The White House today issued an Executive Order that requires the Treasury Department to “issue new and revised guidance * * * to ensure that policies concerning the ‘beginning of construction’ are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has already been built.” The Executive Order follows last week’s enactment of the budget reconciliation act (formerly known as The One Big Beautiful Bill) (the “Act”) which contains a heavily debated and anticipated accelerated phase-out of the production tax credit and investment tax credit for wind and solar facilities, among other changes. For a summary of the phase-out and other renewable energy-related provisions of the Act see here.
A number of renewable energy tax credit provisions of previously existing law and the Act have effective dates that depend on when construction of a facility is considered to have begun. Under the Act, if construction of a wind or solar facility begins after the 12-month anniversary of enactment (July 4, 2026), the facility must be placed in service on or before December 31, 2027 to qualify for the production or investment tax credits. If construction begins before the 12-month anniversary of the Act there is no statutory placed-in-service deadline and the normal beginning-of-construction rules would apply, including a four-year continuity safe harbor. The Executive Order relates to those normal beginning-of-construction rules.
The Treasury Department and the Internal Revenue Service since 2013 have adopted guidance in a series of IRS Notices that outline the requirements to begin construction. That guidance, which has been modified and amended a number of times over the years, provides two alternative methods for establishing that construction of a facility has begun—(i) the physical work test and (ii) the “5% safe harbor.” Under the physical work test, construction of a project is considered to have commenced when “physical work of a significant nature” is undertaken. This may include onsite physical work related to the construction of a project or offsite physical work with respect to property that is integral to the operation of a project (such as a main power transformer). Under the 5% safe harbor, construction of a project is considered to have begun when the taxpayer pays or incurs five percent of the total cost of property included in a project that is integral to the production of electricity. Regardless of which method a taxpayer uses to establish beginning of construction, the taxpayer also must make continuous efforts toward completion of the project from and after the date construction is considered to begin under the physical work test or 5% safe harbor. The guidance provides a safe harbor under which a taxpayer is deemed to make continuous efforts toward completion of a project if the project is placed in service by the end of the fourth calendar year following the year in which the physical work test or 5% safe harbor was satisfied.
Under the longstanding beginning of construction guidance, there is no requirement that any particular portion of a project be constructed on the project site. The Executive Order requires the Treasury Department to issue new and revised guidance “preventing the artificial acceleration or manipulation of eligibility and * * * restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.” It is not clear from the language of the Executive Order exactly what this means, and we will not know exactly what the new and revised requirements will be for beginning of construction until the Treasury Department issues new guidance. The Executive Order requires the Treasury Department to issue new and revised guidance by August 18, 2025 (45 days following enactment of the Act). Until then, there will be significant uncertainty regarding whether and to what extent a taxpayer may continue to rely on the physical work test or the 5% safe harbor to begin construction of a project.
