News Summary
The IRS has updated its guidelines for the initiation of construction for wind and solar energy projects, enforcing stricter requirements for tax credit eligibility. Projects commencing after a specified date must adhere to the Physical Work Test, with limitations on the five percent safe harbor for larger projects. These updates aim to align clean energy development with regulations on foreign-controlled entities and provide clarity for developers seeking tax incentives under the Internal Revenue Code.
Washington, D.C.—
The Internal Revenue Service (IRS) has introduced new rules aimed at tightening the requirements for the “beginning of construction” for wind and solar energy facilities, impacting projects seeking tax credits under Sections 45Y and 48E of the Internal Revenue Code. The updated guidance, issued through Notice 2025-42 on August 15, 2025, responds to presidential efforts to restrict subsidies for foreign-controlled energy projects and clarifies regulatory standards for eligible clean energy investments.
Key Changes to Construction Initiation Rules
The IRS’s new guidance becomes effective for projects that do not start construction under previous rules before September 2, 2025. The notice maintains the existing Physical Work Test but limits the applicability of the five percent safe harbor—which previously allowed applicants to qualify if they had incurred at least five percent of project costs—primarily to small solar projects with a nameplate capacity of 1.5 megawatts or less. For larger wind and solar projects, the five percent safe harbor is no longer valid, and developers must demonstrate compliance with the Physical Work Test instead.
Physical Work Test and Its Application
The Physical Work Test requires that substantial physical work must have begun on-site or off-site, with a list of acceptable activities for each type of project. For wind facilities, this includes tasks such as excavation for turbine foundations and pouring concrete pads, while solar facilities can qualify through activities like assembling structures needed for solar panels. Projects must show continuous progress to meet the test and ensure eligibility for relevant tax credits.
Timeline and Continuity Requirements
The guidance confirms that projects intending to qualify under the Physical Work Test must be placed in service within four years of starting construction to maintain eligibility, aligning with longstanding IRS regulations. This “continuity requirement” remains unchanged from previous guidance, emphasizing the need for projects to reach operational status within this timeframe.
Implications for Developers
Developers of larger projects seeking to qualify via the five percent safe harbor have a narrow window—those who began construction under prior guidance before September 2, 2025, will still be able to rely on this rule. However, moving forward, larger projects must meet the Physical Work Test to qualify for tax credits, adding a layer of complexity and requiring more tangible proof of physical activity on-site.
Future Guidance and Pending Regulations
The notice indicates that additional guidance will be issued regarding the beginning of construction standard under the Foreign Entities of Concern (FEOC) framework. The specific application of this framework to wind and solar projects remains to be clarified in subsequent IRS guidance, which will outline how foreign-controlled entities might influence eligibility and compliance criteria in the future.
Regulatory Context and Future Compliance Deadlines
In light of broader legislative measures, the One Big Beautiful Bill Act (OBBBA) stipulates that wind and solar facilities must commence construction before July 5, 2026, or be operational by December 31, 2027, to qualify for federal tax credits. This deadline aligns with the IRS’s emphasis on ensuring prompt development and adherence to stricter project initiation standards to secure benefits under the clean electricity incentives.
Background and Previous Guidance
The IRS has historically issued guidance on the beginning of construction, including Notice 2013-29 and Notice 2018-59, which established initial criteria for project qualification. The recent update enhances clarity and enforces tighter regulations around physical work, aiming to reduce ambiguity and prevent attempts to establish eligibility through minimal activity or delayed project commencement.
Clarifications on Physical Work Activities
The IRS clarified specific types of work that qualify as significant physical activity. For wind facilities, activities such as excavating for turbine foundations and pouring concrete for pads are recognized as substantial. For solar projects, constructing supporting frames and assembling key structural components count toward qualifying physical work. These clarifications are intended to reinforce the importance of tangible progress for project eligibility.
Looking Ahead
Future IRS guidance will address how the beginning of construction criteria apply within the context of the FEOC Equipment Rule, as mentioned in a footnote of the notice. This forthcoming guidance is expected to further define how foreign interests and new regulatory frameworks influence project eligibility and compliance protocols in the clean energy sector.
Summary
The IRS’s issuance of Notice 2025-42 marks a significant step toward tightening regulations around the initiation of wind and solar projects for tax credit purposes. By requiring tangible physical work and restricting certain safe harbors, the agency aims to ensure more rigorous enforcement and better alignment with legislative and presidential priorities to promote domestic renewable energy development. Developers of renewable projects should closely review these new standards to ensure timely compliance and maximize eligibility for ongoing and future incentives.
Deeper Dive: News & Info About This Topic
HERE Resources
IRS Issues New Guidance for Wind and Solar Tax Credits
How to Create a Beautiful and Functional Outdoor Living Space: Design Tips for Homeowners
Additional Resources
- OurQuadCities: IRS to Keep Wind, Solar Companies from Tax Breaks
- RTO Insider: IRS Guidance on Wind and Solar Credits
- New York Times: IRS Wind, Solar Tax Credits
- PwC: IRS Sheds Light on Construction Rules for Wind and Solar Credits
- Wikipedia: Renewable Energy in the United States
Author: STAFF HERE RALEIGH WRITER
RALEIGH STAFF WRITER The RALEIGH STAFF WRITER represents the experienced team at HERERaleigh.com, your go-to source for actionable local news and information in Raleigh, Wake County, and beyond. Specializing in "news you can use," we cover essential topics like product reviews for personal and business needs, local business directories, politics, real estate trends, neighborhood insights, and state news affecting the area—with deep expertise drawn from years of dedicated reporting and strong community input, including local press releases and business updates. We deliver top reporting on high-value events such as the North Carolina State Fair, Raleigh Arts Festival, and the Hopscotch Music Festival. Our coverage extends to key organizations like the Greater Raleigh Chamber of Commerce and Visit Raleigh, plus leading businesses in technology and education that power the local economy such as Red Hat and NC State University. As part of the broader HERE network, including HEREAsheville.com, HERECharlotte.com, HEREGreensboro.com, and HEREOBX.com, we provide comprehensive, credible insights into North Carolina's dynamic landscape.
