On August 15, 2025, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2025-42 (Guidance), updating the rules on when construction is considered to have “begun” for purposes of claiming either the production tax credit (PTC) under Section 45Y or the investment tax credit (ITC) under Section 48E for certain solar and wind facilities.
The Guidance responds directly to two recent developments:
- The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, phases out the Section 45Y and 48E credits for certain solar and wind facilities. Facilities where construction begins after July 4, 2026, and are placed in service after December 31, 2027, are no longer eligible.
- Executive Order (EO) No. 14315 – Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources (July 7, 2025). The EO directs Treasury to take additional actions to “strictly enforce the termination” of these credits for solar and wind facilities.
Key Takeaways
1. Safe Harbor for Financial Expenditure Eliminated for Most Projects. Previously, solar and wind project taxpayers could claim eligibility for the tax credits by showing that construction had “begun” by either (1) starting physical work of a significant nature (the Physical Work Test), or (2) using the Five Percent Safe Harbor (i.e., incurring at least 5% of total eligible project costs). The Guidance has eliminated the Five Percent Safe Harbor for most solar and wind facilities. Going forward, these projects may only rely on the Physical Work Test to demonstrate tax credit eligibility.
- Under the Physical Work Test, the taxpayer must demonstrate that physical work “of a significant nature” has and is occurring. This can include:
- Off-site work: manufacturing custom components, mounting equipment, and support structures (e.g., racks, rails, inverters, and transformers).
- On-site work: excavating foundation, setting anchor bolts in the ground, pouring concrete pads for the foundation, and installing racks or other structures to affix photovoltaic panel collectors or solar cells to the site.
- Preliminary activities are still not considered significant in nature. Preliminary activities: planning, designing, exploring, researching, mapping, modeling, obtaining permits/licenses, conducting surveys, performing environmental studies, clearing a site, conducting test drilling, excavating to change the contour of the land, and removing existing foundations, turbines, or towers.
- Exception: Small-scale solar facilities with a maximum net output of 1.5 MW (AC) or less may still use the Five Percent Safe Harbor in addition to the Physical Work Test to claim credit eligibility.
2. Guidance Effective September 2, 2025. The Guidance is effective as of September 2, 2025. As a result, facilities that could satisfy either the Physical Work Test or the Safe Harbor before September 2, 2025, may still claim credit eligibility under the prior rules.
3. Continuity Test Remains. Taxpayers must maintain a continuous program of construction involving physical work of a significant nature. Certain disruptions remain excusable, including severe weather, natural disasters, government permitting delays, or manufacturing delays for custom components.
Next Steps
Most solar and wind project developers will need to move quickly to preserve eligibility for tax credits. Under the new rules:
- Most projects that begin construction between September 2, 2025 and July 4, 2026, may only qualify for Section 45Y or 48E credits by meeting the Physical Work Test.
- Projects that begin construction before July 4, 2026, must be placed in service by December 31, 2027, to qualify for Section 45Y or 48E credits.
- Projects that begin construction after July 4, 2026 will not qualify for either the 45Y or 48E credit.
A surge in demand for equipment, components, and construction services is likely as developers accelerate project timelines. Expect strained supply chains, higher pricing, and longer lead times for key materials such as solar modules, inverters, and transformers. Securing custom-manufactured components may be critical to establishing “construction begun” status under the Physical Work Test.
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