The Treasury Department and the IRS recently issued Notice 2025-42, providing guidance as to what constitutes “beginning construction” of solar and wind facilities. Construction on these facilities must begin prior to July 5, 2026, to be eligible for the Section 48E clean electricity investment credit (ITC) and Section 45Y clean electricity production credit (PTC) and not subject to the December 31, 2027, credit termination dates codified in the “One, Big, Beautiful Bill Act” (OBBBA or P.L. 119-21). The notice was issued in response to President Trump’s July 7, 2025, Executive Order 14315 to enforce the termination of the ITC and PTC by “ensur[ing] that policies concerning ‘beginning of construction’ are not circumvented.”
The notice only applies to Section 45Y and Section 48E wind and solar facilities that begin construction on or after September 2, 2025. The notice does not apply to clean energy facilities utilizing other technologies under Section 45Y and Section 48E or to any facilities under Section 45 or Section 48. A long list of IRS notices related to begun construction—including notices 2013-29, 2018-59, and 2022-61—continue to apply for facilities that began or begin construction before September 2, 2025.
As a refresher, and discussed more in depth in our alert discussing renewable energy after the Big Beautiful Bill, following enactment of the OBBBA, solar and wind projects must either begin construction no later than July 4, 2026, or be placed in service no later than December 31, 2027, to qualify for the ITC or PTC. If a solar or wind project meets either deadline, it may qualify for the credit. If a solar or wind project misses both deadlines, it will not qualify for any credit.
Beginning construction on and after September 2, 2025
The IRS has long allowed two methods for establishing that construction has begun, the “significant physical work test” and the “5% safe harbor.” This notice narrows the begun-construction rules, though not as tightly as many industry insiders anticipated. Most notably, the notice eliminates the ability for solar and wind facilities to utilize the 5% safe harbor, except in the case of what the IRS calls a “low output solar facility” (i.e., a solar facility that has a maximum net output of not greater than 1.5 MW, as measured in alternating current). As outlined further below, the physical work test is still available to qualify all solar and wind facilities as having begun construction.
Beyond the limitations for the 5% safe harbor, the notice substantially resembles predecessor Notices 2013-29 and 2018-59, as they have been clarified and modified over time. However, as summarized in detail below, investors and developers should be aware of these changes to strategize for solar and wind financings through calendar year 2027.
Here is a short summary of the available methods for determining whether a project has begun construction.
Notice 2025-42 — Applicable facilities
- Low output solar facilities (1.5 MWac and under) that begin construction after September 1, 2025, and before July 5, 2026
- Available methods to satisfy beginning construction include the physical work test and the 5% safe harbor
- Solar (>1.5 MWac) and wind facilities that begin construction after September 1, 2025, and before July 5, 2026
- Available methods to satisfy beginning construction include the physical work test, but not the 5% safe harbor
Prior guidance — Applicable facilities
- Facilities that begin construction prior to September 2, 2025
- Available methods to satisfy beginning construction include the physical work test and the 5% safe harbor
Physical work test
As noted above, even without the 5% safe harbor, the IRS considers a facility to have begun construction if there is “significant physical work” performed on the facility. This can be work performed by the taxpayer, and it can also be work performed by others. The notice says: “Work performed by the taxpayer and work performed for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in the taxpayer’s trade or business (or for the taxpayer’s production of income) is taken into account in determining whether construction has begun.” We recently shared our thoughts on the physical work test—a summary of the rules follows:
- Both on-site and off-site work count for purposes of demonstrating that physical work of a significant nature has begun.
- Examples of on-site work of a significant nature:
- For wind facilities: 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.
- For solar facilities: The installation of racks or other structures to affix photovoltaic (PV) panels, collectors, or solar cells to a site.
- The most common alternative to on-site physical work is the manufacture of components that will become part of the facility at an off-site location:
- The IRS provides a few examples of these off-site manufacturing activities, including the manufacture of components, mounting equipment, support structures, such as racks, rails, inverters, and transformers, and other power conditioning equipment and components for wind turbines and tower units.
Remember that if the manufacturer is not the taxpayer, then its physical work only counts if:
- Such work is performed pursuant to a binding written contract (again, the same technical rules from prior IRS notices apply), and
- These components are not held in the manufacturer’s inventory.
Finally, the notice identifies “preliminary activities” that do not constitute significant physical work, such as:
- Planning or designing, securing financing, exploring, researching, conducting mapping and modeling to assess a resource, obtaining permits and licenses, conducting surveys, environmental and engineering studies, clearing a site, test drilling to determine soil condition, or excavation to change the contour of the land (as distinguished from excavation for foundations). Removal of existing turbines and towers is considered preliminary work and does not constitute physical work of a significant nature.
Project sponsors unfamiliar with these rules may assume they don’t need to worry about “begun construction” if they have been working on a facility for years, have secured permits and financing, and have initiated clearing trees and debris from the site. As noted in the above discussion and the list of preliminary activities, the project may still fail to satisfy the required tests.
Be aware that the repowering or retrofitting of a facility can also qualify for tax credits, provided the fair market value of the used components of property is not more than 20% of the facility’s total value. Note that the physical work test applies only to the work performed on the new components of property comprising the facility.
The 5% safe harbor for low output solar facilities (≤ 1.5MWac)
Solar facilities with a maximum output of not greater than 1.5MW (in alternating current), may continue utilizing the 5% safe harbor. The determination of whether a qualified facility has a maximum output of not greater than 1.5MWac is based on the nameplate capacity. If the net output is measured in direct current, the net output of a project is to be calculated as follows: the lesser of (i) nameplate capacity measured in direct current and (ii) the nameplate capacity of the first component that inverts the direct current electricity into alternating current.
It is important to recognize that the IRS is alert to the question of whether two or more facilities under 1.5MWac should be combined together for the purpose of this test and thereby become ineligible to use the 5% safe harbor if the aggregate output is greater than 1.5MWac. The following rules apply:
- Integrated Operations. When testing the 1.5MWac threshold, if two or more facilities are considered to have integrated operations, the nameplate capacity of those facilities is combined to determine the 1.5MWac threshold. Facilities have integrated operations if the facilities are:
- Owned by the same or related taxpayers (members of a group of trade or businesses that are under common control as defined in Treasury Regulations Section 1.52-1(b));
- Placed in service in the same taxable year; and
- Transmit electricity generated by the facilities through the same point of interconnection or, if the projects are “behind the meter,” are able to support the same end user.
Accordingly, a facility that first appears under 1.5MWac should be carefully evaluated to ensure that it is not properly combined with another facility or facilities with a resulting loss of eligibility to use the 5% safe harbor.
Are multiple facilities considered one facility for purposes of beginning construction?
The notice provides rules for determining whether the start of construction of one solar or wind facility simultaneously constitutes the start of construction for other facilities as well. The notice provides the following non-exhaustive list of factors to be considered in determining whether multiple facilities are operated as part of a single project and should be treated as a single facility for purposes of beginning construction (note that the determination is made in the calendar year during which the last of the multiple facilities is placed in service):
- The facilities are owned by a single legal entity;
- The facilities are constructed on contiguous pieces of land;
- The facilities are described in a common power purchase agreement or agreements;
- The facilities have a common intertie;
- The facilities share a common substation;
- The facilities are described in one or more common environmental or other regulatory permits;
- The facilities were constructed pursuant to a single master construction contract; and
- The construction of the facilities was financed pursuant to the same loan agreement.
Continuity considerations
Regardless of whether a particular facility satisfies the physical work test or the 5% safe harbor (if applicable), the taxpayer must work “continuously” toward completion. In this regard, the notice continues the safe harbor for facilities placed in service not later than the end of the fourth calendar year after the year in which construction began on the facility. For example, if a facility begins construction at any time in 2025, then it must be placed in service on or before December 31, 2029, to be within this safe harbor, regardless of whether the taxpayer is a calendar-year taxpayer. If the facility does not qualify for the four-calendar-year safe harbor, then a continuous program of construction, involving continuing physical work of a significant nature, must be demonstrated (subject to certain disruptions beyond the taxpayer’s control), presumably with a diary, photographs, and similar evidence and record-keeping. The notice provides a non-exhaustive list of potentially excusable disruptions that would be considered, including severe weather, natural disasters, permitting delays, interconnection-related delays, delays in the manufacture of custom components, labor stoppages, delays due to the inability to obtain specialized equipment of limited availability, financing delays, and delays due to supply shortages.
Understanding FEOC changes
The OBBBA significantly expands the so-called foreign entity of concern (FEOC) rules. In particular, the new FEOC rules deny the credits under Sections 45Y and 48E for projects that begin construction after December 31, 2025, where the taxpayer receives “material assistance from a prohibited foreign entity.” For the purpose of determining whether a project has begun construction and is, therefore, exempt from this material assistance provision, the OBBBA specifically incorporates the guidance provided in IRS Notices 2013-29 and 2018-59 (and other IRS guidance in effect on January 1, 2025). Further, the notice states it “is not intended to address the beginning of construction rules for purposes of foreign entity restrictions.”
Additional guidance is anticipated, consistent with both the OBBBA and EO 14315, with respect to the FEOC rules. Accordingly, developers and investors should expect that determining whether a project has begun construction under (a) the general credit qualification rules and (b) the FEOC rules may depend on similar, but different, sets of rules. In particular, the existing guidance referred to in the FEOC provisions does allow the 5% safe harbor to be used, but it also specifically identifies “stockpiling” as an “abuse” that should be “prevented.” As a result, we await IRS guidance on how to combine those two mandates.
Key observations for investors
Solar Facilities Greater Than 1.5MWac and All Wind Facilities
With the 5% safe harbor rendered inapplicable to any solar facility greater than 1.5MWac and any wind facility that begins construction on or after September 2, 2025, it will be essential for investors looking to finance a solar or wind portfolio to underwrite the developer’s strategy for satisfying the physical work test. Investors should carefully review equipment purchase orders and sales contracts, photographic and other contemporaneous evidence of the off-site or on-site physical work performed, as well as engineering, procurement, and construction (EPC) agreements and associated milestones. Investors should also pay close attention that the custom parts manufactured are not parts customarily held in inventory and that any contract calling for the work to be done is a “written binding contract,” as discussed above.
Solar Facilities NOT Greater Than 1.5MWac
With respect to residential and other solar portfolios containing projects not greater than 1.5MWac in capacity, investors should verify evidence of nameplate capacity and analysis of the integrated operations test described above. We note that residential portfolios typically have shorter construction periods. Accordingly, even if residential installations fail to begin construction by July 4, 2026, they may benefit from their shorter development timeline, enabling them to still get in service by the placed-in-service deadline of December 31, 2027. We note, however, that it will be important to track the forthcoming FEOC-begun-construction guidance to confirm that no new FEOC obligations are introduced on account of a failure to begin construction by the FEOC effective dates.
Partnership Agreements
Investors should consider including representations and covenants in partnership agreements with regard to the physical work test or 5% safe harbor (as applicable), including each facility’s nameplate capacity, an integrated operations analysis of the portfolio, if applicable, and, if appropriate, requirements to deliver evidence of qualification on or about the July 4, 2026, deadline.
Tax Credit Adders
The notice does not impact the ability of facilities to qualify for adders to the tax credits, which were preserved under the OBBBA.
Key observations for developers
Utilize the 5% Safe Harbor prior to September 2, 2025
The notice applies to solar and wind facilities that begin construction on or after September 2, 2025, so there is limited time available to utilize the 5% safe harbor for solar facilities greater than 1.5MWac and for wind facilities. Low output solar, including residential solar, can continue to use the 5% safe harbor until July 4, 2026.
Equipment/EPC Agreements
Developers should procure made-to-order equipment not held or ordinarily held in inventory and review and consider construction timing and scope of work during EPC agreement negotiations, all to ensure projects can satisfy the physical work test on or before July 4, 2026.
Diligence/Contract Drafting
Developers should prepare for investors to require (i) additional diligence as to begun construction strategy, (ii) an additional layer of assurance that utility scale projects satisfy the physical work test, and (iii) with respect to residential and community solar portfolios consisting of projects less than 1.5MWac, evidence as to nameplate capacity and analysis confirming no projects are considered to have integrated operations in excess of the greater than 1.5MWac threshold.
FEOC requirements beginning January 1, 2026
Developers should consider beginning physical work on or before December 31, 2025, to minimize the impact of the FEOC material assistance rules.
PWA requirements
Prevailing wage requirements under Section 48(a)(10) or Section 48E(d)(3) still apply to those facilities (i) that cannot evidence beginning construction prior to January 29, 2023, or (ii) are under 1MWac.
Reaching your renewable energy project goals
As evolving tax credit regulations and legislative changes continue to impact the renewable energy industry, Nixon Peabody’s Renewable Energy Tax Credits attorneys are ready to provide strategic guidance to developers, investors, and other stakeholders to maximize project value and ensure compliance.