New guidance expected from Treasury on "beginning of construction"
Days after signing into law the One Big Beautiful Bill Act (OBBBA), which dramatically rolled back the availability of federal tax credits for solar and wind power projects, President Trump issued an Executive Order (EO) directing the Treasury Department to issue new guidance within 45 days as to what constitutes "beginning of construction" for purposes of qualifying for the credits.
The July 7 Executive Order directs Treasury to "strictly enforce" the termination of production and investment tax credits for wind and solar facilities. This is to include ensuring "that policies concerning the 'beginning of construction' are not circumvented, including by … restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built." (Emphasis added.) The EO also directs Treasury to take "prompt action" to implement new rules on foreign-entity-of-concern (FEOC) restrictions.
The EO reportedly follows assurances that the President made to hardline conservatives in the House prior to voting on the bill who were concerned that the OBBBA did not terminate the federal clean energy tax credits fast enough. The House version of the bill would have terminated the tax credits for solar and wind projects that had not begun construction within 60 days of the law's enactment and been placed in service before 2029.
Under the OBBBA, solar and wind projects are provided a safe harbor from new FEOC restrictions on use of Chinese equipment if the project begins construction by December 31, 2025. Additionally, solar and wind projects that begin construction within 12 months of enactment, or by July 4, 2026, avoid a new deadline requiring projects to be placed in service by the end of 2027. Under current IRS guidance, projects beginning construction within one year of the law would generally have four years to place the project in service.
The EO does not elaborate on what requiring "a substantial portion of a subject facility" to be built means for the purpose of qualifying for the safe harbors. Under longstanding IRS guidance, a taxpayer may establish "beginning of construction" by either (1) starting physical work of a significant nature (Physical Work Test) or (2) paying or incurring five percent or more of the total cost of the energy property (Five Percent Safe Harbor).
Importantly, the OBBBA explicitly incorporates the Five Percent Safe Harbor by providing that "beginning of construction" for purposes of applying the new FEOC rules will be determined pursuant to rules "similar" to the rules "as in effect on January 1, 2025." The OBBBA does not, however, directly reference the current "beginning of construction" rules for purposes of determining whether a project begins construction in time to claim the credits.
It remains to be seen whether any new Treasury guidance can overturn existing IRS rules and guidance as Congress has incorporated them into a statute, at least for purposes of triggering the FEOC restrictions. It may also be difficult for Treasury to apply the phrase "beginning of construction" for purposes of the July 4, 2026, tax credit deadline differently than it does for the December 31, 2025, FEOC deadline. Regardless, the EO introduces uncertainty for projects that have not yet begun construction, which could well discourage development.
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