Treasury, IRS Release New Guidance for Determining Beginning of Construction

The Treasury Department and the IRS on August 15 issued Notice 2025-42 providing guidance on the tests for determining when a solar or wind facility begins construction.

Under the new guidance, projects can rely on the 5% safe harbor method for establishing beginning of construction (BOC) only until September 1, 2025. Starting on September 2, the physical work test will be the only allowable method for establishing BOC for wind and solar facilities.

The new deadline is applicable only to Sections 70512(l)(4) and 70513(g)(5) of the One, Big, Beautiful Bill Act (OBBBA), the general wind and solar credit phaseouts, and not the foreign entity of concern (FEOC) rules in Section 70512(c), for which the statute requires beginning of construction to be based on preexisting notices. For purposes of being exempt from the FEOC rules, a facility can still rely on the December 31, 2025, deadline to establish beginning of construction using the 5% safe harbor. 

The notice allows the 5% safe harbor for low-output solar facilities – those with nameplate capacity of less than or equal to 1.5-megawatts measured in alternating current. In general, the four-year continuity safe harbor was retained for facilities that meet the BOC requirements. 

The new guidance was issued in response to Executive Order 14315 released by the Trump administration on July 7 that  directs the Secretary of the Treasury to strictly enforce the termination of the clean electricity production and investment tax credits under Sections 45Y and 48E  for wind and solar technologies, including by issuing "new and revised" guidance to (i) ensure that policies concerning the "beginning of construction" (BOC) are not circumvented and (ii) implement the enhanced foreign entity of concern requirements of the OBBBA. The executive order required that the guidance be issued within 45 days from the enactment of the OBBBA, or August 18, 2025. 

What is “Beginning of Construction”?

The BOC concept marks a critical milestone in facility development signifying that a taxpayer has satisfied certain criteria that would determine its eligibility for various federal credits, which can significantly affect facility economics. Historically, during periods of credit expirations and extensions, establishing BOC was essential for safe-harboring facilities into a particular credit rate.  For example, the investment tax credit (ITC) rate was 26% in 2020 and was set to phase down to 22% in 2021 (subsequent legislation preserved the 26% rate). Extension aside, if a developer had not established BOC in 2020, the facility would have lost a significant portion of the credit, and consequently, the facility’s value. 

How Does an Energy Facility Achieve BOC?

Historically, the IRS has provided taxpayers with administrative guidance through a series of notices that consistently provided two methods for establishing BOC and safe harboring for facilities at a point in time: the physical work test and the 5% safe harbor. Notice 2025-42 updates these rules by stating that the physical work test “is the sole method that a taxpayer may use”¹  to establish BOC. 

Physical Work Test

To meet this test, the taxpayer/developer must perform physical work of a significant nature (or employ third parties to perform such work under a binding written contract).²  

Unlike the 5% safe harbor, the physical work test focuses on the facts and circumstances surrounding the beginning of construction. Notice 2025-42 reiterates this concept from prior notices: “This test focuses on the nature of work performed, not the amount or the cost.”³  Generally, taxpayers need to demonstrate that physical work of a significant nature has commenced on the facility site related to the energy property itself. Notice 2018-59 notes that preliminary activities, such as designing, securing financing, site clearing, and grading that merely changes the contour of the land do not meet the significant physical work standard.⁴  

Notice 2025-42 provides examples to illustrate what constitutes on-site physical work of a significant nature. For a wind facility, “significant physical work” could take the form of excavating for foundations, pouring concrete pads, or installing the base structure and anchor bolts for turbine towers. For a solar facility, the physical work could start with driving piles for racking or installing racking structures on site. 

Developers should be prudent in their efforts to meet this test. Physical work to meet this test could be performed off-site or on-site, depending on the fact pattern, but the physical work must be related to the energy property.

5% Safe Harbor

Under this test, articulated in Notice 2018-59, the taxpayer/developer pays or incurs 5% or more of the total cost of energy property and makes continuous efforts to advance toward completion of the facility. This method is available only for facilities with output of less than 1.5 megawatts AC on or after September 2, 2025.

Generally, a developer should be purchasing (and taking title to) hard equipment for the facility or incurring costs for engineering, procurement, and construction (EPC) work performed under binding written contracts to meet the 5% safe harbor. These costs must be incurred within the recognition principle of Reg. §1.461-1(a)(1)-(2), or in other words, all events⁵ must have occurred so that the cost can be recognized for federal tax purposes. Notably, costs incurred for site control and any property not integral to the energy property cannot be included when determining whether the 5% threshold has been met.⁶

In practice, meeting this test typically takes the form of the facility owner purchasing components that qualify as “energy property” (panels, racking, turbine blades, towers, etc.) and warehousing equipment offsite while assigning cost on the balance sheet. Costs incurred for site control and any property not integral to the energy property cannot be included when determining whether the 5% threshold has been met.

The determination of whether this test is met is based on the final depreciable tax basis of energy property when it is placed in service. For developers utilizing this method, it’s important to consider that construction and equipment costs often run over budget, resulting in a larger denominator in the final tally of energy property basis. Additionally, for ITC property in particular, it is important to figure any projected basis step-ups or development fees into the estimate of final basis; failure to consider all final costs rolling into depreciable basis could end up causing a failure to meet the safe harbor if the final denominator compared against the initial 5% is larger than expected. 

Continuity Requirement

Both methods of establishing the BOC require the taxpayer to maintain continuous construction or efforts once the BOC has been established. Whether a taxpayer’s activities satisfy this continuity requirement is determined by evaluating the relevant facts and circumstances. Through various notices (including Notice 2025-42), the IRS provides examples of activities that demonstrate progress as well as a list of excusable disruptions. 

Notice 2025-42 preserves the established four-year continuity safe harbor. This safe harbor period begins in the year when construction begins and ends in the calendar year that is four years after the year in which BOC was established. If the facility is placed in service within this time frame, the taxpayer is deemed to satisfy the continuity requirement. 

Critical Dates for BOC

• July 4, 2025: Facilities that can establish BOC before the enactment of the OBBBA are exempt from the OBBBA restrictions on wind and solar credits.
• September 2, 2025: Facilities that can establish BOC before this date can rely on the 5% safe harbor as an allowable method.
• December 31, 2025: The last day that facilities can establish the beginning of construction under either test before they will be subject to the FEOC rules that kick in for tax year 2026.  Facilities that can establish BOC in tax year 2025 will be largely unaffected by the OBBBA. 
• July 4, 2026: Facilities that can establish the beginning of construction by satisfying the physical work test before the one-year anniversary of the OBBBA’s enactment can continue to rely on the four-year continuity safe harbor as outlined in Notice 2018-59. Facilities that start construction after this date have until December 31, 2027, to be placed in service or lose credit eligibility altogether. If a facility relies on the 5% safe harbor to avoid FEOC restrictions, it would apparently also need to establish that physical work has started by July 4, 2026, to comply with Notice 2025-42. 
• December 31, 2027: Solar facilities starting construction more than 12 months after the date of enactment must be placed in service by the end of 2027 to claim the Section 48E or Section 45Y credits. The end of tax year 2027 is the eligibility cutoff after which new wind and solar facilities will not be eligible for the investment or production tax credits. 
• December 31, 2030: Based on the four-year continuity safe harbor as preserved in Notice 2025-42, wind and solar facilities that establish BOC on or before July 4, 2026, will have until the end of calendar year 2030 to be placed in service to preserve 45Y or 48E eligibility. 

References

• ¹ Notice 2025-42, §4.01.
•  ² Notice 2018-59, §4.01.
•  ³ Notice 2025-42, §3.03.
•  ⁴ Notice 2018-59, §4.03.
•  ⁵ I.R.C. Section 461(h).
•  ⁶ Notice 2013-29, §5.01.