On August 15, 2025, the Internal Revenue Service (IRS) released Notice 2025-42 (“Notice”) explaining how to determine when wind and solar projects have begun construction for purposes of qualifying for tax credits under Internal Revenue Code (IRC) Sections 45Y and 48E. The One, Big, Beautiful Bill Act (OBBBA) eliminated the IRC Sections 45Y and 48E credits for wind and solar projects placed in service after December 31, 2027, except for projects on which construction begins within 12 months of July 4, 2025.
The Notice is a partial response to Executive Order (EO) 14315, Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources, signed July 7, 2025, which generally eliminates the “five percent safe harbor” test for making the beginning-of-construction determination for projects under 1.5 megawatts (MW). Additional guidance should be issued by the IRS within the next few weeks, as stated under footnote three in response to EO 14315, to address anti-circumvention rules under the new Foreign Entities of Concern (FEOC) restrictions under the OBBBA.
This 5% safe harbor elimination leaves the “physical work” test (except for solar projects more than 1.5 MW) as the only way to show the project has begun construction (effective for projects that have not begun construction before September 2, 2025). The Notice states that the sole method for determining beginning of construction under the physical work test requires 1) the start of physical work of a significant nature and 2) a continuous program of construction. The Notice defines this test in detail.
Background
The earliest definition of “beginning of construction” goes back to IRS Notice 2013-29, IRS Notice 2018-59, and IRS Notice 2021-41, as well as subsequent guidance such as IRS Notice 2022-61. Paragraph J of Section 70511 of the OBBBA specifically incorporates, by reference into codified law, the definition of the “beginning of construction” as in effect on January 1, 2025.
Under the EO, the Secretary of the Treasury is directed to take any action he deems necessary and appropriate to strictly enforce the termination provisions, with respect to the Section 45Y credit and the Section 48E credit for wind and solar facilities. The action is to be taken within 45 days following enactment of the OBBBA. Such action includes issuing new and revised guidance for applicable wind and solar facilities to ensure that policies concerning beginning of construction are not circumvented. The guidance issued should prevent the artificial acceleration or manipulation of eligibility and restrict the use of broad safe harbors unless a substantial portion of an applicable wind or solar facility has been built.
This new notice provides beginning of construction direction to prevent taxpayers from circumventing the statutory credit termination date and, prevent the artificial manipulation of eligibility for the Section 45Y credit and Section 48E credit for applicable wind and solar facilities. This new direction will also ensure that a substantial portion of any applicable wind or solar facility, not subject to the credit termination date, is built by the beginning of construction deadline. Accordingly, except as provided in Section 6 of this new notice, the five percent safe harbor provided under the IRS notices is not available for purposes of determining whether an applicable wind or solar facility has met the beginning of construction deadline and, thus, is not subject to the credit termination date.
New Rules to Establish Beginning of Construction
Construction of an applicable wind or solar facility begins when physical work of a significant nature begins. The test of significance focuses on the nature of the work performed, not the amount or cost. Provided that physical work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the physical work test. For purposes of demonstrating that physical work of a significant nature has begun, both off-site and on-site work (performed either by the taxpayer or by another person under a binding written contract) may be taken into account. Generally, off-site physical work of a significant nature may include the manufacture of components; mounting equipment; support structures such as racks and rails, inverters, and transformers (used in electrical generation that step up the voltage to less than 69 kilovolts); and other power conditioning equipment.
On-site physical work of a significant nature may include the following nonexclusive list of examples intended to illustrate what constitutes on-site physical work of a significant nature for applicable wind and solar facilities:
- On-site physical work of a significant nature begins with the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation.
- If the applicable wind facility’s wind turbines and tower units are to be assembled on-site from components manufactured off-site by a person other than the taxpayer and delivered to the site, physical work of a significant nature begins when the manufacture of the components begins at the off-site location, but only if:
- the manufacturer’s work is done pursuant to a binding written contract, and
- these components are not held in the manufacturer’s inventory.
On-site physical work of a significant nature for an applicable solar facility may include the installation of racks or other structures to affix photovoltaic panels, collectors, or solar cells to a site.
Preliminary Activities Not Included
Physical work of a significant nature does not include preliminary activities, even if the cost of those preliminary activities is properly included in the depreciable basis of the applicable wind or solar facility. Generally, preliminary activities for applicable wind or solar facilities include, but are not limited to:
- planning or designing;
- securing financing;
- exploring;
- researching;
- conducting mapping and modeling to assess a resource;
- obtaining permits and licenses;
- conducting geophysical, gravity, magnetic, seismic, and resistivity surveys;
- conducting environmental and engineering studies;
- clearing a site;
- conducting test drilling to determine soil condition (including to test the strength of a foundation);
- excavating to change the contour of the land (as distinguished from excavation for a foundation); and
- removing existing foundations, turbines, and towers, solar panels, or any components that will no longer be part of the applicable wind or solar facility (including those on or attached to building structures).
Continuity Safe Harbor
Generally, if a taxpayer places an applicable wind or solar facility in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the applicable wind or solar facility began (continuity safe harbor deadline), the applicable wind or solar facility will be considered to satisfy the continuity requirement (continuity safe harbor). The excusable disruption rules in this notice do not apply for purposes of applying the continuity safe harbor. If an applicable wind or solar facility is not placed in service before the end of the fourth calendar year after the calendar year during which construction of the applicable wind or solar facility began, determining whether the applicable wind or solar facility satisfies the continuity requirement under the physical work test will be decided by the relevant facts and circumstances.
Low Output Solar Facility
The definition of “low output solar facility” is an energy facility with a maximum net output of not greater than 1.5 MW, as measured in alternating current (AC), that is using the reported “nameplate” maximum capacity. Property included within the solar facility would be the interconnection machinery (switch gear, etc.), in addition to the photovoltaic (PV) solar panels, inverters, and any other interdependent components necessary to place the property in service. To meet the definition of “integrated operations,” there is a three-part test: 1) owned by the same or related taxpayers, 2) placed in service in the same taxable year, and 3) transmit electricity generated by the facilities through the same interconnection (front of the meter or behind the meter) directly to the same end user.
Recommended Advice
“Anyone wishing to construct a wind or solar energy generating facility will have three paths forward: 1) place the facility in service on or before December 31, 2027; 2) achieve the physical work test for beginning of construction on or before July 4, 2027, and place in service within four years; or 3) for solar projects under 1.5 MW (AC) binding contract, reach the 5% cost safe harbor and place the project in service within four years,” advises Scott Stogsdill, Ryan Director and Leader of the Federal Green Energy team. Ian Boccaccio, Ryan Principal and Income Tax Practice Leader, warns that “FEOC is going to be huge for investment tax credits starting next year, and the IRS promises additional guidance on anti-circumvention, particularly of the Material Assistance clause. We should all be on the lookout for this additional guidance.”
Reach out to Ian Boccaccio and Scott Stogsdill for further technical guidance.
TECHNICAL INFORMATION CONTACTS:
Ian Boccaccio
Principal
Ryan
469.399.4545
ian.boccaccio@ryan.com
Scott Stogsdill
Director
Ryan
469.399.4496
scott.stogsdill@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.
- Sujet
- Ian Boccaccio