The IRS released Notice 2025-42, which provides guidance regarding the “beginning of construction” requirements for wind and solar projects under the Clean Electricity Production Credit (IRC Section 45Y) and Clean Electricity Credit (IRC Section 48E). The One Big Beautiful Bill Act (OBBBA) accelerated the termination of the credits. If construction begins after July 4, 2026, the OBBBA requires wind and solar projects to be placed in service by December 31, 2027. If construction begins before July 5, 2026, the wind and solar projects may qualify for the tax credits if placed in service by December 31, 2029.
On July 7, 2025, an executive order was issued that directed the Treasury Department to take necessary actions to enforce these termination provisions within 45 days of enactment of the OBBBA.
Key Takeaways
- IRS Notice 2025-42 redefines “beginning of construction” rules for wind and solar projects claiming clean energy tax credits.
- Key deadlines vary by start date — projects starting before July 5, 2026, may qualify for credits through 2029 or 2030, while later projects face a 2027 cutoff.
- The Physical Work Test is now the primary standard; the Five Percent Safe Harbor applies only to smaller solar projects begun before July 5, 2026.
How to Determine “Beginning of Construction”
The notice significantly changes the existing “beginning of construction” rules a taxpayer must use to claim the tax credits for wind and solar projects. It’s effective for wind and solar projects that begin construction on or after September 2, 2025.
The Old Method
Prior to the notice being issued, taxpayers were allowed to establish the “beginning of construction” for energy credits using either the Physical Work Test or the Five Percent Safe Harbor, as described below:
- Physical Work Test – Construction begins when physical work of a significant nature has commenced, either on-site (e.g., excavation, foundation work, installing racks for solar panels) or off-site (e.g., component manufacturing under a binding contract); the test focuses on the nature of the work being performed and not on the cost.
- Five Percent Safe Harbor – Construction begins when a taxpayer paid or incurred at least 5% of the total project cost.
Additionally, taxpayers had to demonstrate either continuous construction or continuous efforts (continuity requirement).
The New Method
The notice establishes the Physical Work Test as the primary method for most wind and solar projects to show that construction has begun before the July 4, 2026, deadline. The Five Percent Safe Harbor can only be used for solar projects that begin construction before July 5, 2026, if they have a maximum net output of not greater than 1.5 megawatts.
The notice states that taxpayers must maintain a continuous program of construction to meet the physical work test for wind and solar projects. Continuing physical work of a significant nature, either under the Continuity Safe Harbor or the facts and circumstances must be meant.
The Continuity Safe Harbor applies if the project is placed in service no more than four calendar years after the construction started.
Key Dates to Remember
Recapping the key dates:
- Projects using the Five Percent Safe Harbor with a 2025 start construction date beginning before September 2, 2025, will have until December 31, 2029, to be placed in service.
- Projects with a 2026 start construction date beginning before July 5, 2026, will have until December 31, 2030, to be placed in service (the start construction date will be based on the physical work method).
- Projects beginning construction after July 4, 2026, must be placed in service by December 31, 2027.
Developers of wind and solar projects need to pay attention to when “beginning of construction” happens to make sure their project is eligible for the appropriate tax credit. At Creative Planning Business Services, we can help clients understand the nuances of when this occurs. To learn more, please schedule a call.
