Wind and Solar Safe Harbor Survives Court Ruling

On June 6, the U.S. District Court for the District of Columbia in Oregon Environmental Council v. IRS took the extraordinary step of vacating IRS Notice 2025-42 in full and remanding it to the IRS. The notice eliminated the long-recognized 5% safe harbor for beginning construction under Section 45Y and Section 48E for wind and large-scale solar projects. As a result of the ruling, wind and solar projects that don’t meet the physical work test for beginning of construction on or before July 4, 2026, still are eligible to use the 5% safe harbor to determine whether they meet the beginning-of-construction deadline.

Crowe observation

The government is expected to appeal the decision and ask the court to reinstate the notice while the appeal is pending. Although the 5% safe harbor is restored for now, there is a real possibility that it could be removed while litigation continues.

Background

Since publication of Notice 2013-29, the IRS has recognized two ways for an energy project to begin construction for tax credit purposes: the qualitative physical work test (the date on which physical work of a significant nature begins) and the quantitative 5% safe harbor (the date on which the taxpayer has paid or incurred at least 5% of the total project cost). Both the physical work test and the safe harbor were allowed in IRS guidance on beginning of construction for tax credits, including Notice 2018-59 and Notice 2022-61.

The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, compressed the eligibility window for wind and solar project eligibility under Sections 45Y and 48E. Before the OBBBA, those technology-neutral credits generally remained available on a longer timeline that could have extended through 2032. The OBBBA, however, accelerated the phaseout for wind and solar projects by providing that those projects must begin construction on or before July 4, 2026, unless the facility is placed in service by Dec. 31, 2027.

Crowe observation

The placed-in-service date is a far less certain target given interconnection, permitting, and financing timelines, which are largely outside the taxpayer’s control. In contrast, beginning construction provides a more forgiving four-year continuity window rather than a hard placed-in-service 2027 cliff.

Notice 2025-42, issued Aug. 15, 2025, implemented Executive Order 14315, which directed the U.S. Department of the Treasury to strictly enforce the Section 45Y and Section 48E credit termination dates and curb broad safe harbors for wind and solar facilities. The notice eliminated the 5% safe harbor for all wind projects and for solar facilities above 1.5-megawatt nameplate capacity (low-output solar projects at or below 1.5 megawatts kept the safe harbor), leaving the physical work test as the sole path for affected projects that had not begun construction before Sept. 2, 2025. The notice also tightened the continuity requirement, replacing the more flexible continuous-efforts test with the stricter continuous-program-of-construction test when the four-year continuity safe harbor is unmet.

The court’s decision

The court sided with taxpayers and threw out the notice, finding that the IRS acted arbitrarily and capriciously because it did not adequately justify eliminating the 5% safe harbor. Three issues appear to have driven the court to the result. First, the IRS explained its major reversal of position in a single paragraph and never showed how a project that satisfies the 5% safe harbor circumvents the statutory beginning-of-construction deadline. Second, the IRS ignored more than a decade of reliance on the 5% safe harbor – developers and investors had structured projects around the safe harbor since 2013 – and didn’t take into account past comments warning of exactly the harm that removal of the safe harbor would cause. Third, the IRS never explained why wind and large-scale solar projects should be singled out when the underlying credits apply equally to all technologies, and it did not adopt the narrower fixes commenters had suggested.

Importantly for project owners, the court vacated the notice for everyone, not just the parties to the case, so the restored safe harbor is available to all wind and solar projects.

Looking ahead

For now, the 5% safe harbor is a valid method to determine beginning of construction for wind and solar under Section 45Y and Section 48E. Because the government is expected to appeal the case, taxpayers should rely on the physical work test when available and understand the risk associated with using the 5% safe harbor to determine the date of beginning of construction if that date is close to the July 4 deadline.

Taxpayers that pivoted to the physical work test after Notice 2025-42 and taxpayers with projects that stalled after incurring costs but before completing physical work should consult their tax adviser to reassess whether the restored 5% safe harbor changes their position. Tax equity investors, lenders, and Section 6418 tax credit purchasers should work with their advisers to refresh diligence, revisit representations and warranties on deals restructured around the elimination of the 5% safe harbor under Notice 2025-42 and, if changes are made, expressly address the appeal risk in their documents.