New Rules for Wind and Solar Energy Projects

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) amended the clean energy tax credit rules to set new termination dates for certain wind and solar facilities eligible for the clean electricity production credit (Section 45Y) and clean electricity investment credit (Section 48E). Under the OBBBA, projects that begin construction after July 4, 2026, are ineligible for credits if placed in service after Dec. 31, 2027.

Three days later, on July 7, 2025, Executive Order 14315 directed Treasury to issue guidance to strictly enforce these new termination provisions and to prevent circumvention of these rules by restricting the use of broad safe harbors unless substantial construction has occurred.

The IRS issued Notice 2025-42 on Aug. 15, 2025, which fulfills that directive. It removes the 5% safe harbor for larger projects and requires physical work of a significant nature (physical work test) to establish that construction began on or before July 4, 2026. The goal is to ensure that only substantially advanced projects qualify for credits beyond the new cutoff dates and to prevent manipulation of the statutory deadlines.

Background

Sections 45Y and 48E were enacted as part of the Inflation Reduction Act of 2022 to provide technology-neutral tax credits for zero- or negative-emissions electricity generation. Under the original law, both credits applied to qualified facilities placed in service after Dec. 31, 2024. The Section 45Y credit is based on electricity produced at a qualified facility and sold to an unrelated party or consumed or stored with proper metering, while the Section 48E credit is based on the taxpayer’s qualified investment in a qualified facility, including basis in qualified property and interconnection costs. To qualify, facilities must have a greenhouse gas emissions rate of not greater than zero, as confirmed in annual IRS emissions tables. Rev. Proc. 2025-14 lists wind and solar facilities at zero.

Before the OBBBA, Sections 45Y and 48E had no near-term termination date for specific technologies such as wind and solar. Instead, the credits were set to phase out gradually beginning in the later of the calendar year after U.S. electricity sector emissions fell to 25% of 2022 levels or 2032. These dates meant qualifying wind and solar projects placed in service in the late 2020s and beyond – potentially into the 2030s – still could receive credits under the pre-OBBBA law. Rules for the beginning of construction for Sections 45Y and 48E were provided in Notice 2022-61, which allowed taxpayers to establish a construction start date using either the physical work test or the 5% safe harbor together with a continuity requirement or continuity safe harbor.

The OBBBA introduced new Sections 45Y(d)(4) and 48E(e)(4) that terminate credits for wind and solar facilities (except certain storage facilities) placed in service after Dec. 31, 2027, but apply this termination only if construction begins after July 4, 2026.

Notice 2025-42

Notice 2025-42 changes how taxpayers may establish the beginning of construction for purposes of avoiding the OBBBA termination provisions. For most large projects, the only method available is the physical work test. To meet this test, a taxpayer must begin physical work of a significant nature before July 5, 2026. Work may be performed either on-site or off-site, provided it is done under a binding written contract and is not from existing inventory. Qualifying on-site work includes activities such as excavation for wind turbine foundations, setting anchor bolts, pouring concrete pads, or installing racking systems for solar panels. Qualifying off-site work can include the manufacture of major components like racking, rails, inverters, or certain transformers, but only if the components are made specifically for the project and not held in inventory. Preliminary activities, such as planning, permitting, site clearing, test drilling, and arranging financing, do not count toward the test.

Taxpayers also must meet a continuity requirement by maintaining a continuous program of construction, though certain delays beyond the taxpayer’s control will not cause a failure. Additionally, the notice provides a continuity safe harbor, under which a facility is deemed to satisfy the requirement if it is placed in service within four years of the year construction began.

An exception applies for low-output solar facilities with a maximum net output of 1.5 megawatts AC or less, which may use either the physical work test or the 5% safe harbor. The notice clarifies several related rules, including that work under a binding written contract counts toward the physical work test, that multiple facilities may be treated as a single project in certain circumstances, that only new components count toward the test for retrofits under the 80/20 rule, and that a facility can be transferred without losing its construction start date except where only equipment is transferred between unrelated parties.

This notice applies to applicable wind and solar facilities for which construction begins on or after Sept. 2, 2025, as determined under the prior rules of Notice 2022-61. Projects that relied on the 5% safe harbor under the prior rules will need to evaluate eligibility under Notice 2025-42.

Crowe observation

Removing the 5% safe harbor for most wind and solar projects changes how developers can secure eligibility before the OBBBA termination provisions apply. Developers must demonstrate substantial physical progress – not just financial commitment – before July 5, 2026.

Looking ahead

Treasury and the IRS have provided rules for the beginning of construction that walk a fine line between critics and supporters of solar and wind energy credits by making a stricter physical work method the sole method of determining the beginning of construction, except for qualifying small projects. This shift likely will accelerate actual construction activity in the next year, especially for large-scale wind and solar projects aiming to avoid the OBBBA termination provisions. Taxpayers building or investing in solar and wind projects should consult their tax advisers to evaluate how the notice will affect them and keep abreast of continuing developments.