Five Percent Safe Harbor. Going forward, only the Physical Work Test may be used to establish that construction has begun.
The Physical Work Test requires that a taxpayer begin physical work of a significant nature on the project site or on project components. The test focuses on the nature of the work, not the amount or cost, and it includes both on-site and offsite work. Qualifying activities include, for example, site grading, foundation pouring or the manufacture of custom components or equipment. Preliminary activities such as planning or design, obtaining permits and licenses and conducting surveys and studies are not considered physical work of a significant nature.
The notice also clarifies that taxpayers must demonstrate continuous progress toward completion once physical work has begun (the “continuity requirement”). This includes maintaining a consistent schedule of development, procurement and construction activity. Projects that experience extended delays or inactivity may be deemed to have failed the continuity requirement, even if physical work was initiated on time. The notice provides a safe harbor whereby the continuity requirement is deemed met if the qualified solar or wind facility is placed in service no later than the last day of the fourth calendar year after the calendar year in which construction began.
For example, if construction begins in June 2026 (as determined under Notice 2025-42), then the safe harbor is met as along as the qualified facility is placed in service no later than Dec. 31, 2030, without regard for certain excusable disruptions.
Notice 2025-42 allows taxpayers with low output solar facilities (maximum net output not greater than 1.5 MW nameplate capacity as measured in alternating current) to continue to rely on the IRS Notices, including the Five Percent Safe Harbor.
The notice applies only to solar and wind facilities that begin construction on or after Sept. 2, 2025, as determined under the IRS Notices, including projects relying on the now-disallowed Five Percent Safe Harbor.
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