On August 15, 2025, the Treasury Department (Treasury) and Internal Revenue Service (IRS) issued much-anticipated guidance (Notice 2025-42) regarding the determination of when an applicable wind or solar facility is considered to begin construction for purposes of the provisions of the One Big Beautiful Bill Act (OBBBA) that terminate clean energy tax credits for applicable wind and solar facilities. Under the OBBBA, to qualify for production tax credits (PTCs) under IRC Section 45Y or investment tax credits (ITCs) under Section 48E, an applicable wind or facility generally must be placed in service on or before December 31, 2027. An applicable facility is not subject to this placement in service deadline (the Wind and Solar Tax Credit Termination Date), however, if the facility is considered to have achieved beginning of construction (BOC) on or before July 4, 2026 (BOC Deadline). For purposes of the BOC Deadline, the Notice generally eliminates the Five Percent Safe Harbor method that has been allowed under prior guidance to establish BOC – leaving the facts-and-circumstances-based Physical Work Test as the sole means of establishing BOC for this purpose. Further, the Notice retains the four-year continuity safe harbor for purposes of the continuous construction requirement (the Continuity Requirement).
Background
Prior to the enactment of the OBBBA, the IRS issued several Notices (e.g., Notices 2013–29, 2018-59, and 2022-61) that set forth rules on when BOC is considered to occur for purposes of determining a wind or solar facility’s allowance for clean energy tax credits. Under the prior Notices, a taxpayer could establish BOC by satisfying either (i) the Physical Work Test, which is a facts-and-circumstances test pursuant to which construction of a facility is considered to begin when physical work of a significant nature begins, or (ii) the Five Percent Safe Harbor, which is a mechanical test pursuant to which construction of energy property is considered to begin if a taxpayer pays or incurs at least five percent of the eligible project costs.
Once construction of a facility has begun, whether under the Physical Work Test or the Five Percent Safe Harbor, there must be continuous progress towards completion of the facility – this is referred to as the Continuity Requirement. The prior Notices generally include a safe harbor pursuant to which the Continuity Requirement is considered satisfied if a project is placed in service no later than the end of the fourth calendar year after the calendar year during which construction began. In cases where the four-year continuity safe harbor is not satisfied, the determination of whether the applicable wind or solar facility satisfies the Continuity Requirement is based on the relevant facts and circumstances.
Treasury and IRS issued Notice 2025-42 in response to an Executive Order issued shortly after the enactment of the OBBBA, which in part directed the Secretary of the Treasury to take action deemed necessary and appropriate to strictly enforce the OBBBA’s December 31, 2027 Wind and Solar Tax Credit Terminate Date for applicable wind or solar facilities, including by issuing new and revised guidance for applicable wind and solar facilities to ensure that policies concerning BOC are not circumvented. As stated in the Notice, Treasury and the IRS have determined that the guidance in the Notice is necessary and appropriate to properly enforce the Wind and Solar Tax Credit Termination Date, including to “ensure that a substantial portion of any applicable wind or solar facility not subject to the credit termination date is built by the beginning of construction deadline.”
Key aspects of the Notice include the following:
Scope: Under its terms, the scope of the Notice applies only to when a facility begins construction for purposes of determining whether such facility is subject to the December 31, 2027 Wind and Solar Tax Credit Termination Date.
Elimination of the Five Percent Safe Harbor and Retention of the Physical Work Test: For purposes of applying the BOC Deadline to an applicable wind or solar facility other than a low output solar facility, the Notice eliminates the Five Percent Safe Harbor and makes the Physical Work Test the sole method that a taxpayer may use for purposes of determining BOC in applying the Wind and Solar Tax Credit Termination Date. A “low output solar facility,” which generally means a solar facility with a maximum net output of not greater than 1.5 MW, may continue to rely on the Five Percent Safe Harbor or Physical Work Test to establish BOC on or before July 4, 2026. The substantive requirements of the Physical Work Test under the prior Notices remain largely unchanged.
Retention of Continuity Safe Harbor: The Notice retains the four-year continuity safe harbor for purposes of the Continuity Requirement. Projects that begin construction prior to the July 4, 2026 BOC Deadline, and therefore avoid the Wind and Solar Tax Credit Termination Date, remain subject to the Continuity Requirement with respect to placement in service.
Prospective Effective Date: The Notice is effective for applicable wind and solar facilities that did not achieve BOC, as determined under the prior Notices, before September 2, 2025. Accordingly, the prior Notices, including the Five Percent Safe Harbor, remain available for purposes of determining whether such a facility is subject to the Wind and Solar Tax Credit Termination Date, provided that the facility is considered to have achieved BOC under the prior Notices before September 2, 2025.
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