New "Beginning of Construction" Guidelines Issued for Wind and Solar Tax Credits
The Internal Revenue Service ("IRS") has issued Notice 2025-42 to implement the One Big Beautiful Bill Act ("OBBBA") mandate to phase out the clean electricity production tax credit (§ 45Y) and investment tax credit (§ 48E) for wind and solar projects. The notice tightens the "beginning of construction" rules for these projects.
Background
The Inflation Reduction Act of 2022 introduced technology-neutral production and investment energy tax credits under sections 45Y and 48E. However, the OBBBA, enacted on July 4, 2025, terminates energy tax credits under sections 45Y and 48E for wind or solar facilities that are placed in service after 2027, unless those projects "begin construction" by July 4, 2026.
Historically, "beginning of construction" for energy credits could be established by either performing significant physical work on the project (the "Physical Work Test") or by incurring at least five percent of total project costs (the "Five Percent Safe Harbor").
An executive order issued on July 7, 2025, flagged that the IRS would provide new guidance on "beginning of construction" as applicable to wind and solar projects, to ensure that taxpayers could not inappropriately (in the view of the IRS) circumvent the phaseout of the credit for those projects. Pursuant to that executive order, on August 15, 2025, the IRS released Notice 2025-42.
What Notice 2025-42 Changes
Notice 2025-42 preserves the familiar Physical Work Test (and related continuity rules) but, effective as of September 2, 2025, eliminates the Five Percent Safe Harbor for all wind and solar projects except for a narrow class of low-output solar facilities. Taxpayers able to quickly assemble the necessary funds may still be able to qualify under the Five Percent Safe Harbor through September 1, 2025. Additionally, certain solar facilities with a maximum net output of 1.5 MW (based on nameplate capacity) or less may still rely on the Five Percent Safe Harbor, subject to aggregation rules designed to prevent artificial fragmentation.
Accordingly, for most wind and solar projects to be placed in service after 2027, the ability to lock in eligibility for energy tax credits under sections 45Y and 48E now depends on starting significant physical work by July 4, 2026, rather than simply incurring five percent of project costs. Importantly, the "beginning of construction" guidelines for energy projects that are not wind or solar projects appear to be unaffected. Additionally, Notice 2025-42 does not address the beginning of construction rules for purposes of the foreign entity of concern restrictions, which generally apply to clean energy projects commencing construction (within the meaning of those rules) after this year. The foreign entity of concern rules are expected to be addressed in future guidance.
