IRS and Treasury Tighten Beginning-of-Construction Rules for Wind and Solar

On Aug. 15, the U.S. Treasury Department and the Internal Revenue Service (IRS) released IRS Notice 2025-42, narrowing the rules for what qualifies as “beginning of construction” (BOC) under the One Big Beautiful Bill Act (OBBBA) with respect to wind and solar projects for purposes of the termination of the technology-neutral clean electricity Production Tax Credit under Section 45Y (CEPTC) and the Investment Tax Credit under Section 48E (CEITC).

As discussed in our prior client alert, wind and solar projects that BOC within 12 months of the OBBBA’s enactment can still qualify for the full CEPTC and CEITC with no hard placed-in-service deadline. For any wind and solar projects that fall outside of this one-year safe harbor, the OBBBA shortens the timeline for these projects to qualify for the CEPTC and the CEITC, requiring them to be placed in service by Dec. 31, 2027.

While Notice 2025-42 preserves longstanding physical work and continuity requirements, it narrows the BOC rules by eliminating the broadly used 5% safe harbor method, as outlined in detail below. Developers and investors must pivot quickly to comply with the new BOC standards or risk losing eligibility for valuable clean energy tax credits for solar and wind projects.

Key Changes Under Notice 2025-42

Elimination of the 5% Safe Harbor (With a Limited Exception): Previously, a taxpayer could establish BOC by paying or incurring at least 5% of project costs (5% Safe Harbor). Under Notice 2025-42, the 5% Safe Harbor is eliminated for most wind and solar facilities, unless the solar facility has a maximum net output of ≤1.5 MW.

Physical Work Test as the Sole Method to Establish BOC: Except for the limited solar exception described above, taxpayers must now rely on the Physical Work Test to satisfy BOC, which requires commencement of physical work of a significant nature. The Physical Work Test under Notice 2025-42 is virtually identical to prior IRS BOC guidance, including on-site activities (e.g., excavation, foundation work, rack or structure installation) and off-site manufacturing (e.g., inverters or transformers), provided that the work is under a binding written contract and the components are not normally held in inventory.

Effective Date and Applicability: The new BOC rules under Notice 2025-42 apply to wind and solar projects whose BOC does not begin before Sept. 2, 2025, under prior IRS guidance. Projects that BOC before that date, including those relying on the 5% Safe Harbor, will remain governed by the prior IRS guidance on BOC.

Continuity Requirement and Four-Year Safe Harbor: The obligation to maintain continuous construction remains in place (Continuity Requirement). A safe harbor continues to apply if the facility is placed in service within four calendar years of BOC (Continuity Safe Harbor), in which case the Continuity Requirement is deemed satisfied. Consistent with prior IRS guidance, permissible delays such as weather, permitting or interconnection delays remain recognized exceptions. However, the prior “continuous efforts” standard (e.g., entering into contracts, permits or procurement) is no longer sufficient and actual continuous construction is required. Projects that fall outside of the Continuity Safe Harbor are still determined by the relevant facts and circumstances for purposes of determining if the Continuity Requirement is met.

Foreign Entity of Concern (FEOC) Guidance Pending: Importantly, Notice 2025-42 does not address BOC rules related to the OBBBA’s Foreign Entity of Concern (FEOC) restrictions. That guidance is forthcoming, as noted in the footnotes to Notice 2025-42.