IRS Releases Updated OBBBA-Related Energy Credit Guidance

On August 15, 2025, the US Department of the Treasury and the Internal Revenue Service (the “IRS”) issued Notice 2025-42 (the “August 2025 Notice”), providing critical guidance on the determination of when construction begins for wind and solar facilities for purposes of the clean electricity production credit under Section 45Y and the clean electricity investment credit under Section 48E of the Internal Revenue Code. This guidance is particularly significant in light of the termination provisions enacted by the One Big Beautiful Bill Act (the “OBBBA”), which impose new deadlines and restrictions on the availability of these credits. 

Overview of OBBBA Termination Provisions

The OBBBA, enacted on July 4, 2025, terminates the Section 45Y and Section 48E credits for “applicable wind facilities”¹ and “applicable solar facilities”² placed in service after December 31, 2027 (the “credit termination date”).³ The credit termination date applies to applicable wind and solar facilities the construction of which begins after July 5, 2026 (beginning-of- construction deadline), 12 months after the date of enactment of the OBBBA. The August 2025 Notice implements Executive Order 14315⁴, which directs strict enforcement of these termination provisions and aims to prevent circumvention through “artificial acceleration or manipulation of eligibility.” ⁵ 

Methods for Establishing Beginning of Construction

Prior to enactment of the OBBBA, the IRS had issued a series of notices for purposes of determining the beginning-of-construction date of a project (the “Prior Guidance”). Pursuant to such notices, to demonstrate beginning of construction, a taxpayer must either (i) start physical work of a significant nature (“Physical Work Test”), or (ii) pay or incur 5% or more of the total cost of the project (“Five Percent Safe Harbor”). For purposes of the OBBBA’s beginning-of-construction deadline, the August 2025 Notice provides that the Physical Work Test is the exclusive method for establishing that construction has begun on an applicable wind or solar facility before July 5, 2026. The previously available Five Percent Safe Harbor is not available for these purposes, except for certain low-output solar facilities (see below). 

The Physical Work Test under the August 2025 Notice is the same as under the Prior Guidance. Specifically, under the Physical Work Test, construction is considered to have begun when physical work of a significant nature commences. This includes both on- and off-site work, provided such work is performed either by the taxpayer or by another party under a binding written contract entered into prior to the commencement of work. The test focuses on the nature of the work, not the amount or cost, and there is no fixed minimum threshold. Whether physical work of a significant nature has begun before July 5, 2026, with respect to an applicable wind or solar facility, will depend on the relevant facts and circumstances.

• On-site physical work of a significant nature: For applicable solar facilities, this may include installation of racks or structures to affix photovoltaic panels. For applicable wind facilities, this may include excavation for foundations, setting anchor bolts, or pouring concrete pads. Another common strategy is to construct on-site roads that are used for equipment to operate and maintain the energy property (as opposed to roads to access the site or that are used primarily for employee or visitor parking).
• Off-site physical work of a significant nature: This may include manufacture of components, mounting equipment, support structures such as racks and rails, inverters, and certain transformers, and other power-conditioning equipment tailored to the applicable facilities, provided such components are not held in inventory and are produced under a binding written contract. A typical strategy is to enter into a transformer-supply agreement and to require completion of discrete components (e.g., radiators or conservator tanks) prior to the applicable deadline.

Preliminary activities, such as planning, permitting, site-clearing, financing, etc., do not constitute physical work of a significant nature. 

Inventory Exclusion: Work to produce components that are in existing inventory or normally held in inventory by a vendor does not satisfy the Physical Work Test.

Continuity Requirement and Safe Harbor 

Taxpayers must maintain a continuous program of construction (the “Continuity Requirement”) after physical work of a significant nature has begun. The August 2025 Notice provides a Continuity Safe Harbor; if a facility is placed in service by the end of the fourth calendar year after the year in which construction began (the “Placed-in-Service Deadline”), the Continuity Requirement is deemed satisfied. Alternatively, a taxpayer may satisfy the Continuity Requirement by demonstrating actual continuous construction based on the relevant facts and circumstances. Excusable disruptions beyond the taxpayer’s control (e.g., severe weather and natural disasters, permitting delays, supply shortages) do not count against the Continuity Requirement for facts-and-circumstances determinations, but do not extend the four-year safe harbor.

As a practical matter, this means that developers seeking to grandfather multiple projects by entering into contracts and performing work prior to the beginning-of-construction deadline must consider the feasibility of placing those projects into service prior to the Placed-in-Service Deadline.

Other Key Provisions

• Binding Written Contracts: Work performed under a binding written contract entered into before work commences is taken into account. Contracts must be enforceable under local law and not limit damages to a specified amount, except that a cap of at least 5% of the contract price is permitted. 
• Single-Project Rule: Multiple facilities operated as part of a single project may be treated as a single facility for purposes of the beginning-of-construction determination, based on factors such as common ownership, contiguous land, shared permits, and common financing. 
• Integral Property: Only work on property integral to the production of electricity (not transmission) is considered. 
• 80/20 Rule for Retrofits: Retrofitted facilities may qualify as newly placed in service if the value of used components does not exceed 20% of the total facility value. The Physical Work Test applies only to new components. 
• Transfers: Facilities may be transferred without loss of begun-construction status, except that work performed or costs incurred by an unrelated transferor are not attributed to the transferee. 

Exception for Low Output Solar Facilities 

For “low output solar facilities” (maximum net output not greater than 1.5 MW AC), taxpayers may establish the beginning of construction before July 5, 2026, by either satisfying the Physical Work Test or the Five Percent Safe Harbor, following principles from prior IRS guidance. For these purposes, the maximum net output is generally measured at the inverter level; however, multiple facilities with “integrated operations” will be aggregated for purposes of the 1.5 MW determination. Solar facilities will be treated as “integrated” if the facilities are (a) owned by the same or related taxpayers; (b) placed in service in the same taxable year; and (c) connected to the grid at the same point of interconnection or, in the case of a behind-the-meter project, share the same end-user. Thus, as a practical matter, we would expect blocks of a typical utility scale solar project to be aggregated for purposes of this exception (assuming the blocks are placed in service in the same taxable year); however, the exception may be applicable for certain residential and low-output community solar projects.

Effective Date and Modification of Prior Guidance 

The August 2025 Notice modifies prior guidance to provide that, except as specifically provided, only the Physical Work Test is available for determining the beginning of construction for purposes of the OBBBA deadlines. The August 2025 Notice is effective for facilities for which construction did not begin prior to September 2, 2025. This means that developers still have a short window to grandfather projects based on the Five Percent Safe Harbor. However, as a general matter, amounts paid for goods or services are not treated as incurred for purposes of the Five Percent Safe Harbor unless the taxpayer has a reasonable expectation at the time of payment that such goods or services will be delivered or performed within 3.5 months of the payment date. Thus, developers that intend to grandfather projects prior to September 2, 2025 by using the Five Percent Safe Harbor should carefully consider the feasibility of satisfying the delivery requirement, among other technical considerations.

¹ The term “applicable wind facility” means an applicable facility as provided in §§ 45Y(d)(4)(B)(i) and 48E(e)(4)(B)(i) (except as provided in § 48E(e)(4)(C) relating to energy storage technology).

² The term “applicable solar facility” means an applicable facility as provided in §§ 45Y(d)(4)(B)(ii) and 48E(e)(4)(B)(ii) (except as provided in § 48E(e)(4)(C)).

³ See Sections 70512(a) and 70513(a) of the OBBBA.

⁴ Executive Order 14315 of July 7, 2025, Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources, 90 F.R. 30821.

⁵ Treasury and the IRS intend to issue separate guidance addressing the application of the “foreign entity of concern” (“FEOC”) limitations contained in §§ 45(b)(10), 45Y(g)(11), 48(a)(12), and 48E(h)(4) of the Code. Consequently, the August 2025 Notice is limited to the termination of the § 45Y and § 48E credits for applicable wind and solar facilities and does not interpret, modify, or otherwise opine on the beginning-of-construction (“BOC”) rules for purposes of determining FEOC status.