The US Department of the Treasury and the Internal Revenue Service (IRS) recently released Notice 2025-42 to implement Executive Order (EO) 14315. The Notice, issued on August 15, 2025, provides guidance on when construction of a wind or solar facility is considered to have begun, which is relevant for determining whether a facility qualifying for tax credits under Section 45Y or Section 48E of the Internal Revenue Code must be placed in service by December 31, 2027.
This is a key consideration for taxpayers because if construction of a project begins before July 5, 2026, the December 31, 2027 placed-in-service deadline will not apply. Another note for taxpayers is that the Notice appears not to apply for purposes of determining whether the material assistance cost ratio thresholds under Section 7701(a)(52) apply, which become effective for projects that begin construction after December 31, 2025. Finally, these changes to the begun construction guidance do not apply to technologies outside of wind and solar facilities, such as battery energy storage systems.
Key changes in the Notice
The most significant change from the existing begun construction rules is that the Five-Percent Safe Harbor will not be available for facilities that begin construction on or after September 2, 2025, unless a facility satisfies a narrow exception for “Low Output Solar Facilities.”
This exception appears to be applicable to residential solar and smaller commercial and industrial facilities allowing use of the Five-Percent Safe Harbor. After September 2, 2025, for the majority of other solar and all wind facilities, the Physical Work Test will be the only method available to establish that construction began prior to July 5, 2026, and is excepted from the December 31, 2027 sunset of Sections 45Y and 48E.
In contrast to the repeal of the Five-Percent Safe Harbor for solar and wind facilities qualifying for Sections 45Y or 48E, the Notice largely adopts the existing rules applicable to the Physical Work Test, as set forth in prior IRS Notices. This includes adopting the four-year Continuity Safe Harbor and permitting either on-site work or off-site work of a significant nature performed pursuant to a binding written agreement to qualify.
Further, the standard for what constitutes a binding written agreement and what constitutes work of a significant nature remains unchanged. In addition, the Notice adopts the existing rules related to master contracts, including subsequent assignments of property manufactured pursuant to such contracts. It also adopts the existing rules related to assignments of projects to related or unrelated persons.
Furthermore, it incorporates the existing 80/20 Rules applicable to retrofitted facilities and adopts similar factors to those set forth in Treasury Regulations Section 1.48-13(d), for purposes of determining whether multiple facilities constitute a single project in order to determine the date construction began.
As a result, a wind or solar facility may have multiple begun construction dates for purposes of analyzing different aspects of qualification for credits under Sections 45Y and 48E.
Background
IRA
The Inflation Reduction Act of 2022 (IRA) modified existing and created new tax credits for certain renewable energy projects. The IRA modified existing Sections 45 and 48, adding (1) prevailing wage and apprenticeship requirements and (2) domestic content and energy community adders, and allowing for new technologies. The IRA also created Sections 45Y and 48E as technology-neutral successors for Sections 45 and 48. Generally, construction on a facility must have begun prior to January 1, 2025 to qualify for Sections 48 or 45. A facility that is placed in service on or after January 1, 2025 will also qualify for 45Y and 48E.
OBBBA
Sections 70512(a) and 70513(a) of the One Big Beautiful Bill Act (OBBBA) added new Code provisions that terminate the credits under Sections 45Y and 48E for applicable wind and solar facilities (Clean Wind and Solar Sunset) placed in service after December 31, 2027, significantly accelerating the termination timeline created by the IRA.
Importantly, the OBBBA did not impact Sections 45 and 48. Additionally, Section 45Y is available for the full ten years after a facility is placed in service, so long as it is done so before the December 31, 2027 deadline (ie, for facilities on which construction does not begin prior to July 5, 2025) and such facility and its owners are not subject to the prohibited foreign entity rules added by the OBBBA. Projects that begin construction before December 31, 2025 will not be subject to the material assistance cost-ratio thresholds.
EO 14315
On July 7, 2025, President Donald Trump issued EO 14315, “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources,” 90 F.R. 30821. The EO directs the Secretary of the Treasury to publish guidance in order to “strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities”, including ensuring that “policies concerning the ‘beginning of construction’ are not circumvented” and restrict “the use of broad safe harbors unless a substantial portion of an applicable wind or solar facility has been built.”
Historic begun construction notices
In response to the passage of the American Taxpayer Relief Act of 2012, Treasury issued Notice 2013-29, Notice 2013-60, and Notice 2014-46 (PTC Notices), which collectively introduced and provided guidance on two tests that taxpayers could use to prove the start of construction for a Section 45 facility. The two tests under the PTC Notices are the Five-Percent Safe Harbor and the Physical Work Test.
Both tests incorporate a continuity requirement whereby a taxpayer must make continuous efforts towards construction of the facility. Notice 2016-31 extended and modified the continuity requirement by introducing a safe harbor whereby a taxpayer has four calendar years after the calendar year in which construction began to place the facility in service. A taxpayer may still place a facility in service more than four years after construction began, however, the taxpayer must rely on facts and circumstances to prove continuity.
Notice 2018-59 incorporated the Five-Percent Safe Harbor and Physical Work Tests, along with the Continuity Requirement for determining when construction began for purposes of Section 48 property.
Notice 2021-41 extended the Continuity Safe Harbor period to six years for property that began construction in 2016 through 2020 in response to the COVID-19 pandemic.
Most recently, Treasury issued Notice 2022-61, which provides – in relevant part to determine when construction begins for purposes of Sections 45Y and 48E – that principles similar to those in the PTC Notices and Notice 2018-59 apply regarding the Five-Percent and Physical Work Tests, also incorporating the Continuity Requirements.
Summary of the Notice
The Notice is effective for facilities the construction of which did not begin prior to September 2, 2025. Further, it only applies for purposes of determining whether an applicable wind or solar facility is subject to the credit termination provisions added to Sections 45Y and 48E by the OBBBA, and in this respect, supersedes Notice 2022-61.
Again, the Notice does not apply for purposes of determining begun construction for the effective date of the material assistance cost-ratio thresholds (creating potentially multiple begun construction dates for different qualification aspects of wind and solar), and it does not apply to any other technologies.
Physical Work Test is the exclusive method
The Notice establishes that for purposes of the Clean Wind and Solar Sunset, the Physical Work Test is the exclusive method for establishing that construction has begun. Thus, except as set forth below, the Five-Percent Safe Harbor is not available. The Notice also sets forth the requirements for establishing that construction has begun on an applicable wind or solar facility under the Physical Work Test. In doing so, it effectively incorporates the existing rules from the PTC Notices and Notice 2018-59.
For instance, the Notice provides that both on-site and off-site physical work of a significant nature may be considered, provided such work is performed either by the taxpayer or by another person under a binding written contract. Examples of qualifying physical work include the manufacture of components, mounting equipment, support structures (such as racks and rails), inverters, and transformers and other power conditioning equipment. The Notice emphasizes that the test focuses on the nature of the work performed – not the amount or cost – and that preliminary activities such as planning, permitting, and site clearing do not qualify. Further, work completed to produce components normally held in inventory does not satisfy the Physical Work Test.
The Notice incorporates the requirement that once construction begins, a taxpayer must maintain a continuous program of construction after beginning physical work of a significant nature, until the project is placed in service in order to maintain the qualifying status. The Notice incorporates the existing Continuity Safe Harbor, under which a facility placed in service within four calendar years of the year in which construction began is deemed to satisfy the continuity requirement. In cases in which the Continuity Safe Harbor is not met, satisfaction of the continuity requirement is determined by relevant facts and circumstances. When the Facts and Circumstances Test is relied on, certain excusable disruptions, such as severe weather, natural disasters, or delays in obtaining permits, will not prevent satisfaction of the continuity requirement.
As noted above, the Notice also adopts other existing rules related to the Physical Work Test. This includes the rules related to:
- Construction by contract, such as the definition of a binding written contract and the treatment of master contracts and project contracts
- The criteria for treating multiple facilities as a single project, including factors such as common ownership, contiguous land, shared permits, and common financing
- What property is considered integral to the applicable wind or solar facility
- Application of the 80/20 Rule for retrofitted facilities, including the treatment of new and used components and the timing of application of the Physical Work Test, and
- The transfer and relocation of facilities and equipment, including rules for claiming credits after transfer and the treatment of work performed prior to relocation or transfer.
Key takeaway
The rules related to the Physical Work Test remain largely untouched by the Notice. This appears to be consistent with the request for guidance in the EO and benefits taxpayers looking to grandfather solar and wind facilities. Importantly, the Notice adopts single project combination for purposes of determining begun construction date (even though Sections 45Y and 48E regulations did not adopt an energy project concept). Thus, it appears taxpayers can still meet begun construction deadlines using other co-located technologies (ie, other than solar and wind).
Five-Percent Safe Harbor available for low-output solar facilities
The Notice provides an exception to the general rule, allowing taxpayers to establish that construction has begun on a low-output solar facility by satisfying either the Physical Work Test or the Five-Percent Safe Harbor.
The Notice defines a low-output solar facility as one with a maximum net output not greater than 1.5 megawatts (MW) (alternating current). This is determined by using the maximum nameplate generating capacity of the unit of qualified facility on a steady-state basis during continuous operations under standard conditions – as measured by the manufacturer and consistent with the definition of “nameplate capacity” provided under 40 CFR 96.202. This determination does not include the nameplate capacity of any component that is an integral part of the applicable solar facility.
The nameplate-capacity determination is made by including functionally interdependent components, but independently from any other applicable solar facility that shares an integral part with the tested solar facility. For solar facilities that generate electricity in direct current, the determination of whether the solar facility has a maximum net output less than the 1.5-MW maximum is determined based on (1) the sum of the nameplate generating capacities of the applicable solar facility in direct current, which is deemed to be the nameplate-generating capacity of the unit of applicable solar facility in alternating current or (2) the nameplate capacity of the first component of the applicable solar facility that inverts the direct current electricity into alternating current.
Notwithstanding the foregoing, the nameplate-generating capacity of two or more applicable solar facilities having integrated operations is measured in the aggregate for purposes of testing the 1.5 MW maximum. For this purpose, two or more applicable solar facilities of the same technology type will be treated as having integrated operations if they:
- Are owned by the same or related taxpayers
- Are placed in service in the same taxable year, and
- Transmit electricity generated by the facilities through the same point of interconnection, or if the facilities (1) are not grid-connected or are delivering electricity directly to an end user behind a utility meter or (2) are able to support the same end user.
Taxpayers are relevant for this purpose if they are members of a group of trades or businesses that are under common control within the meaning of Treasury Regulations Section 1.52-1(b).
Key takeaway
For purposes of being grandfathered out of the December 31, 2027 sunset, aggregating “integrated operations” in order to apply the 1.5-MW maximum limitation to determine which solar facilities can still rely on the Five-Percent Safe Harbor significantly limits the number of facilities that it will apply to.
It appears, however, that most residential solar facilities and smaller commercial and industrial solar facilities still use the Five-Percent Safe Harbor.
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