August 18, 2025 | By Dorian Hunt, Head of Energy and Renewables Tax

On August 15, 2025, in response to President Trump’s Executive Order 14315 directing Treasury to issue guidance ‘deemed necessary to strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E for wind and solar facilities’ within 45 days following the enactment of One, Big, Beautiful Bill Act1 (the “OBBBA”), Treasury and the Internal Revenue Service released Notice 2025-42 (the “Notice”), providing guidance on how taxpayers may establish beginning of construction for wind and solar facilities under Section 48E and 45Y of the Internal Revenue Code (the “tech-neutral tax credits”). While the changes in the Notice are not retroactive, the Notice’s effective date of September 2, 2025 (the “Effective Date”) provides very little time for developers and stakeholders to react to the Notice’s changes.

Key Takeaways

As of the Effective Date, the Physical Work Test, which requires that physical work of a significant nature (“PWSN”) be performed, will be the only way for most wind and solar projects to start construction. However, solar projects that have a nameplate capacity below 1.5 MWAC, as measured in alternating current, may still be able to utilize the 5% Safe Harbor to start construction. The Notice does not alter or address what it means to begin construction for Foreign Entity of Concern (“FEOC”) purposes.

OBBBA Start of Construction Recap

To quickly recap the rules prior to the Effective Date, a wind or solar project’s start of construction date affects the availability and amount of its tech-neutral tax credits. The schedule provided in the OBBBA indicates projects that:

  1. Begin construction prior to December 31, 2025 are not subject to FEOC material assistance restrictions and can claim tech-neutral tax credits if placed into service within 4 years of beginning construction, which means no later than the end of 2029,
  2. Begin construction between January 1, 2026 and July 4, 2026 are subject to FEOC material assistance restrictions but may be able to claim tech-neutral tax credits if placed into service within 4 years of beginning construction, which means no later than the end of 2030,
  3. Begin construction after July 4, 2026 are subject to FEOC material assistance restrictions and can only claim tech-neutral tax credits if they are placed in service on or before December 31, 2027. If placed into service during 2028 or later, such projects are not able to claim tech-neutral tax credits.

The Increased Significance of Physical Work of a Significant Nature

The Physical Work Test has shifted from being an option for meeting the beginning of construction test to being the sole option. All solar and wind facilities may still start construction through either on-site or off-site variants of PWSN. The Physical Work Test contained in Notice 2025-42 largely mirror prior guidance related to establishing beginning of construction through PWSN, such as Notices 2013-29 and 2018-59. The Notice refers to construction as beginning when PWSN “begins,” but also introduces new language stating that the Physical Work Test requires such work to be “performed.”2 Although the IRS did not expressly identify this as a change, the shift in wording could potentially signal a more exacting standard.

The Notice provides that PWSN must be with respect to the solar or wind facility, that there is no minimum amount of work or monetary percentage threshold to satisfy physical work, and that preliminary activities, even if included in the depreciable basis, would not constitute physical work of a significant nature. The Notice also reiterates the rules required to establish off-site physical work and the continuity requirements and clarifies that certain disruptions beyond the taxpayer’s control, such as severe weather, permitting delays, interconnection issues, or other government-related holdups, will not be treated as breaking continuity. Aside from these clarifications, the rules generally align with prior guidance, including the availability of the continuity safe harbor, the restrictions on equipment trafficking, etc.

Small Solar Exception

Low output solar facilities, defined as solar facilities with a maximum net output of 1.5 MWAC or less, may still establish beginning of construction by using either the 5% Safe Harbor or the Physical Work Test. This exception applies solely to low output solar facilities.

Generally, the 1.5 MWAC limitation is measured at the level of a “unit of qualified facility”. However, in determining whether the 1.5 MWAC limitation is relevant to a particular project, the nameplate capacities of those units must be aggregated in the case of “integrated operations”. That is, if a collection of units is owned by the same taxpayer, in service and in same taxable year and delivers electricity to the same interconnect or end user, that collection of units is deemed “integrated” and the sum of the units’ nameplates must be used when comparing against the 1.5 MWAC threshold. This effectively removes the opportunity for taxpayers to navigate the limitation through creative engineering and design.

Conclusion

The Notice is not as restrictive as many wind and solar stakeholders had feared, but it does make qualifying for tech-neutral tax credits harder for many developers. The removal of the 5% Safe Harbor and further reliance on the Physical Work Test will likely force industry stakeholders to self-develop bankable thresholds as to what “significant” means in the context of PWSN. We expect there to be significant diversity in practice and perspectives on this point as the situation evolves. Elimination of the 5% Safe Harbor also limits the ability to rely on stockpiling strategies. Although the Notice continues to permit transfers of equipment between projects in certain circumstances, those transactions will need a clear business rationale.

Developers of solar rooftop projects, which typically have fewer opportunities to commence PWSN, are likely celebrating the 1.5 MWAC exception for solar. For those projects that don’t meet this exception and won’t have begun construction under pre-Notice standards by the Effective Date, the clock is now ticking to begin construction to Satisfy the Physical Work Test before July 5, 2026, or be subject to particularly onerous placed-in-service deadlines.

 

Footnotes

 

1 Section 70512(a) and (l)(4) of Section 70512 and Section 70513(a) and (g)(5) of Public Law 119-21, 139 Stat. 72 (July 4, 2025).

2 Notice 2025-42, section 3.02 (“Construction … begins when physical work of a significant nature begins.”) and section 3.03 (“The Physical Work Test requires that physical work of a significant nature be performed.”).