On Aug. 15, 2025, the U.S. Internal Revenue Service issued Notice 2025-42 addressing the beginning of construction for wind and solar facilities under Section 45Y and 48E of the Internal Revenue Code of 1986, as amended. The Notice largely adopts the existing beginning of construction guidance applicable to Section 45 and 48 of the Code in Notice 2013-29 and 2018-59 issued prior to the Inflation Reduction Act of 2022 (the Pre-IRA Notices), except that it limits the use of the 5% safe harbor to solar projects with a nameplate capacity of 1.5 MW (AC) or less, as generally measured on an interconnection point basis. The Notice is effective for projects that do not begin construction under the Pre-IRA Notices prior to Sept. 2, 2025.
One key takeaway is that large wind and solar projects (i.e., projects over 1.5 MW (AC) measured on an interconnection point basis) seeking to begin construction using the 5% safe harbor should do so prior to Sept. 2, 2025.
The Notice was issued in response to a July 7, 2024, executive order (EO) from President Donald Trump titled “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources,” which directed the U.S. Department of the Treasury to issue new and modify existing guidance regarding the “beginning of construction” tax regime for wind and solar projects, as well as the One Big Beautiful Bill Act’s (OBBBA’s) foreign entity of concern (FEOC) restrictions. (See McGuireWoods’ July 8, 2025, legal alert.)
The OBBBA requires wind and solar projects to begin construction for tax purposes on or before July 4, 2026, or be subject to a placed in service deadline of Dec. 31, 2027. Under the guidance provided in the Notice, wind and solar projects beginning construction in 2025 would have a placed in service deadline of Dec. 31, 2029, and those beginning construction in 2026 on or before July 4 would have a placed in service deadline of Dec. 31, 2030.
The Notice is a relief for the wind and solar industry, which was rightfully concerned with language in the EO asking for “strict enforcement” regarding the beginning of construction for wind and solar and instructing Treasury to issue rules that would not allow for a project to begin construction for tax purposes until a “significant portion of the facility is built,” in each case to the extent such guidance would comply with applicable laws.
It appears the Treasury has given deference to the historical and plain meaning of the term beginning of construction (including guidance issued in 2018 during Trump’s first term), as well as the codification of the Pre-IRA Notices in Section 7701(a)(51)(J) of the Code, as amended by the OBBBA.
Although the EO directs Treasury to issue guidance on the FEOC requirements, the Notice notes in a footnote that the Notice does not address the FEOC restrictions, including when construction begins for the “material assistance from a prohibited foreign entity” rules found in Section 45Y(b)(6) and 48E(b)(1)(E) of the Code, as amended by the OBBBA (the FEOC Equipment Rule), which only apply to projects beginning construction Jan. 1, 2026, or later.
Physical Work Test
The physical work test in the Notice appears to be identical to the test in the Pre-IRA Notices. Physical work of a significant nature may be performed on-site or off-site, on property included in an applicable qualified facility, including property integral to a unit of qualified facility, such as operation and maintenance roads, inverters and transformers, as detailed in Treasury Regulations Sections 1.45Y-2(b) and 1.48E-2(d).
Importantly, although the Notice does not contain specific language regarding work on a main power transformer (69 KV or greater), the applicable Treasury Regulations include in a qualified facility “transformers, inverters and converters which modify the characteristics of electricity into a form suitable for use, transmission or distribution.” Therefore, a popular safe harbor method whereby a taxpayer begins physical work of a significant nature on a main power transformer should continue to be available.
The Notice specifically notes that off-site physical work can be done on mounting equipment, racks and rails, inverters, transformers and other power conditioning equipment, so long as it is not held in the inventory of the manufacturer. The Notice also adopts the historical on-site physical work test’s non-exhaustive list of on-site physical work that includes, for a wind facility, the excavation of a turbine foundation, the setting of anchor bolts into the ground, or the pouring of concrete pads of the foundation and, for a solar facility, the installation of racks or other structures to affix solar panels, collectors or solar cells to a site. Additionally, activities that specifically do not constitute on-site physical work remain unchanged.
Physical work not performed directly by the taxpayer must be performed pursuant to a binding written contract, and the property to which physical work was done must be incorporated into the project to meet the beginning of construction requirements.
Continuity Requirement
The Notice leaves the continuity requirement mostly unchanged. The continuity requirement safe harbor will allow projects until the end of the calendar year that is four years after the year in which a project begins construction to be placed in service. To the extent a project goes beyond the safe harbor deadline, it can still prove that it maintained a continuous program of construction, which is measured based on a facts and circumstances analysis.
For purposes of the facts and circumstances test only, the Notice includes a list of excusable delays outside the taxpayer’s control but excludes a list of factors applicable to the 5% safe harbor that indicates continuous efforts.
Single Project Rule
The Notice adopts the Pre-IRA Notices’ single project rules, allowing multiple qualified facilities to be treated as one project, solely for the purposes of the beginning of construction, based on the relevant facts and circumstances and weighing certain factors, including whether (i) the facilities are owned by a single legal entity, (ii) the facilities are constructed on a contiguous piece of land, (iii) the facilities are described in a common power purchase agreement or agreements, (iv) the facilities have a common intertie, (v) the facilities share a common substation, (vi) the facilities are described in one or more common environmental or other regulatory permits, (vii) the facilities were constructed pursuant to a single master construction contract and (viii) the construction of the facilities was financed pursuant to the same loan agreement.
5% Safe Harbor for Low-Output Solar Facilities
The Notice provides for a 5% safe harbor test that appears to be designed to accommodate rooftop and community solar projects. Effective Sept. 2, 2025, the 5% safe harbor is only available for solar projects with an output of 1.5 MW (AC) or less. The rule for measuring the nameplate capacity of a solar facility mirrors the rules for measuring nameplate capacity with respect to the 1 MW prevailing wage and apprenticeship exception found in Treasury Regulations Sections 1.45Y-3(c) and 1.48E-3(c).
Generally, nameplate capacity is measured using the lesser of (i) the sum of the nameplate generating capacities within the applicable solar facility in DC, which is deemed the nameplate generating capacity of the unit of applicable solar facility in AC and (ii) the nameplate capacity of the first component of the applicable solar facility that inverts the DC electricity into AC. Nameplate capacity is aggregated with other solar facilities with “integrated operations,” which includes solar facilities that are (i) owned by the same or related taxpayer, (ii) placed in service in the same taxable year and (iii) transmit electricity generated by the facilities through the same point of interconnection or, if 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. For these purposes, related taxpayer means a group of trades or businesses that are under common control, as defined in Treasury Regulation Section 1.52-1(b).
Beginning of Construction for FEOC Purposes
The Notice in a footnote explains that future guidance will come regarding beginning of construction for purposes of establishing a project’s requirement to comply with, or the threshold percentage applicable under, the FEOC Equipment Rule. Until such guidance is issued, it appears that taxpayers may rely on the Notice for the purposes of establishing the beginning of construction for purposes of the FEOC Equipment Rule. Section 7701(a)(52)(F) of the Code, as amended by the OBBBA, states that beginning of construction for purposes of the FEOC Equipment Rule will be determined under rules similar to the Pre-IRA Notices, which presumably now includes the Notice, although this is not explicitly stated. However, Section 7701(a)(52)(D)(v) of the Code, as amended by the OBBBA, invites the Treasury to issue anti-circumvention guidance for purposes of the FEOC Equipment Rule, if “the facts and circumstances indicate that the beginning of construction … has not in fact occurred.”
While the effective date of such anti-circumvention guidance is uncertain, Treasury signaled through the Notice that it respects Treasury’s typical stance not to issue retroactive guidance in the renewables space as well as the legal issues associated with retroactive guidance. Accordingly, McGuireWoods encourages developers to consider whether it may be advantageous to begin construction under the Notice prior to further guidance being issued to avoid the FEOC Equipment Rule.
