The IRS recently issued Notice 2025-42, which makes a significant change to how wind and solar projects establish the “beginning of construction” for purposes of claiming federal clean energy credits.
For years, developers could satisfy this requirement in one of two ways:
- Five Percent Safe Harbor – by incurring at least 5% of a project’s total costs before the deadline, or
- Physical Work Test – by beginning physical work of a significant nature, either on-site or through binding contracts for off-site work.
With the release of Notice 2025-42, the Five Percent Safe Harbor has been eliminated for most projects. Going forward, the Physical Work Test is now the only method available to establish the start of construction—except in limited cases for small-scale solar facilities (≤1.5 MW AC), which can still use the Safe Harbor.
Why This Matters
The change is more than a technical adjustment, it has practical implications for how projects are financed, scheduled, and executed. Many developers previously relied on the Safe Harbor as a flexible way to secure eligibility for credits without moving dirt at the project site. That option is now off the table for large solar and all wind projects.
Instead, projects must show real, tangible progress. This means activities such as excavation, foundation work, and the manufacture of components under binding contracts will take on even greater importance. Developers will also need to be mindful of the continuity requirement, which generally requires projects to demonstrate ongoing construction or place the facility in service within four years.
Deadlines to Keep in Mind
Under the One Big Beautiful Bill Act (OBBBA), wind and solar projects must begin construction by July 5, 2026, to qualify for credits before they phase out. This makes early planning and clear documentation of physical work critical over the next two years.
Key Takeaways for Developers and Investors
- Act quickly: Projects hoping to rely on the 5% Safe Harbor had only until early September 2025 to incur qualifying costs. Going forward, physical work is required.
- Document thoroughly: Keep detailed records of contracts, site work, and construction milestones to support credit eligibility.
- Plan for continuity: Delays in supply chain, permitting, or weather may be excusable, but continuous physical progress is the safest path.
- Consider project size: Only small-scale solar projects can still benefit from the Safe Harbor.
Looking Ahead
Notice 2025-42 raises the bar for demonstrating progress on renewable energy projects. While this may add complexity, it also brings clarity to how credits are earned. Developers, investors, and tax professionals should carefully review their strategies to ensure they remain on track to qualify for valuable clean energy incentives before the OBBBA deadlines arrive.
For a detailed technical breakdown, you can read the full summary here. And if you have any questions or are interested in learning more, don’t hesitate to reach out today!
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.