The One Big Beautiful Bill Act, enacted on July 4, 2025, imposed new restrictions on the availability of the Investment Tax Credit (ITC) and Production Tax Credit (PTC) for wind and solar projects under Code Sections 45Y and 48E. In order to be eligible for the ITC and PTC moving forward, new wind and solar projects must either be placed in service by December 31, 2027, or “begin construction” on or before July 4, 2026.
On July 7, 2025, President Trump issued Executive Order 14315, which directed the Treasury Department to issue guidance 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.” The Executive Order directed the Treasury Secretary to issue guidance relating to the “beginning of construction” standard to narrow the definition of what would constitute “beginning of construction” with respect to solar and wind projects relating to the July 4, 2026, safe harbor deadline.
On August 15, 2025, the Treasury Department issued Notice 2025-42 in fulfilment of its obligation under the Executive Order. Prior to the Notice, taxpayers could satisfy the beginning of construction standard by meeting one of two criteria: (i) the “five percent safe harbor,” in which the taxpayer incurs 5% of all project costs; or (ii) the “physical work test,” in which the taxpayer begins physical work of a significant enough nature sufficient to meet the test.
The Notice eliminates the “five percent safe harbor” for solar and wind facilities, leaving the “physical work test” as the only path to begin construction before the July 4, 2026, deadline. Although the “physical work test” is a facts and circumstances determination, the Notice, along with prior guidance, would permit such test to be met by acts such as (i) on-site physical work, such as excavating project foundations, pouring concrete pads or installing racks for solar panels, or (ii) off-site work under a binding written contract to manufacture or assemble non-inventory components specific to such project.
The Notice is effective for all applicable wind and solar facilities that begin construction on or after September 2, 2025. Therefore, project developers seeking to use the five percent safe harbor have a very short window to evaluate and fund such project costs. The Notice specifically excludes certain so called “low output solar facilities” (those that have a maximum net output of less than 1.5 MWac) from the limitations contained in the Notice, allowing such facilities to continue to utilize the “five percent safe harbor.”
The Notice is applicable only to wind and solar facilities under Code Sections 45Y and 48E, and therefore the other technologies covered in Code Sections 45Y and 48E—most notably battery energy storage systems—are not otherwise impacted by this Notice. The Notice maintains the requirement that a taxpayer must maintain a continuous program of construction on a project but also continues the safe harbor for projects that place their facility into service by the end of the fourth calendar year after the calendar year in which construction began.
