Guidance outlining the “beginning of construction” requirements that must be met for a solar or wind facility to qualify for the nonresidential IRC §45Y Clean Electricity Production Credit or §48E Clean Electricity Investment Credit has been issued. (IRS Notice 2025-42) The guidance applies to applicable wind and solar facilities, where construction begins after September 1, 2025.
Under OBBBA, solar and wind facilities are generally only eligible for the credits if they are placed in service by the end of 2027. (OBBBA §§70512, 70513) However, an exception applies if the construction of the facility begins prior to July 5, 2026, referred to as the beginning of construction deadline.
Prior to OBBBA’s passage, the IRS had provided guidance via various notices as to when construction begins, which could be satisfied by either meeting:
- A physical work test (which also requires taxpayers to satisfy a continuity requirement); or
- A 5% safe harbor test.
Notice 2025-42 eliminates the 5% safe harbor test for all facilities other than low-output solar facilities, which are defined as facilities generating 1.5 megawatts or less. Under the 5% safe harbor test a taxpayer can establish that construction has begun when the taxpayer incurs 5% or more of the total cost of the energy property.
For all other facilities, taxpayers must now establish via a facts and circumstances analysis that physical work of a “significant nature” has begun to qualify for the credits. Highlights of the guidance include:
- Specifying that, as before, the focus is on the nature of the actual work performed (other than preliminary activities), not the amount or the cost, and both off-site and on-site work may be taken into account. The notice provides nonexclusive lists of types of activities that would constitute work of a significant nature and ineligible preliminary activities (e.g., planning and permitting); and
- Clarifying that the continuity requirement, which requires that the taxpayer continue to make progress toward completion of the project, will continue to be satisfied if the facility is placed in service by the end of the fourth calendar year after construction began. The notice also provides a list of excusable disruptions to the continuity requirement.
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