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On August 15, 2025, the IRS released Notice 2025-42 (the Notice) providing new beginning of construction (BOC) guidance for solar and wind projects claiming production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code. The Notice is the product of an executive order (EO) issued by President Trump on July 7, 2025, mandating the promulgation of guidance in order to prevent the “artificial acceleration or manipulation of eligibility” and “restrict the use of broad safe harbors” by projects seeking to claim such credits. The EO is discussed in our prior alert here.
The strong language in the EO had caused many in the renewables industry to fear that the BOC standard in forthcoming guidance portended by the EO would significantly change current law and thereby jeopardize many projects hoping to effectively grandfather themselves out of the reach of the significant law changes imposed by the One Big Beautiful Bill. Ultimately, however, the Notice made fewer changes than many expected and is causing many in the renewables industry to breathe a sigh of relief.
Highlights of the Notice include:
For projects that do not qualify as “low output solar facilities,” the Notice abolishes the 5% Safe Harbor, meaning that the physical work test will be the sole means of establishing BOC.
The 5% Safe Harbor will survive with respect to certain smaller-scale solar facilities that qualify as “low output solar facilities.” For these purposes, a low output solar facility is an applicable solar facility that has maximum net output of not greater than 1.5 megawatts (as measured in alternating current). Status as a low output solar facility is based on nameplate capacity and is tested on the basis of functionally interdependent property. Facilities with “integrated operations” (based on, for example, relatedness, common interconnection points or end users) are also aggregated for these purposes.
Comment: Because the 5% Safe Harbor requires a realistic prognostication of what total project costs will be in the future, it has always been susceptible to cost overrun concerns. In the past few years, with supply chain problems brought about by the COVID pandemic and an increasingly inflationary environment, perhaps not surprisingly, the alternative physical work test had already become the first choice of many, if not most, projects seeking to establish BOC. While not having the 5% Safe Harbor as a backup plan will be impactful, many taxpayers are likely to be unphased by this development.
With respect to the physical work test, the Notice largely follows existing law, with a couple of nuances and clarifications. Specifically, the test will retain its character as a facts and circumstances test, looking to the nature of the work performed rather than requiring a fixed minimum amount of work or monetary or percentage threshold. Similarly and as before, both off-site and on-site work will be counted, including work performed for the taxpayer by another person pursuant to a binding written contract, and activities of a preliminary nature (such as, for example, planning or designing, securing financing, researching and exploring) are excluded. The Notice also retains familiar standards relating to retrofitted property1 and the treatment of work performed on property that is transferred between related and unrelated taxpayers.2
Importantly, physical work on property integral to a facility, such as transformers, will continue to qualify. While work on items that would be inventory in the hands of a vendor continue to be excluded, the Notice also provides a helpful clarification that the standard looks not to a vendor in the abstract, but rather to the vendor selling equipment to the taxpayer.
As before, projects establishing beginning of construction must also establish continuity of work up through the date the project is placed in service. The Notice re-iterates the continuous program of construction standard, which requires continuous work subject to certain excusable disruptions, all consistent with prior guidance. Similarly, the four-year continuity safe harbor will continue to apply.
Comment: All things considered, in light of the EO, the Notice in many ways represents a “best case scenario” for taxpayers in the renewables space. There had been much concern over whether the Continuity Safe Harbor would also be abolished, whether the physical work test would be made more stringent or otherwise less taxpayer-favorable, and whether such changes would be made retroactive so as to impact some or all existing builds. Ultimately, the Notice provides certainty and retains many of the standards that are already well-understood in the industry.
The new landscape created by the Notice does, however, possess some interesting features and challenges, creating an interesting environment for taxpayers. Some such features include:
1 This standard, known as the “80/20 Rule,” provides that a retrofitted wind or solar facility may qualify as originally placed in service (thereby allowing credits to be claimed more than once with respect to certain “used” property or components) provided the fair market value of the used components or property does not comprise more than 20 percent of the applicable wind or solar facility’s total value.
2 These related party transfer rules generally allow physical work performed with respect to tangible personal property to be claimed by a transferee of such property as long as the transferor and transferee are related to one another for U.S. federal income tax purposes.
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