[co-author: Christopher Torikoglu]*
On July 4, 2025, Public Law 119-21, commonly known as the One Big Beautiful Bill Act (the “OBBBA”), became law and enacted significant changes to various renewable energy incentives, including the clean electricity production and investment tax credits under sections 45Y and 48E of the Code.1
These sections now provide that wind and solar facilities that begin construction after July 4, 2026 must be placed in service before January 1, 2028 to qualify for the credits. The OBBBA also precludes “prohibited foreign entities” from claiming the credits and requires projects (not just wind and solar) that begin construction after December 31, 2025 to satisfy certain “material assistance rules” to qualify for the credits (together, these rules are colloquially named the “foreign entity of concern,” or “FEOC,” rules).2
On the heels of the OBBBA, President Trump signed Executive Order 14315 (the “Executive Order”) directing the Treasury to release updated beginning-of-construction guidance to sharpen the teeth of the OBBBA’s new sunset dates for the clean electricity production and investment tax credits for wind and solar projects. The Executive Order also directs the Treasury to release guidance to implement the FEOC rules within the same time frame.
On August 15, 2025, the Internal Revenue Service (the “IRS”) and the Treasury released Notice 2025-42 (the “Notice”), which provides the revised beginning-of-construction guidance envisaged by the Executive Order. The Notice applies solely for the purposes of the wind and solar beginning-of-construction deadline introduced by the OBBBA.3 The Notice:
- most importantly, eliminates the 5% spend safe harbor, except for low-output solar facilities (those with an output of 1.5MWac or less, determined on an integrated operations basis)
- is not retroactive and provides a small period of grace to wind and solar facilities for which construction has not begun before September 2, 2025
- applies solely for the purposes of the beginning-of-construction deadline for wind and solar facilities for which a credit under section 45Y or 48E would be claimed, and does not purport to affect beginning-of-construction guidance generally
- otherwise generally applies existing guidance relating to on- and off-site physical work of a significant nature, the continuity safe harbor, and the transfer rules.
The highlights of the Notice are described in more detail below.
Scope and applicability of the notice
The Notice only applies to facilities, the construction of which had not begun under pre-existing guidance prior to September 2, 2025, and only applies for the purposes of determining whether a wind or solar facility qualifying for credits under section 45Y or 48E must be placed in service before January 1, 2028.
The Notice is not retroactive and taxpayers beginning construction under pre-existing guidance have limited time to do so if they want to avoid the wind and solar cut-off. The Notice applies only for the purposes of determining whether a wind or solar facility, for which the section 45Y or 48E credit will be claimed, must be placed in service before January 1, 2028. Rules governing the beginning of construction for the material assistance rules are upcoming. Projects for which credits under section 45 or 48 will be claimed are not affected by this guidance.
Physical Work Test for wind and certain solar facilities
Wind facilities and solar facilities with an output greater than 1.5MWac must begin construction under the Physical Work Test, which is largely identical to the test described in previous notices.
The primary method of beginning construction is physical work of a significant nature (the “Physical Work Test”). The Physical Work Test depends on the relevant facts and circumstances. Work performed by another person pursuant to a binding written contract (which is defined identically with prior guidance) entered into before the work begins is taken into account. The Physical Work Test focuses on the nature of the work performed and not the amount, percentage, or cost of the work. Preliminary activities, such as site clearing or obtaining permits and licenses, do not constitute physical work of a significant nature. Physical work performed on a component or part “that is either in existing inventory or is normally held in inventory by one selling the component/part to the taxpayer” does not satisfy the Physical Work Test. Either on- or off-site work may satisfy the Physical Work Test.
- Off-site work satisfying the Physical Work Test may include the manufacture of components, mounting equipment, support structures such as racks and rails, inverters, and transformers and other power conditioning equipment.
- On-site work satisfying the Physical Work Test includes, for wind facilities, the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of concrete pads for the foundation. For solar facilities, qualifying work includes the installation of racks or other structures to affix photovoltaic panels, collectors, or solar cells to a site. The foregoing is a non-exclusive list.
Observation:
- The Notice repeats prior beginning-of-construction notices exactly in defining the Physical Work Test, which suggests the Notice is not intended to alter taxpayers’ longstanding understanding of what this test entails.
- A published version of the Notice appeared (arbitrarily) to limit the transformers upon which qualifying physical work could be performed to those that step up the voltage to less than 69kv. The official version of the notice released on the IRS website does not contain this restriction. Removing this specification is the only difference between the early version of the Notice and the official version.
- This formulation of the description of non-qualifying work on inventory differs slightly from prior formulations, which provide that the qualifying physical work may not include work on components that are either in or normally held in existing inventory by “a vendor.” The reason for the change is not entirely clear, but if the determination of whether a part or component is inventory is made on a supplier-by-supplier basis, the Notice may have broadened the Physical Work Test for the purposes of the wind and solar beginning-of-construction deadline.
5% safe spend harbor for low-output solar projects
There is a 5% spend safe harbor for solar facilities with a net output of not greater than 1.5MWac.
The Notice provides limited application of the 5% spend safe harbor for a “low output solar facility,” which is a solar facility with a net output of not greater than 1.5MWac. The Notice does not reiterate the 5% spend safe harbor and provides that a taxpayer may apply principles similar to those found in Notice 2013-29 with respect to the 5% spend safe harbor. Solar facilities which have integrated operations with other solar facilities are treated as one solar facility for the purposes of determining the facility’s maximum net output. The standard for determining whether a solar facility has “integrated operations” with another solar facility requires that such facilities (i) be owned by the same or related taxpayers (defined with respect to the common control rules under section 52), (ii) be placed in service in the same taxable year, and (iii) transmit electricity generated by the facilities through the same point of interconnection, or, if the facilities are not grid-connected, or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user.
Continuity requirements and safe harbor
The Continuous Construction test and the Continuity Safe Harbor are identical to that of prior guidance, but the Continuous Efforts test may not be used.
The taxpayer must maintain a continuous program of construction (the “Continuity Requirement”), which the taxpayer will be deemed to do if it places the project in service by the end of the calendar year that is no more than four calendar years after the calendar year in which construction began (the “Continuity Safe Harbor”).
If a project does not qualify for the Continuity Safe Harbor, the taxpayer must maintain a continuous program of construction, which involves continuing physical work of a significant nature (“Continuous Construction”). Whether a taxpayer has satisfied the Continuous Construction requirement depends on the facts and circumstances. Disruptions beyond the taxpayer’s control, such as permit, interconnection, and financing delays, do not impact whether the taxpayer has failed to demonstrate Continuous Construction.
Observation:
- Prior guidance allows a taxpayer to maintain a continuous program of construction by satisfying either the Continuous Construction test or by making continuous efforts toward the completion of a facility (“Continuous Efforts”), which includes efforts not constituting physical work. The Notice does not permit a taxpayer to comply with the Continuous Efforts requirement to demonstrate a continuous program of construction, and only the Continuous Construction test is available.
- The Notice is otherwise verbatim with respect to the Continuity Requirement with prior beginning-of-construction notices, and therefore the Continuity Requirement should be understood in line with prior guidance.
Single project determination
The single project test is identical to that in prior guidance.
Multiple facilities that are operated as a single project (including shared equipment) are treated as a single facility for the purposes of determining whether construction has begun on such facility (either under the Physical Work Test or the 5% spend safe harbor). Factors that may indicate a single project include, for example, whether facilities are owned by the same legal entity or whether they have a common intertie. The “single project” requirements repeat that of prior guidance.
Transfer of property and related rules
The transfer rules generally repeat prior guidance.
Like in prior guidance, a taxpayer may transfer solely tangible property to a related party, within the meaning of section 197(f)(9)(C), and such related party will step into the shoes of the taxpayer with respect to the beginning of construction. If a transferor transfers solely tangible property (including contractual rights to such property under a binding written contract) to a transferee that is unrelated to such transferor, any work performed or amounts paid or incurred by the transferor with respect to such transferred property will not be taken into account by the transferee for purposes of the Physical Work Test. These rules generally repeat prior guidance.
*Law Clerk, New York
Footnotes
1. All references to the “Code” or a “section” refer to the Internal Revenue Code of 1986 and the sections thereunder, as may be amended from time to time.
2. See section 7701(a)(51) for the prohibited foreign entity rules and section 7701(a)(52) for the material assistance rules.
3. The Notice does not contain FEOC guidance.
[View source.]
