On August 15, the Treasury Department published long-awaited guidance on applicability of “beginning of construction” safe harbors for solar and wind projects under the One Big Beautiful Bill and Executive Order 14315. While IRS Notice 2025-42 was expected to be much worse for the industry, the version that was issued does provide relief for those who plan ahead.
Key Changes in Notice 2025-42
1. Preserves the Physical Work Test for beginning construction
Notice 2025-42 maintains the existing “Physical Work Test,” meaning that qualifying projects must show that physical work of a significant nature has begun, either on-site (e.g., excavation, setting anchor bolts, installing racks or structures) or off-site (e.g., manufacturing non-inventory components). This is in line with the earlier guidance (e.g., IRS Notice 2013-29 and Notice 2018-59).
2. Eliminates almost all use of the 5% Test
Previously, taxpayers could satisfy “beginning of construction” rules by meeting the “5% Test” safe harbor, by spending at least 5% of the project costs. Notice 2025-42 removes this safe harbor entirely, except for low-output solar facilities. Under the new guidance, only projects with a nameplate capacity of 1.5 MW (AC) or less can still rely on the 5% Test to meet this safe harbor. The 5% Test was a favorable safe harbor, because it is easier to show documentation and substantiate that this test has been met, especially in instances where a project has not received all of the necessary permits for construction.
3. Applies only prospectively
The new rules apply only to projects that begin construction on or after September 2, 2025. For projects that have begun construction prior to September 2, 2025, prior guidance will remain applicable. This creates potential benefits to developers, contractors, and owners that have been preparing since the passage of the One Big Beautiful Bill in July.
4. Maintains the four-year Continuity Safe Harbor
The Continuity Safe Harbor remains relatively unchanged. Projects are still considered to have met the continuity requirement if they are placed in service by the end of the fourth calendar year after construction begins. For example, if construction starts in 2025, the safe harbor keeps eligibility if in service by end of 2029. However, if the project is placed in service after 2029, the project owner would be required to substantiate and prove (through facts and circumstances) that the project maintained a continuous program of construction. The facts and circumstance test to show continuity is affected by Notice 2025-42.
5. Retains “Single Project” rule for beginning of construction
Multiple qualified facilities can still be treated as a single project, using the same criteria as before (e.g., common ownership, contiguous land, shared substation or PPA, joint construction contract/financing, etc.) for purposes of the beginning-of-construction test.
6. Clarifies off-site work criteria
Off-site physical work still counts if performed on non-inventory components (e.g., inverters, racks, transformers) under a binding written contract, and later incorporated into the qualifying facility. However, at the time the One Big Beautiful Bill and Executive Order 14315 were signed, there were many public statements regarding scrutinizing projects that rely on off-site work. Prudent project owners will scrutinize the facts and circumstances around the off-site work, including any facility inspection, inventory records, and payment receipts to confirm that all documentation available is maintained until all statutes of limitations have run.
7. Addresses, but defers, guidance on FEOC (Foreign Entity of Concern) rules
Although the Executive Order and OBBBA include FEOC restrictions under Sections 45Y(b)(6) and 48E(b)(1)(E), Notice 2025-42 does not yet address FEOC-specific requirements for “beginning of construction” rules. A footnote indicates more guidance will come. In the meantime, taxpayers can generally rely on the same “beginning of construction” framework under Notice 2025-42.
Why It Matters
Notice 2025-42 narrows the pathways for beginning construction—cost-based safe harbor is effectively removed except for very small solar projects—meaning most medium- to large-scale developers must rely on actual physical construction activities. This will affect project pricing in projects being sold prior to operations; likewise, this is expected to affect rates for project financing, tax credit insurance, and tax credit sales.
For large-scale wind or solar projects, proof of physical construction now must be clear and documented. Simply spending money isn’t enough. The continuity rule remains, giving an extended timeline (up to four years) to place projects in service.
The September 2nd applicability provides a short window for the industry to push projects to begin construction immediately; having less than 3 weeks to meet the 5% Test to safe harbor an entire portfolio may not be realistic, but it could be the only pathway for some projects. Asset owners may give priority to projects that would not be able to commence physical work until after July 4, 2026; this could be the only way to protect those projects from less favorable changes promulgated with the One Big Beautiful Bill.
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