The IRS on Aug. 15, 2025, released Notice 2025-42, which provides guidance on how taxpayers can establish the "beginning of construction" (BOC) of a wind or solar facility for purposes of determining whether such facility is subject to credit termination provisions added to Internal Revenue Code Sections 45Y and 48E under the One Big Beautiful Bill Act (OBBB).
Under the OBBB, wind and solar facilities must either 1) be placed in service by Dec. 31, 2027, or 2) BOC within one year after enactment of the OBBB (i.e., by July 3, 2026). The notice follows President Donald Trump's executive order (EO), issued on July 7, 2025, that required, among other things, the U.S. Department of the Treasury secretary to issue guidance for wind and solar facilities under Section 45Y (production tax credit, or PTC) and Section 48E (investment tax credit, or ITC) that it "deems appropriate and consistent with applicable law to ensure that policies concerning 'beginning of construction' are not circumvented, including by preventing the 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." (See Holland & Knight's previous alert, "Executive Order Requires Treasury Guidance on Wind, Solar and FEOC Rules for Energy Tax Credits," July 8, 2025.)
Generally, Notice 2025-42 makes the following changes to the historical BOC rules for wind and solar:
- removes the 5 Percent Safe Harbor for all wind facilities and for solar facilities with net output of more than 1.5 megawatts of alternating current power (MW(ac))
- retains the Physical Work Test with limited modifications
- provides for a four-year continuity requirement safe harbor, thereby eliminating the 10-year continuity safe harbor for offshore wind projects and projects on federal lands
This Holland & Knight alert provides an overview of the historical BOC rules and how Notice 2025-42 modifies those rules for wind and solar facilities.
What Does the Notice Apply To?
Notice 2025-42 is effective for solar and wind facilities, the construction of which begins on or after Sept. 2, 2025. Notice 2025-42 applies only for purposes of determining whether construction of a wind or solar facility begins by July 3, 2026.
How Have the BOC Rules Changed?
Neither the Internal Revenue Code nor Treasury Department regulations provide guidance on what it means to BOC for tax purposes. Instead, the determination of whether construction began on a qualified facility or an energy property project for these purposes is made in accordance with a series of IRS notices (the BOC Notices).1
In the BOC Notices, the Treasury Department and IRS provide two methods that a taxpayer may use to establish the BOC of a qualified facility or energy property project: 1) begin physical work of a significant nature of that facility or property (Physical Work Test) or 2) pay or incur 5 percent or more of the cost of that facility or property (5 Percent Safe Harbor). Only one of these methods must be satisfied to establish BOC, and construction begins at the time at which either method is first satisfied.
Option 1: Physical Work Test
Historical Physical Work Test Rules
The Physical Work Test requires taxpayers to begin physical work of a significant nature on a qualified facility. Generally, work performed by the taxpayer and work performed for the taxpayer by other persons (under a binding written contract that is entered into before the work begins) is taken into account to determine whether construction has begun. That work can be undertaken on-site or off-site. Notably, this test focuses on the nature of the work performed, not the amount or cost.
Generally, if the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the physical work test. Though the BOC Notices do not define the term "significant nature," based on the nonexclusive list of certain on-site and off-site activities that could be treated as physical work of a significant nature, the BOC Notices make clear that qualifying work may not be de minimis for purposes of establishing BOC via the Physical Work Test.2 Further, the BOC Notices exclude preliminary activities as well as other work performed by the taxpayer (or by another person under a binding written contract) to produce components of energy property projects that are held in inventory by a vendor from constituting satisfaction of the physical work test.
The Physical Work Test includes a "continuity requirement," which historically requires that a taxpayer make continuous efforts or continuous progress toward completion once construction has begun. Whether a taxpayer makes continuous efforts or continuous progress to satisfy this continuity requirement will be determined by the facts and circumstances. Notably, a taxpayer can satisfy the continuity requirement by placing the project in service by the end of the year that includes the fourth anniversary of the date in which construction began (the Continuity Safe Harbor) – e.g., by Dec. 31, 2029, for a project for which construction began during 2025.
What's Changed in the Physical Work Test?
Notice 2025-42 did not generally modify the historical rules under the Physical Work Test. However, Notice 2025-42 1) does not include the 10-year Continuity Safe Harbor for offshore wind projects and projects built on federal land that were included in previous BOC Notices and 2) alters the continuity requirement by referring only to a continuous progress toward completion and not to continuous efforts.
Option 2: 5 Percent Safe Harbor
Historical 5 Percent Safe Harbor Rules
The 5 Percent Safe Harbor requires taxpayers to pay (for cash-basis taxpayers) or incur (for accrual-basis taxpayers) 5 percent or more of the total cost of a qualified facility or energy property project.
For these purposes, all costs properly included in the depreciable basis of the qualified facility or energy property project (which do not include the cost of land or any property not integral to the facility or project) are taken into account to determine whether the 5 Percent Safe Harbor has been met.
Taxpayers can rely on the economic performance rules under Section 461 of the Internal Revenue Code and Treasury Department regulations for incurring costs for federal income tax purposes. Under these rules, a taxpayer can treat property as provided to the taxpayer when the taxpayer pays the person providing the property, if the taxpayer reasonably expects the property to be provided within three and a half months after the date of the payment (the "three-and-a-half-month rule"). Taxpayers relying on the three-and-a-half-month rule should seek to put guardrails in place to make sure economic performance occurs (for example, the property is actually received by the taxpayer) within three and a half months from the date of payment.
The 5 Percent Safe Harbor also includes the "continuity requirement," which requires that a taxpayer make continuous efforts or continuous progress toward completion once construction has begun. As with the Physical Work Test, whether a taxpayer makes continuous efforts or continuous progress to satisfy this continuity requirement will be determined by the facts and circumstances, but a taxpayer can satisfy the continuity requirement through the Continuity Safe Harbor.
What's Changed in the 5 Percent Safe Harbor?
Notice 2025-42 eliminates the ability to utilize the 5 Percent Safe Harbor for wind and solar facilities that begin construction on or after Sept. 2, 2025. One exception is for solar facilities if the net output (in nameplate capacity) of such facility is less than 1.5 MW(ac). For purposes of the 1.5 MW(ac) determination, solar facilities with "integrated operations" are measured in the aggregate. Taxpayers must aggregate operations with one or more other solar facilities that are 1) owned by the same taxpayer, 2) placed in service in the same taxable year and 3) connected to the same interconnection point.
Notice 2025-42 also eliminates the rule with respect to the 5 Percent Safe Harbor that a taxpayer can make "continuous efforts" toward completing the project once construction has begun. Now, taxpayers must demonstrate a continuous program of construction that involves continuing physical work of a significant nature. Though Notice 2025-42 retains a list of excusable disruptions for purposes of satisfying the Continuity Safe Harbor, the list of disruptions does not apply for purposes of satisfying the continuity requirement. Finally, as noted above for the Physical Work Test, Notice 2025-42 does not include the special 10-year Continuity Safe Harbor for offshore wind projects and projects built on federal land that was included in previous BOC Notices.
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Notes
1 See Notices 2013-29, 2013-20 IRB 1085; 2013-60, 2013-44 IRB 431; 2014-46, 2014-35 IRB 520; 2015-25, 2015-13 IRB 814; 2016-31, 2016-23 IRB 1025; 2017-04, 2017-3 IRB 541; 2018-59, 2018 IRB 196; 2019-43, 2019-31 IRB 487; 2020-41, 2020-25 IRB 954; 2021-05, 2021-3 IRB 479; 2021-41, 2021-29 IRB 17; and Notice 2025-42.
2 Note that an earlier version of Notice 2025-42 included as an example "transformers (used in electrical generation that step up the voltage to less than 60 kilovolts)," but the final version removed the parenthetical consistent with the prior BOC Notices.
