News Summary
The IRS has issued new guidelines outlining construction requirements for wind and solar projects, impacting eligibility for tax credits. The changes emphasize compliance with domestic energy production standards and are a response to an executive order aimed at reducing foreign energy dependency. Developers must adhere to the new Physical Work Test and continuity of construction rules while deadlines for project completion are enforced. These updates are crucial for stakeholders in the renewable energy sector as they adapt to changing regulations and pursue necessary tax incentives.
Washington D.C. – On August 15, 2025, the Internal Revenue Service (IRS) issued Notice 2025-42, which outlines new “beginning of construction” requirements for wind and solar facilities. This guidance aims to clarify eligibility criteria under Sections 45Y and 48E of the Internal Revenue Code and is especially relevant for developers seeking tax credits associated with clean energy initiatives.
The notice comes as a response to Executive Order 14315, signed on July 7, 2025, which seeks to put an end to subsidies for energy sources controlled by foreign entities. This move highlights the administration’s focus on bolstering domestic energy production and ensuring compliance with specific regulatory standards. The IRS updates will be compulsory for projects commencing construction on or after September 2, 2025, thus affecting numerous upcoming renewable energy projects across the country.
According to the notice, the IRS has largely retained the previously established Physical Work Test, but has introduced significant changes regarding the application of the five percent safe harbor provision. This provision will only be applicable to smaller solar projects with a nameplate capacity of 1.5 megawatts (MW) or less. For larger wind and solar projects, the previous five percent safe harbor provision will no longer be valid. Consequently, these larger projects will need to meet the stringent standards of the Physical Work Test to qualify for tax credits.
To be eligible for the five percent safe harbor, developers of large projects must demonstrate that construction has begun under the earlier guidance before the September 2, 2025, cutoff date. The Physical Work Test, which verifies the progress of construction, allows for substantial physical work to be engaged on-site or off-site. Activities deemed acceptable include tasks such as excavation for turbine foundations and pouring concrete pads for wind facilities, while solar projects may involve assembling structures for solar panel installation.
The notice retains the existing requirement pertaining to the continuity of construction. This rule stipulates that projects must be operational by the end of the calendar year that is four years subsequent to the commencement of construction. This stipulation ensures that projects move forward in a timely manner rather than being indefinitely postponed.
Though Notice 2025-42 lays down the new framework, it does not yet address the beginnings of construction criteria under the new Foreign Entities of Concern (FEOC) framework. This suggests that future IRS guidance is forthcoming and will likely expand upon these requirements to ensure comprehensive regulation against foreign-controlled entities in the renewable energy sector.
Furthermore, under the One Big Beautiful Bill Act (OBBBA), wind and solar facilities must begin construction by July 5, 2026, or be fully operational by December 31, 2027, in order to qualify for tax credits. This provision reinforces the deadline the IRS has imposed for projects aspiring to take advantage of the incentives designed to promote clean energy production.
Prior to Notice 2025-42, the IRS had provided guidance regarding the beginning of construction, specifically through Notice 2013-29 and Notice 2018-59, emphasizing compliance and clarity for energy developers. With the issuance of this latest notice, the IRS intends to clarify the eligibility requirements for the Section 45Y clean electricity production credit and the Section 48E clean electricity investment credit.
As the renewable energy landscape continues to evolve, stakeholders in the wind and solar sectors will need to navigate these new guidelines while planning their projects. The changes are aimed at reinforcing domestic energy production standards and ensuring that taxpayers’ funds are allocated efficiently towards supporting renewable energy initiatives.
In summary, the IRS’s Notice 2025-42 serves as a pivotal update in the realm of renewable energy, enforcing new construction criteria that align with the administration’s objective of reducing dependency on foreign energy sources while promoting local initiatives.
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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
Author: STAFF HERE NEW YORK WRITER
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