On August 15, the Internal Revenue Service (IRS) issued Notice 2025-42, which eliminates the previously allowed 5% safe harbor rule used to demonstrate the start date of construction for all wind and most solar projects, except small facilities that have a maximum net output less than or equal to 1.5 megawatts.
For projects that begin construction on or after September 2, 2025, taxpayers must now rely solely on the physical work test (with the exception of small solar projects) to demonstrate construction has begun if they intend to claim a credit for a project placed in service after 2027.
Early Termination of Wind and Solar Energy Tax Credits Background
The enactment of P.L. 119-21, commonly referred to as the “One Big Beautiful Bill Act,” on July 4 included early termination of solar and wind projects generating credits under IRC Sections 48E and 45Y. P.L. 119-21 terminated credits for solar and wind facilities placed in service after December 31, 2027, for which construction begins more than 12 months after enactment.
At the time the bill passed, a taxpayer could demonstrate it had begun construction of a project, a critical test for credit eligibility, utilizing either the physical work test or the 5% safe harbor test.
The Physical Work Test
The physical work test deems that the construction of an energy property begins when significant physical work begins. This is a facts-and-circumstances test that focuses on the nature of the tasks performed, not the amount or cost of the work. Thus, the test does not require a fixed minimum amount of work or a monetary or percentage threshold.
The 5% Safe Harbor Test
The 5% safe harbor test deems construction of an energy property begins when a taxpayer pays or incurs 5% of the total cost of the energy property.
The Executive Order Impacting Clean Energy Tax Credits
On July 7, 2025, President Trump issued an executive order titled “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources” that directed Treasury to issue new and revised guidance within 45 days of P.L. 119-21’s enactment “to ensure that policies concerning the ‘beginning of construction’ are not circumvented, including the prevention of artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”
Notice 2025-42 does not address beginning of construction rules related to the foreign entity of concern (FEOC) restrictions. The notice indicated that Treasury and the IRS are still drafting additional guidance on the FEOC restrictions concerning beginning of construction.
Take a deeper dive into the provisions of the 2025 final budget reconciliation bill with our detailed analysis.
How Can Cherry Bekaert Help
Cherry Bekaert’s Energy Tax Credits & Incentives team can help you assess your wind or solar project’s compliance with the reshaped rules governing credit eligibility in the advent of the 2025 tax reform.
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