Sen. Chuck Grassley, R-Iowa, announced in the Congressional Record on August 1 that he would place a hold on three Treasury nominations over threats from the Trump administration that it would tighten the rules for determining the “beginning of construction” deadline for solar and wind energy projects.
The move comes in response to a July 7 order from President Donald Trump instructing the IRS to issue new guidance for establishing when construction has begun for purposes of the production tax credit under Section 45Y and the investment tax credit under Section 48E. The One Big Beautiful Bill Act (OBBBA) signed on July 4 created several new deadlines that hinge on when construction begins, including:
- Imposing new material assistance requirements on sourcing Section 45Y and Section 48E projects from certain Chinese suppliers and other foreign entities of concern for projects that begin construction after Dec. 31., 2025;
- Repealing the credits for wind and solar projects under Section 45Y and Section 48E unless construction begins by July 4, 2026, or the project is placed in service by the end of 2027;
- Repealing the clean hydrogen credit under Section 45V for construction that begins after 2027; and
- Repealing the Section 179D deduction for energy-efficient commercial building improvements for construction that begins after June 30, 2026.
Several House Republicans threatened to block the OBBBA over Senate changes softening the energy credit phaseouts, and Trump reportedly promised to strictly enforce the beginning of construction rules to secure their votes.
Trump’s order instructs Treasury to take all necessary and appropriate action “to strictly enforce the termination” of Section 45Y and Section 48E credits for solar and wind facilities. The order specifically mentions issuing new and revised guidance to ensure that “beginning of construction” rules are not circumvented, including “restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”
The order seems to take aim at long-standing IRS guidance under a series of notices that created a safe harbor that allows taxpayers to establish that construction has begun by incurring 5% of the project’s overall costs (Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25, Notice 2016-31, Notice 2017-04, Notice 2018-59, Notice 2019-43, Notice 2020-12, Notice 2020-41, Notice 2021-5, and Notice 2021-41). The guidance also provides a general rule allowing taxpayers to establish that construction has begun by satisfying a test showing that “physical work of a significant nature” has begun.
The OBBBA’s statutory language requires that for purposes of meeting the December 31, 2025, deadline for the application of the material assistance rules, beginning of construction must be determined using rules similar to those in Notice 2013-29 and Notice 2018-59. This would appear to prevent the Trump administration from changing the guidance or removing the safe harbor for the material assistance deadline of December 31, 2025.
Treasury and the IRS may have significantly more leeway to remove the 5% safe harbor or otherwise change the determination of when construction has begun for the July 4, 2026, deadline for the Section 45Y and Section 48E credits, and potentially for other purposes. The Trump order directs the IRS to issue guidance by August 18.
Grassley threatened to block the nominations until he could be assured the administration would not undermine the existing beginning of construction rules.
“What it means for a project to ‘begin construction’ has been well established by Treasury guidance for more than a decade. Moreover, Congress specifically references current Treasury guidance to set that term’s meaning in law. This is a case where both the law and congressional intent are clear,” Grassley said.
BDO Takeaway
Taxpayers seeking to begin construction on energy credit projects before the end of 2025 may still be able to rely on the existing rules, but they should also expect increased IRS scrutiny of their positions. It will be important to properly identify eligible costs and document compliance with the 5% safe harbor. Taxpayers using the “physical work of a significant nature” standard should also consider documenting the application of the rules to their specific facts, particularly if the credits will later be sold. It is also critical for taxpayers to assess the full impact of broader OBBBA changes to energy credits, and to consider the potential impact of new guidance on projects beginning construction in 2026.