The Beginning of the End: IRS Guidance Issued on Beginning of Construction Exception for Wind and Solar Tax Credit Repeal

On August 15, 2025, the U.S. Treasury Department (Treasury) released IRS Notice 2025-42 (the Notice). The Notice provides guidance regarding when construction of an applicable wind facility or solar facility begins for purposes of determining whether such facility is eligible for a “beginning of construction” exception (the BOC Exception) to the placed-in-service deadline for wind and solar projects added to Section 45Y and Section 48E by the One Big Beautiful Bill Act (OBBBA). The Notice was issued in response to an Executive Order issued by President Donald J. Trump shortly after OBBBA’s enactment.

As described more fully below, the key takeaways from the Notice are as follows:

• subject to an exception for “low output” solar facilities, in the case of any wind or solar facility not treated as beginning construction before the Notice’s September 2, 2025 effective date under prior beginning of construction guidance (the Prior BOC Guidance),¹ the 5% safe harbor will no longer be available to establish, and satisfaction of the physical work test will be the only way to establish, that construction of such a facility has begun for purposes of the BOC Exception;  
• the guidance included in the Notice, including guidance relating to the physical work test and the related continuity safe harbor, is otherwise generally consistent with the Prior BOC Guidance; and 
• the Notice applies solely for purposes of determining when construction begins for purposes of the BOC Exception, although Treasury indicates that it is working on similar guidance for purposes of certain “prohibited foreign entity” rules added by OBBBA, the applicability of which depends on when a project’s construction begins. 

Background

Under the Prior BOC Guidance, a taxpayer can generally demonstrate that construction of a project began by a specified deadline using one of two methods (each, a BOC method): (i) by showing that at least five percent of the total eligible project costs have been paid or incurred before the beginning of construction deadline (commonly referred to as the “5% safe harbor”); or (ii) by beginning “physical work of a significant nature” on the project (commonly referred to as the “physical work test”). In order to rely on either BOC method, the taxpayer must also satisfy certain continuity requirements, with a safe harbor provided for projects placed in service by the end of the fourth calendar year following the year in which construction of those projects begins (the Continuity Safe Harbor). 

As discussed more fully in our previous Update, OBBBA terminates the Section 45Y PTC and Section 48E ITC for wind and solar projects that are placed in service after December 31, 2027, with an exception for wind and solar projects that begin construction on or before July 4, 2026 (i.e., the BOC Exception referred to above).   

In Executive Order 14315, signed on July 7, 2025 (three days after OBBBA’s enactment) (the Executive Order), President Trump directed Treasury, within 45 days following OBBBA’s enactment, to take all action the Secretary deemed necessary and appropriate to strictly enforce the termination of the Section 45Y PTC and Section 48E ITC for wind and solar facilities, including the issuance of “new and revised guidance as the Secretary of the Treasury deems appropriate and consistent with applicable law to ensure that policies concerning the beginning of construction are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of the subject facility has been built.”

Key takeaways from the Notice

Limited availability of 5% safe harbor. The Notice provides that, for wind and solar projects not treated as beginning construction before September 2, 2025, under the Prior BOC Guidance, the 5% safe harbor may not be relied upon to establish that construction of the project began for purposes of the BOC Exception. An exception is provided for a solar facility that has a maximum net output of no greater than 1.5 Megawatt (AC). This exception only applies to low-output solar facilities; a similar exception is not provided for wind facilities.

Sidley Insight: The Notice’s effective date provision will permit taxpayers who previously incurred (or who, before September 2, 2025, incur) costs intended to satisfy the 5% safe harbor as part of their beginning of construction strategies to rely on those costs to demonstrate that construction began before the BOC Exception deadline in cases where physical work does not begin before that deadline, subject to satisfaction of the continuity requirement. 

In addition, the continued availability of the 5% safe harbor for “low output” solar projects is helpful for residential and small commercial and industrial solar developers, as the output of many of those projects is likely to be 1.5 Megawatts or less.

Prior BOC Guidance otherwise retained. Aside from the elimination of the 5% safe harbor, the guidance included in the Notice addresses the same topics addressed by the Prior BOC Guidance to similar effect.  

The physical work test included in the Notice is essentially identical to the physical work test included in the Prior BOC Guidance. Of particular note, as in the Prior BOC Guidance, the Notice provides that “off-site” work performed on behalf of a taxpayer pursuant to a “binding written contract” can satisfy the physical work test. In addition, the Notice includes examples of off-site and on-site work constituting physical work of a significant nature that are the same as those included in the Prior BOC Guidance.  

The Notice also retains the “continuity” requirement included in the Prior BOC Guidance,² including the Continuity Safe Harbor. Under this safe harbor, a project will satisfy the continuity requirement if it is placed in service by the end of the fourth calendar year after the year in which the project begins construction even if there are significant delays or disruptions in the construction process that would otherwise result in a failure to satisfy the continuity requirement.   

In addition, consistent with the Prior BOC Guidance, the Notice provides that multiple facilities operated as part of a single project will be treated as a single applicable wind or solar facility for purposes of determining when construction of each facility begins. The Notice adopts the same facts and circumstances approach included in the Prior BOC Guidance to determine whether multiple facilities are properly treated as a single project and includes the same non-exhaustive list of factors to be considered in making that determination.

Finally, like the Prior BOC Guidance, (i) the Notice allows transferees of wind and solar projects to rely on physical work performed by or on behalf of the transferor for purposes of determining when construction of those projects began; and (ii) in the case of transfers consisting solely of tangible property, the Notice allows transferees to rely on work performed on that property only if the transferee is related to the transferor (within the meaning of Section 197(f)(9)(C) of the Code).      

Sidley Insight: The physical work test has remained largely unchanged since its introduction as part of the Prior BOC Guidance. During that time, several strategies have been used to satisfy this requirement. For example, developers often rely on on-site construction of roads or foundations and/or off-site work involving third-party manufacturing of transformers (or components thereof, like conservator tanks and radiators) pursuant to “binding contracts.” Tax equity investors have generally gotten comfortable with these approaches so long as the developer is able to provide sufficient documentation and evidence to support the position. Given the lack of any material changes to the physical work test included in the Notice, those strategies should continue to be available.   

Additional Beginning of Construction Guidance Forthcoming. In addition to the accelerated termination of the Section 45Y PTC and the Section 48E ITC for wind and solar facilities, OBBBA includes provisions that prevent “prohibited foreign entities” (PFEs) from claiming various credits and, in the case of certain credits, disallows those credits to taxpayers who receive “material assistance” from PFEs. Certain of these rules apply only in the case of projects that begin construction after a certain date. OBBBA generally provides that the Prior BOC Guidance will apply in determining when construction begins for those purposes, but it generally grants Treasury authority to promulgate regulations intended to prevent circumvention of these rules. The Notice makes clear that it is not intended to address whether a project has begun construction for purposes of the PFE rules but indicates that Treasury and the IRS are “currently drafting additional guidance as is necessary and appropriate to implement” the PFE restrictions. 

¹ See Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice 2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B. 814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025; updated, clarified, and modified by Notice 2017-04, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43, 2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954; clarified and modified by Notice 2021-5, 2021-3 I.R.B.479; clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17; Notice 2020-12, 2020-11 I.R.B. 495. 

² The Notice does make one unhelpful modification to the Prior BOC Guidance, although that modification is unlikely to have any meaningful practical effect. If a taxpayer is unable to rely on the Continuity Safe Harbor, it must generally demonstrate that the continuity requirement is satisfied based on an analysis of the relevant facts and circumstances. Based on changes made to the Prior BOC Guidance in 2021, taxpayers relying on the physical work test who are unable to rely on the Continuity Safe Harbor can satisfy the continuity requirement by showing that either of two tests (referred to as the “continuous efforts test” and the “continuous program of construction test”) was satisfied. The Notice reverts to the rule in effect under the Prior BOC Guidance before the changes made in 2021 and requires taxpayers who are unable to rely on the Continuity Safe Harbor to satisfy the continuous program of construction test, which is more difficult to satisfy than the continuous efforts test. While unhelpful, because developers generally make every effort to ensure that their projects are placed in service within the Continuity Safe Harbor period to avoid uncertainties around qualification that would otherwise result, this change will only be relevant in unusual cases.