The IRS today issued guidance regarding the “beginning of construction” requirement as it relates to the clean electricity production tax credit (PTC) under Internal Revenue Code Section 45Y and the clean electricity investment tax credit (ITC) under Internal Revenue Code Section 48E. The guidance, Notice 2025-42 (the Notice), was issued pursuant to Executive Order 14315, Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources, directing the Treasury Department to issue guidance related to beginning of construction for the PTC and ITC following enactment of Public Law 119-21 (commonly known as the One, Big, Beautiful Bill Act) (the Act). The Act included a number of changes to the PTC and ITC, the application of many of which depend on the date construction of a qualified facility begins. For a description of the renewable energy tax credit changes in the Act, see our prior alert.
The Notice generally applies the same “physical work test” as previous IRS guidance regarding the beginning of construction requirements applicable to projects qualifying for the prior production tax credit under Internal Revenue Code Section 45 and investment tax credit under Internal Revenue Code Section 48. Like prior guidance, the physical work test under the Notice provides that construction of a qualified facility begins when physical work of a significant nature begins and takes into account both on-site and off-site physical work. Preliminary activities and work related to property that is in existing inventory or normally held in inventory are not taken into account. The Notice also generally follows prior beginning-of-construction guidance, including the continuity requirement and continuity safe harbor, construction by contract and binding written contract requirements, single facility treatment for qualified facilities operated as part of a single project, application of the “80/20 Rule” to retrofitted qualified facilities, and transfers of qualified facilities and equipment construction of which has already begun.
The Notice limits application of the 5% safe harbor, pursuant to which a taxpayer could begin construction of project by paying or incurring five percent or more of the total cost of the project, to “low-output solar facilities,” which includes any solar qualified facility that has a maximum net output of not greater than 1.5 megawatt (as measured in alternating current). For purposes of the 1.5 MW limitation, the output of two or more applicable solar qualified facilities with integrated operations are combined. Qualified facilities have integrated operations if they are owned by the same or related taxpayers (members of a group of trades or businesses that are under common control), are placed in service in the same taxable year, and transmit electricity generated at the facilities through the same point of interconnection (or, if not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user).
The Notice is effective for applicable wind and solar qualified facilities the construction of which does not begin (based on the prior beginning-of-construction rules) prior to September 2, 2025.
The Notice also indicates that additional guidance related to new prohibited foreign entity rules under the Act is forthcoming.
