Wind/solar energy left out in the cold under IRS guidance

The Internal Revenue Service has issued guidance clarifying when the construction of a facility begins for purposes of the accelerated termination, enacted as part of the One Big Beautiful Bill Act (P.L. 119-21), of the clean electricity production and investment credits for wind and solar projects. 

Under the OBBBA, if the construction of a facility begins by July 4, 2026, it is not subject to the accelerated termination provisions. With a limited exception, the new guidance eliminates a previously provided safe harbor for determining the beginning of construction based on the percentage of total costs incurred. Thus, to avoid the accelerated termination provisions, a taxpayer generally will have to show that physical work of a significant nature began by July 4, 2026. 

The clean electricity production credit under Internal Revenue Code Section 45Y provides a credit based on the amount of electricity produced at a "qualified facility" and sold to an unrelated buyer, or, in some cases, sold, consumed or stored by the taxpayer. A qualified facility generally has been placed in service after 2024, is used for the generation of electricity, and has a greenhouse gas emissions rate not greater than zero. 

The clean electricity investment credit, under IRC Section 48E, is based on a percentage of a taxpayer's "qualified investment" with respect to a "qualified facility" or "energy storage technology." In general, a taxpayer's qualified investment is the basis of "qualified property" that the taxpayer places in service as part of a qualified facility and includes expenditures related to certain interconnection property. As in Section 45Y, a qualified facility generally is a facility that is placed in service after 2024, used for the generation of electricity, and for which the anticipated GHG emissions rate is not greater than zero. 

OBBBA's accelerated termination of credits for wind and solar

Before the OBBBA, the clean electricity production credit was to phase out beginning with facilities where construction begins the second year after the later of either 2032 or the year in which Treasury determined that the annual GHG emissions from the production of electricity in the United States are equal to or less than 25% of such emissions for calendar year 2022. The clean electricity investment credit had a parallel phaseout period and termination date.

The OBBBA accelerated the termination of such credits for facilities that use wind or solar to produce electricity. The legislation generally provides that:

• The clean electricity production credit is unavailable for such facilities placed in service after 2027; and,
• The clean electricity investment credit is unavailable for property (excluding energy storage property) placed in service after 2027, that is part of such a facility.

The new termination provisions apply only to facilities the construction of which begins after July 4, 2026, however. 

IRS notice

On August 15, the IRS issued Notice 2025-42, providing guidance on the beginning of construction with respect to the termination of credits for wind and solar. The notice states that its purpose is "to prevent taxpayers from circumventing the statutory credit termination date, prevent artificial manipulation of eligibility for the Sec. 45Y and Sec. 48E credit for applicable wind and solar facilities, and ensure that a substantial portion of any applicable wind or solar facility not subject to the credit termination date is built by the beginning of construction deadline [i.e., July 4, 2026]." 

Under Notice 2025-42, the IRS will determine the beginning of construction for most wind and solar facilities based on the "physical work test," under which construction of a facility begins when "physical work of a significant nature begins." In that regard, other than for "low output solar facilities," the guidance eliminates a "5% safe harbor" that had been provided in previous beginning-of-construction guidance. Under the safe harbor, the IRS considered construction to have begun if the taxpayer paid or incurred 5% or more of the total cost of a facility. For such purposes, all costs included in the depreciable basis of the facility were taken into account. 

Whether Notice 2025-42's physical work test has been met depends on the relevant facts and circumstances. The focus is on the nature of the work, not the amount or the cost, and if the physical work performed is of a significant nature, there is no fixed minimum amount or monetary or percentage threshold that must be satisfied. Under the notice, both off-site and on-site work count in establishing physical work of a significant nature, and examples of each are provided.

The guidance emphasizes that physical work of a significant nature does not include preliminary activities, such as planning or designing, securing financing, exploring or researching, even if the cost of such activities is properly includible in the depreciable basis of the facility. 

Notice 2025-42's physical work test also requires the taxpayer to maintain "a continuous program of construction," which involves continuing physical work of a significant nature and generally is determined by the relevant facts and circumstances. The notice provides, however, that certain disruptions in construction that are beyond the taxpayer's control, such as delays due to severe weather, will not be considered failures to satisfy the continuity requirement. In addition, the notice establishes a continuity safe harbor: If a taxpayer places a facility in service by the end of the calendar year that is no more than four calendar years after the calendar year during which construction began, then the facility will be considered to satisfy the continuity requirement. 

As noted above, for a low-output solar facility (i.e., a facility that has maximum net output not greater than 1.5 megawatts), a taxpayer may establish the beginning of construction either by satisfying the physical work test or by applying the 5% safe harbor established in prior guidance. Detailed rules for determining maximum net output, including an aggregation rule for facilities with integrated operations, are provided. 

Noticed 2025-42 applies to facilities the construction of which did not begin (as determined under Notice 2022-61) before Sept. 2, 2025.

With the issuance of the new guidance, taxpayers planning wind and solar projects now have a clearer picture of what they need to accomplish by July 4, 2026, to convince the IRS that they are not subject to OBBBA's accelerated termination of the clean electricity production and investment credits.