IRS Issues New Guidance on Beginning of Construction Rules for Wind and Solar Tax Credits

The Treasury Department and IRS have issued Notice 2025-42, providing updated guidance on the Beginning of Construction requirements for claiming Clean Electricity Production and Investment Tax Credits for wind and solar facilities. This update reflects changes from The One, Big, Beautiful Bill Act (OBBBA) and Executive Order 14315, which begin phasing out subsidies for certain energy sources.

Key Deadlines

• End of Credit Availability:
  Wind and solar projects placed in service after December 31, 2027, will not qualify for these credits.
• Construction Start Deadline:
  Projects must begin construction before July 5, 2026, to remain eligible. If construction begins before this date, the project may qualify under the four-year continuity safe harbor.

Beginning of Construction Tests

1. Large Projects (>1.5 MW AC Nameplate Capacity)

• Must use the Physical Work Test to demonstrate construction has started.
• Permitting, planning, and site clearing do not qualify.
• Only physical work of a significant nature either on-site or off-site (e.g., manufacturing of custom components) counts.
• Components held in stock or produced without a binding contract do not count toward the Physical Work Test.

2. Small Solar Projects (≤1.5 MW AC Nameplate Capacity)

Developers of smaller solar facilities have more flexibility; they can qualify by using either:

• Option 1: Physical Work Test, or
• Option 2: Five Percent Safe Harbor, where at least 5% of total project costs are incurred before the deadline.

This guidance applies to wind and solar projects that begin construction on or after September 2, 2025.

Continuity Requirement

To qualify for a tax credit, solar and wind projects must maintain a continuous program of construction. This means there must be an ongoing, significant amount of physical work. However, certain delays that are outside of the taxpayer’s control won’t be considered a failure to meet this requirement. These include a non-exhaustive list of excusable disruptions such as severe weather, natural disasters, delays in obtaining permits or licenses, labor stoppages, supply shortages, financing delays, and issues with grid interconnection.

Key Takeaways for CPAs and Developers

• Developers must move quickly: Start project before July 5, 2026, to be eligible for the four-year continuity safe harbor deadline.
• Projects greater than 1.5 MW AC net output must begin construction before September 2, 2025, to avoid the strict physical work test requirement under Notice 2025-42.
• Smaller solar projects not greater than 1.5 MW AC benefit from dual qualification pathways, i.e., Physical work test and the Five Percent Safe Harbor.
• CPAs should advise clients to maintain robust documentation of construction activity to defend credit claims.