IRS Issues New Beginning of Construction Guidance for Solar and Wind Facilities
On August 15, 2025, the Internal Revenue Service (IRS) issued Notice 2025-42 to address the beginning of construction (BOC) requirements for solar and wind projects under sections 45Y and 48E of the Internal Revenue Code (Code). The Notice largely leaves intact the historical BOC guidance applicable to tax credits available under Sections 45 and 48 of the Code, with one significant exception — the 5% safe harbor will only apply to solar projects (i.e., not wind) with a nameplate capacity of 1.5 MW AC or less. The Notice applies to all solar and wind projects where BOC has not occurred under prior IRS guidance by September 2, 2025. As discussed in this prior Pierce Atwood alert, the One Big Beautiful Bill Act (OBBBA) provides for an early termination of the solar and wind tax credits available under Code Sections 45Y and 48E. Specifically, the OBBBA eliminates credits for solar and wind projects (i) where BOC occurs on or after July 4, 2026, and (ii) which are placed in service after December 31, 2027, except that, projects that are placed in service before December 31, 2027, or where BOC occurs before July 4, 2026, are still eligible for the credits.
Shortly after signing the OBBBA into law, the administration issued Executive Order 14315 calling for the IRS to issue revised BOC guidance for wind and solar projects so that the BOC rules were “not circumvented, including guidance to prevent the artificial acceleration or manipulation of eligibility and to restrict the use of broad safe harbors…” In response to the executive order, the IRS issued the Notice.
Five Percent Safe Harbor Terminated for Solar Projects Over 1.5 MW and All Wind Projects
Under prior IRS guidance, a taxpayer could establish that BOC has occurred by paying or incurring at least 5% of the total project costs for a wind or solar project (e.g., purchasing transformers, panels, racking, turbines, etc.). The Notice eliminates the 5% safe harbor for solar projects that have a maximum net output greater than 1.5 MW AC, and all wind projects regardless of output. Accordingly, under the Notice, solar projects with an output greater than 1.5 MW and all wind projects can only establish that BOC has occurred through the physical work test. For solar projects with an output of 1.5 MW or less, referred to in the Notice as “low output solar facilities,” the 5% safe harbor remains available and is relatively unchanged from the historical guidance.
Physical Work Test and Continuity Safe Harbor Remain Unchanged
The Notice preserves the physical work test, which is satisfied where physical work of a significant nature begins. The physical work test focuses on the nature of on-site and off-site physical work that has been performed, rather than the cost. On-site work includes, among other things, the installation of racks or other structures to affix photovoltaic panels, and the excavation and pouring of foundations for turbines. Offsite work includes the manufacture of components, mounting equipment, support structures, inverters, transformers, and other power conditioning equipment (e.g., main power transformers), so long as it is not held in the inventory of the manufacturer.
The Notice also preserves the continuity requirement – i.e., that after construction is established, the taxpayer maintains a continuous program of construction – and the associated safe harbor, which is met where a taxpayer places the facility in service by the end of the calendar year that is no more than four calendar years after BOC occurs. For example, if BOC occurs on August 20, 2025, the wind or solar project must be placed in service by December 31, 2029, to satisfy the safe harbor. Where the safe harbor is not met, then the continuity requirement will be determined by the relevant facts and circumstances.
For additional information regarding how the Notice or the recent tax legislation impacts your energy project, please contact Pierce Atwood attorneys Kris Eimicke, Joe Donovan, Allen Braddock, or any other member of our Energy Infrastructure and Project Development team.