IRS Updates Guidelines for Clean Energy Tax Credits

News Summary

The IRS has introduced new guidelines regarding the ‘beginning of construction’ for wind and solar facilities, impacting eligibility for critical tax credits. The changes focus on a more restrictive application of the Physical Work Test. Notably, the five percent safe harbor will now apply only to small solar projects, while larger projects must comply with stricter standards. Developers must also adhere to deadlines to remain eligible for these incentives, reflecting an ongoing shift towards prioritizing domestic energy infrastructure and reinforcing energy independence.

Washington, D.C. – On August 15, 2025, the Internal Revenue Service (IRS) issued Notice 2025-42, which provides new guidance on the “beginning of construction” requirements for wind and solar facilities under Sections 45Y and 48E of the Internal Revenue Code. This new set of guidelines primarily aims to clarify eligibility for tax credits associated with clean energy projects while tightening regulations to ensure compliance with federal energy policies.

The IRS notice is proactive in response to Executive Order 14315, enacted on July 7, 2025, which focused on halting subsidies for foreign-controlled energy sources. The changes presented in the notice will impact any projects that have not commenced construction under previous IRS guidance before the cutoff date of September 2, 2025.

Key updates in Notice 2025-42 maintain the existing Physical Work Test crucial for determining the beginning of construction but significantly alter the scope of its application. The five percent safe harbor provision, which previously allowed developers of larger facilities to qualify for certain tax benefits based on preliminary investments, will now be restricted to small solar projects with a nameplate capacity of 1.5 MW or less. This means that larger wind and solar projects will no longer qualify for this leniency, requiring them instead to fulfill the standards set by the Physical Work Test.

Developers of larger projects seeking to utilize the five percent safe harbor must ensure construction started under earlier IRS guidance before the September 2, 2025 deadline. Those who miss this deadline will be subject to the stricter Physical Work Test criteria to qualify for tax credits.

The Physical Work Test itself allows significant physical work to be performed either on-site or off-site for wind and solar projects, and the IRS outlines a variety of acceptable activities. For instance, significant physical work for wind facilities might include excavation for turbine foundations, and for solar facilities, assembling supporting structures for solar panels qualifies as significant progress under the new guidelines.

The continuity requirement remains unchanged, stipulating that projects must be placed in service by the end of the calendar year that falls four years after construction begins. This ensures that developers remain accountable for timely project completion.

Importantly, the IRS Notice 2025-42 does not currently address how the beginning of construction standard interacts with the new Foreign Entities of Concern (FEOC) framework. The absence of guidance on this issue implies that further IRS details are expected in the future, indicating a need for developers to remain alert for updates.

As per the stipulations of the One Big Beautiful Bill Act (OBBBA), wind and solar facilities must begin construction prior to July 5, 2026, or validate operational status by December 31, 2027, to remain eligible for tax credits. These deadlines are designed to stimulate the growth of domestic energy infrastructure while maintaining a focus on energy independence.

This recent IRS notice builds upon previous guidance from the agency, including Notice 2013-29 and Notice 2018-59, that offered initial insights and criteria regarding when construction could be considered begun. The revision aims to enforce a more robust framework for determining eligibility for the Section 45Y clean electricity production credit and the Section 48E clean electricity investment credit, which have become critical for supporting the renewable energy sector amidst escalating global energy demands.

As the energy landscape evolves, adherence to the revised guidelines presented in Notice 2025-42 will be essential for developers looking to capitalize on available tax incentives while aligning with national policy shifts focused on renewable energy and domestic energy production.

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New Stricter Regulations on Renewable Energy Tax Credits

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