On August 15, 2025, the IRS and the Treasury Department released Notice 2025-42 (the Notice), providing critical guidance on the beginning of construction requirements for wind and solar facilities in light of the One Big Beautiful Bill Act (the OBBBA) and Executive Order 14315 (the Executive Order). This Notice provides guidance regarding when construction of a wind facility or solar facility has begun for purposes of determining whether such facility is subject to the credit termination provisions added to Sections 45Y and 48E by the OBBBA.
Background
Prior IRS guidance (including, most notably, Notices 2013-59, 2018-59 and 2022-61) provided two methods to establish that construction has begun: (i) starting physical work of a significant nature (the Physical Work Test) or (ii) paying or incurring 5% of the total project costs of the energy property (the Five Percent Safe Harbor). Under such guidance, a taxpayer that properly begins physical work of a significant nature or incurs 5% of the cost of the project’s energy property must also make continuous progress toward completion once construction begins (the Continuity Requirement).
The OBBBA, enacted on July 4, 2025, introduced a firm termination date for wind and solar facilities under Sections 45Y and 48E: qualified facilities placed in service after December 31, 2027, are ineligible for such credits if construction begins after July 4, 2026. The Executive Order, issued on July 7, 2025, further directed the Treasury Department to strictly enforce these termination provisions, including by issuing new and revised guidance “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 Notice was issued pursuant to the Executive Order and provides new beginning of construction guidance that differs from prior IRS guidance.
The Executive Order also directed the Secretary of the Treasury to take action within 45 days following enactment of the OBBBA “to implement the enhanced Foreign Entity of Concern restrictions in the One Big Beautiful Bill Act.” The Notice is not intended to address the beginning of construction rules for the purposes of those foreign entity restrictions. The Notice indicates that the Treasury Department and the IRS are currently drafting additional guidance as is necessary and appropriate to implement those restrictions.
Key Provisions of Notice 2025-42
Effective Date
The Notice applies to wind and solar facilities, the construction of which did not begin (as determined under section 5 of Notice 2022-61) prior to September 2, 2025 (the BOC Deadline). Thus, taxpayers that start construction prior to September 2, 2025, will use the prior IRS guidance.
Physical Work Test as the Sole Method for Most Projects
For wind and solar facilities, taxpayers must now use the Physical Work Test to establish that construction began before July 5, 2026. The requirements to satisfy the Physical Work Test in the Notice are generally consistent with the requirements to satisfy the Physical Work Test in prior IRS guidance. Consistent with prior IRS guidance, construction of an applicable wind or solar facility begins when physical work of a significant nature begins. Both work performed by the taxpayer and work performed for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction or production of the applicable wind or solar facility may be taken into account in determining whether construction has begun. The test focuses on the nature of the work performed, not the amount or the cost, and both off-site work and on-site work may be taken into account for purposes of the Physical Work Test.
The Five Percent Safe Harbor is eliminated for wind and solar facilities, except for certain low output solar facilities.
Five Percent Safe Harbor Exception for Low Output Solar Facilities
Only solar facilities with a maximum net output of 1.5 MW (AC) or less may use the Five Percent Safe Harbor to demonstrate beginning of construction. The Notice provides guidance on measuring such output for this purpose, including a rule that would integrate facilities of the same technology type if the facilities are: (a) owned by the same or related taxpayers; (b) placed in service in the same taxable year; and (c) transmit electricity generated by the facilities through the same point of interconnection or, if the facilities are not grid-connected or are delivered electricity directly to an end user behind a utility meter, are able to support the same end user.
Continuous Program of Construction Required
The Continuity Requirement, which was previously broken into “continuous program construction” and “continuous efforts,” can now be met only through a “continuous program of construction.” Consistent with prior IRS guidance, a continuous program of construction involves continuing physical work of a significant nature and is based on a facts-and-circumstances analysis.
Importantly, the Notice retains the safe harbor from prior IRS guidance that provides that if a taxpayer places a wind or solar facility in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the wind or solar facility began (the Continuity Safe Harbor Deadline), the applicable wind or solar facility will be considered to satisfy the Continuity Requirement (the Continuity Safe Harbor). Thus, if construction begins on a wind or solar facility on August 20, 2025, and the applicable wind or solar facility is placed in service by December 31, 2029, the applicable wind or solar facility will be deemed to satisfy the Continuity Requirement. If the facility is not placed in service by the Continuity Safe Harbor Deadline, the taxpayer will have to show that the Continuity requirement is met under the facts-and-circumstances test described above.
Aggregation and Transfer Rules
Multiple facilities operated as a single project may be aggregated for purposes of determining whether construction of an applicable wind or solar facility has begun. Consistent with prior IRS guidance, factors indicating that multiple facilities are operated as part of a single project include, but are not limited to:
- The facilities are owned by a single legal entity;
- The facilities are constructed on contiguous pieces of land;
- The facilities are described in a common power purchase agreement or agreements;
- The facilities have a common intertie;
- The facilities share a common substation;
- The facilities are described in one or more common environmental or other regulatory permits;
- The facilities were constructed pursuant to a single master construction contract; and
- The construction of the facilities was financed pursuant to the same loan agreement.
Consistent with prior IRS guidance, partially or fully developed facilities may be transferred without losing qualification, except for transfers of solely tangible personal property between unrelated parties.
Practical Implications and Next Steps
The Notice modifies the ability of wind and solar developers to establish beginning of construction under Sections 45Y and 48E, particularly with respect to the elimination of the Five Percent Safe Harbor. Until the BOC Deadline, developers should review project timelines and contracts to evaluate their beginning of construction strategies, particularly with respect to the Five Percent Safe Harbor.
The Notice also generally follows prior IRS guidance with respect to the Physical Work Test and the Continuity Safe Harbor, which should give participants some comfort regarding start of construction strategies. As noted above, additional guidance is expected related to the foreign entity of concern provisions in the OBBBA. Projects that start construction by December 31, 2025, are not subject to the new “material assistance” rules and the requirements for meeting the “material assistance” test generally depend on when construction starts; however, the Notice does not address the beginning of construction rules for purposes of these rules, and it is possible that subsequent guidance could introduce further changes to the beginning of construction rules.
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