Key takeaways
With an effective date of September 2, 2025, New Beginning of Construction guidance will be prospective and not apply to projects that satisfied beginning of construction under old IRS guidance before September 2, 2025.
New guidance applies only to wind and solar; largely eliminates 5% cost safe harbor, but preserves physical work (on-site or off-site allowed) and 4-year continuity safe harbors.
On Friday, August 15, the Department of Treasury and IRS released guidance providing a revised definition of “beginning of construction” for purposes of the termination date of the section 45Y production tax credit (PTC) and section 48E investment tax credit (ITC) for wind and solar projects. Under the One Big Beautiful Bill Act (OBBBA) as enacted on July 4, 2025, developers of wind and solar projects must begin construction by July 4, 2026, or be placed in service by the end of 2027 to be eligible for these tax credits.
In the past, IRS PTC and ITC safe harbor rules allowed a project to be considered to have "begun construction" for tax credit eligibility purposes if project owners incur 5% of their costs ("Five Percent Safe Harbor") or when physical work of a significant nature begins. However, a few days after OBBBA was enacted, President Trump released Executive Order 14315, “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources,” directing Treasury to restrict the use of safe harbors for tax credit eligibility of wind and solar projects.
The new guidance released by Treasury/IRS in IRS Notice 2025-42 alters the definition for when projects begin construction, in accordance with the Executive Order. The guidance removes the Five Percent Safe Harbor, except for low output solar facilities with a maximum net output (measured in alternating current) not greater than 1.5MW. This means that, with the exception of low-output solar, wind and solar projects can no longer qualify as having “begun construction” through acquisitions held in seller inventory because inventory sales do not count for the physical work test.
The new guidance keeps the physical work test and continuity requirements. The guidance preserves the continuity safe harbor, where if a taxpayer places the applicable wind or solar project in service by the end of the calendar year that is four years after the (calendar) year in which construction began on the project, the continuity test is considered satisfied.
For projects that are not placed in service by the end of the four-year safe harbor period, in order to satisfy continuity under this new guidance, the taxpayer must demonstrate that it has satisfied a continuous program of construction involving physical work of a significant nature. The guidance also allows for “excusable disruptions” to continuous physical work, including for (among others) permit, supply chain, weather, interconnection, and labor-related delays.
There is no minimum dollar spent requirement for the physical work test, and the guidance still allows for both on and off-site work to satisfy the physical work of a significant nature test. Examples of off-site work include the manufacture of components, mounting equipment, support structures, and other power conditioning equipment that are not “inventory.” On-site physical work for a wind facility typically begins with the excavation for the foundation, setting of anchor bolts into the ground, or pouring concrete pads for the foundation. On-site physical work for a solar facility typically begins with the installation of racks or other structures to affix photovoltaic panels, collectors, or solar cells to a site.
In sum, under this new guidance, applicable wind and solar projects will be eligible for tax credits under sections 45Y and 48E if they begin physical work of a significant nature by July 4, 2026, or (if construction has not begun by then) if they are placed in service by the end of 2027. As the guidance goes into effect on September 2, 2025, projects that begin construction before such date (under the previously applicable IRS beginning of construction guidance) are not affected. Newer projects that are not low-output solar will be able to satisfy beginning of construction if there is some on-site or off-site physical construction, and such projects are placed in service by the end of the calendar year 4 years after construction begins, or, for longer term projects, if physical work continuity is satisfied.
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