Corporate Insights: New Internal Revenue Service (IRS) Guidance on One Big Beautiful Bill Act Tightens Long-standing Rules for Determining Beginning of Construction and Limits the Safe Harbor Rules
Notice 2025-42 released by the IRS on August
15, 2025 (New Guidance) provides guidance
consistent with the provisions of the One Big
Beautiful Bill Act (Act) and the related July 7,
2025 Executive Order (July 7 EO) with respect
to applicable wind and solar facilities that did
not begin construction prior to September 2,
2025. (See our previous post about the Act
here).
As we know, the Act terminated the §45Y credit and the
§48E credits for applicable wind and solar facilities not
placed in service by December 31, 2027, providing that, to be
eligible for tax credits under the Act, solar and wind facilities
must be placed in service prior to January 1, 2028, or begin
construction within 12 months following enactment (i.e., July
4, 2026). Additionally, the July 7 EO granted the Secretary of
the Treasury broad authority to strictly enforce the termination
of the clean electricity production and investment tax credits
for wind and solar facilities.
In furtherance of the above, among other things, the New
Guidance:
Eliminates the previous 5% safe harbor provided under
Notice 2022-61 (Previous Guidance) for the purposes of
determining whether a wind or solar facility has met the
beginning of construction requirements, and applies a
new and limited safe harbor applicable to low output solar
projects with less than 1.5MW nameplate capacity (Low
Output Solar Safe Harbor)
Other than with respect to the Low Output Solar Safe
Harbor exception described above, establishes the physical
work test as the sole method of satisfying the beginning of
construction requirements
Eliminates a taxpayer’s ability to satisfy continuity
requirements by showing “continuous efforts” in the case
of construction extending beyond four years, which means
that taxpayers will have to maintain a continuous program
of construction to qualify for the tax credits
After September 2, 2025, except in the case of the Low
Output Solar Safe Harbor, there will only be one way to prove
that timely construction has begun in order to qualify for tax
credits on applicable wind and solar facilities.
The physical work test requires that a taxpayer demonstrates
that they have (a) begun physical work of a significant nature
on tangible personal property and other tangible property
used as an integral part of the activity performed by the
applicable wind or solar facility, as well as (b) maintained a
continuous program of construction (Continuity Requirement).
There is still no fixed minimum amount, value of work, or
percentage threshold required to satisfy the physical work
test, and this determination will continue to depend on the
relevant facts and circumstances considering both off-site
and on-site work. For wind 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”. While for solar facilities: “on-site physical work
of a significant nature may include the installation of racks or
other structures to affix photovoltaic panels, collectors or solar
cells to a site.” The requirements for off-site physical work
of a significant nature are the same and “may include the
manufacture of components, mounting equipment, support
structures such as racks and rails, inverters and transformers
and other power conditioning equipment.” For property that
is manufactured, constructed or produced for a taxpayer by
a third-party to qualify toward the physical work test, it must
be performed pursuant to a binding written contract that is
entered into prior to the work taking place, and that does not
limit damages to an amount less than 5% of the total contract
price. In addition, components held in the manufacturer’s
inventory continue to be excluded from the physical work test
determination.
A taxpayer will meet the Continuity Requirement of the
physical work test if it demonstrates a continuous program
of construction involving continuous physical work of a
significant nature with respect to an applicable wind or solar
facility, or it otherwise meets the limited continuity safe
harbor established by the New Guidelines for facilities that are
placed 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 facility began (Continuity Safe Harbor).
Importantly, the New Guidance preserves the non-exhaustive
list of excusable disruptions to a taxpayer’s ability for
purposes of demonstrating the Continuity Requirement
(but not for purposes of the Continuity Safe Harbor), which
includes: 1) delays due to severe weather conditions;
2) delays due to natural disasters; 3) delays in obtaining
permits or licenses from federal, state, local or Indian
tribal governments, including, but not limited to, delays
in obtaining permits or licenses from the Federal Energy
Regulatory Commission, the Environmental Protection
Agency, the Bureau of Land Management and the Federal
Aviation Agency; 4) interconnection-related delays, such as
those relating to the completion of construction on a new
transmission, distribution line or necessary transmission, or
distribution upgrades to resolve grid congestion issues that
may be associated with an applicable wind or solar facility’s
planned interconnection; 5) delays in the manufacture of
custom components; and 6) financing delays.
It is important to note that the New Guidance specifically
applies to wind and solar facilities, not other technologies,
that begin construction after September 2, 2025, but before
July 4, 2026. Section 5 of the Notice 2022-61, including its
safe harbor provisions, will continue to apply to wind and solar
facilities that begin construction in accordance with Notice
2022-61 prior to September 2, 2025.
Lastly, the New Guidance is expected to be followed by
additional guidance addressing the beginning of construction
rules for the purposes of foreign entity material sourcing
restrictions.
For further guidance, please contact the authors or any other
members of our Energy and Natural Resources Industry
Group or Tax Practice Group.
