Key insights
- The IRS issued new guidance for wind and solar energy projects, changing how they qualify for energy tax credits. Projects must now show significant physical work started before July 5, 2026.
- New rules may mean revamped project plans and business models to ensure tax credit eligibility.
- Construction must be continuous, with a four-year safe harbor to get the facility up and running. Delays don't extend this window, so the burden of proof is on you.
- With the clock ticking on wind and solar credit eligibility, developers and investors should evaluate project viability in light of the stricter requirements.
Act now to take advantage of energy tax credits.
The IRS recently issued guidance redefining what it means to “begin construction” for purposes of claiming the Clean Electricity Production Credit (Section 45Y) and the Clean Electricity Investment Credit (Section 48E).
These new rules may mean revamping project plans and business models to enable energy tax credit eligibility. Learn more about the latest limitations and requirements.
What impact did OBBBA have on energy tax credits?
The One Big Beautiful Bill Act (OBBBA) rolled back a number of clean energy tax incentives. Among its many provisions, it terminated the Section 45Y and Section 48E credits for wind and solar facilities that begin construction after July 4, 2026 and are placed in service after December 31, 2027.
The law was swiftly followed by Executive Order 14315, which directed the Treasury Department to issue guidance to prevent “artificial acceleration or manipulation” of eligibility for these credits.
Instead of broad, flexible safe harbors, the government is demanding rigor, documentation, and a clear demonstration of physical progress.
The physical work test: A new gatekeeper
Under Notice 2025-42, the physical work test is now the only path forward for many wind and solar projects. To meet this test, a taxpayer must demonstrate that physical work of a significant nature began before July 5, 2026.
The IRS emphasizes that the test is qualitative, not quantitative. There is no minimum dollar threshold, no required percentage of completion. Instead, the focus is on the nature of the work performed. It must be integral to the facility’s function as a generator of electricity. And it must be real.
Qualifying activities defined
The notice provides a detailed taxonomy of qualifying and non-qualifying activities, drawing a bright line between preparatory work and actual construction while targeting “warehouse-to-qualify” strategies.
| Qualifying activities |
|
|---|---|
|
Wind facilities |
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| Solar facilities (on-site) |
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| Off-site (conditional) |
|
| Non-qualifying activities |
|---|
|
Binding contracts and third-party rules tightened
The notice also narrows the rules around third-party work. A contract is only considered binding if it is enforceable under local law and does not limit damages to less than 5% of the total contract price. This standard echoes prior IRS guidance but takes on new significance now that the physical work test is required.
The IRS allows for the use of master contracts and project contracts to assign rights to affiliated entities, but the original contract must meet the binding standard. This provision offers some flexibility for developers using special purpose vehicles, but the documentation burden is high.
Continuity requirement enforced
Beginning construction is not enough. Taxpayers must also maintain a “continuous program of construction.” The IRS offers a continuity safe harbor: if the facility is placed in service within four calendar years of the year construction began, the requirement is deemed satisfied.
But there’s a catch. The safe harbor is rigid. Excusable disruptions — such as severe weather, permitting delays, or supply chain issues — do not extend the four-year window. They may be considered under a facts-and-circumstances test if the safe harbor is missed, but the burden of proof shifts squarely to the taxpayer.
Other key aspects of energy tax credits could impact your business. Watch our webinar on tax credit transferability.
Exception for low output solar and retrofitted facilities
Low-output solar facilities
Defined as those with a maximum net output of not greater than 1.5 megawatts (AC), low-output solar facilities may still use the 5% safe harbor. This carve-out should be a relief for residential and small commercial projects, where the compliance burden of the physical work test may be challenging.
Retrofitted facilities
Under the familiar 80/20 rule, a facility may be treated as newly placed in service if at least 80% of its value comes from new components. In such cases, the physical work test applies only to the new components.
Facility transfers
The notice clarifies that facilities may be transferred without losing eligibility — provided the transfer is not between unrelated parties. Work performed by an unrelated seller cannot be used by the buyer to satisfy the physical work test. This rule is likely to have a significant effect on the secondary market for partially developed projects.
Aggregation principles
The IRS also reaffirms the “single project” doctrine. Multiple facilities may be treated as a single project if they share ownership, location, interconnection, and financing. This provision should offer some relief for utility-scale developers building in phases.
How CLA can help
Notice 2025-42 aims to tie tax benefits to real, measurable progress — and these new rules will likely change many business models.
CLA’s renewable energy practice can help you understand how this latest guidance impacts your organization, evaluate project begin-construction dates, and document your available tax credits.
Contact us
Get help claiming energy tax credits under the new rules. Complete the form below to connect with CLA.