On July 7, 2025, President Donald Trump issued an executive order titled “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources.” The EO directs the U.S. Department of the Treasury to issue new and modify existing guidance on the longstanding “beginning of construction” tax regime regarding wind and solar projects, as well as the One Big Beautiful Bill Act’s (BBB’s) foreign entity of concern (FEOC) restrictions, by Aug. 18, 2025.
The EO focuses on the beginning of construction tax rules for wind and solar projects to ensure that “policies concerning the ‘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.” The EO also instructs Treasury to strictly enforce the termination of clean energy production tax credits and investment tax credits under Section 45Y and 48E of the Internal Revenue Code.
Additionally, the EO provides for a speedy implementation of the FEOC restrictions by requesting that Treasury issue guidance before its applicability date to projects.
Beginning of Construction for Wind and Solar Projects
Generally, under current law, the IRS recognizes two tests for a wind or solar project to begin construction for tax purposes: the physical work test and the 5% safe harbor. Only one test must be satisfied to establish the beginning of construction. Once construction begins, a taxpayer must make continuous efforts toward completion. Under a continuity safe harbor endorsed by the IRS, projects that begin construction in 2025 have until the end of 2029 to be placed in service, and projects that begin construction in 2026 have until the end of 2030 to be placed in service.
Under the physical work test, a taxpayer must perform physical work of a substantial nature on equipment that is an integral part of the facility.
Off-site work must be performed pursuant to a binding written contract on components not normally held in the supplier’s inventory that are critical to the project’s production of energy. For this purpose, taxpayers typically complete work of a substantial nature on a main power transformer or other custom-designed equipment.
For on-site work, activities such as building foundations uniquely designed to support electricity-generating equipment, roads vital to the operation of the facility or other physical work of a substantial nature can be used to establish the beginning of construction.
Under the 5% safe harbor, a taxpayer must, pursuant to a binding written contract, pay or incur at least 5% of the total cost of the facility and, for accrual-based taxpayers, take delivery of such components or expect to take delivery within three-and-a-half months of the execution of the binding written contract.
Commentary
The EO appears to take aim at all three beginning of construction strategies in favor of a new, heightened physical work standard — that a “substantial portion” of a wind or solar facility must be built. It is unclear how this standard will be outlined in future guidance. While the FEOC guidance is necessary, it remains to be seen whether Treasury’s guidance will be overly burdensome. Moreover, the applicability date of the beginning of construction guidance is uncertain.
It also is unclear whether the beginning of construction guidance will apply broadly or if the new rules will be strictly applied to determining the beginning of construction date for FEOC restrictions, as contemplated in Sections 7701(a)(51)(K) and 7701(a)(52)(D)(v)(II) of the Internal Revenue Code, as amended by the recent legislation. Under the new rules in the BBB, wind and solar projects beginning construction prior to Jan. 1, 2026 would not be subject to the FEOC restrictions.
