Key insights
- The IRS issued updated guidance on how wind and solar projects qualify for energy tax credits, but a recent court ruling restored both the physical work test and the 5% safe harbor for now.
- With more than one way to establish eligibility again, project teams may need to revisit plans and timelines as the July 4, 2026, deadline approaches.
- Construction must still be continuous, with a four-year safe harbor to place projects in service. Delays don’t extend this window, so documentation remains critical.
- As guidance may continue to shift, developers and investors should act now to confirm their approach, support their position, and reduce execution risk ahead of the deadline.
Act now to take advantage of energy tax credits.
Under IRS Notice 2025-42, Treasury issued guidance redefining what it means to “begin construction” for purposes of claiming the Clean Electricity Production Credit (Section 45Y) and the Clean Electricity Investment Credit (Section 48E).
A recent court decision in Oregon Environmental Council v. Internal Revenue Service shifted that interpretation, restoring a key method many developers rely on and changing how projects may manage the fast-approaching deadline.
These developments may affect project timelines and how you position your project for energy tax credit eligibility.
What impact did OBBBA have on energy tax credits?
The One Big Beautiful Bill Act (OBBBA) rolled back a number of clean energy tax incentives. Among its many provisions, it terminated the Section 45Y and Section 48E credits for wind and solar facilities that begin construction after July 4, 2026 and are placed in service after December 31, 2027.
Details of the Case
Applying core Administrative Procedure Act principles, the court held that Treasury and the IRS failed to engage in reasoned decision-making.
It emphasized that the agency did not adequately explain why the 5% Safe Harbor permitted improper “circumvention” of statutory deadlines, did not justify treating wind and large-scale solar differently from other technologies under technology-neutral credits, and failed to meaningfully account for the substantial reliance interests built over more than a decade of consistent guidance.
Those reliance interests played a central role in the court’s analysis. The opinion underscores that taxpayers have structured significant investments based on the continued availability of both methods for establishing beginning of construction, and that the IRS itself repeatedly reinforced that framework.
In that context, a sudden shift — supported by only a cursory explanation — was insufficient as a matter of administrative law.
The law was swiftly followed by Executive Order 14315, which directed the Treasury Department to issue guidance to prevent “artificial acceleration or manipulation” of eligibility for these credits.
The Treasury Department complied with the executive order by issuing IRS Notice 2025-42 and removing the traditional safe harbors developers have relied on, for over a decade, to establish the beginning of construction date.
Beginning of construction: Flexibility returns as deadlines approach
Earlier guidance had narrowed how projects could demonstrate that construction began, effectively limiting many wind and solar projects to the Physical Work Test.
A court ruling vacated that guidance, restoring the long-standing approach. For now, taxpayers may rely on either the Physical Work Test or the Five Percent Safe Harbor to establish beginning of construction for Sections 45Y and 48E.
This distinction is more than technical; it directly determines whether credits are available at all. Many projects have been designed around the ability to use either method.
With the July 4, 2026 deadline approaching, this restored flexibility creates an opportunity to revisit how your project’s eligibility is determined.
The Physical Work Test
The physical work test remains one way to establish beginning of construction for many wind and solar projects. To meet this test, a taxpayer must demonstrate physical work of a significant nature began before July 5, 2026.
Treasury emphasizes the test is qualitative, not quantitative. There is no minimum dollar threshold, no required percentage of completion. Instead, the focus is on the nature of the work performed. It must be integral to the facility’s function as a generator of electricity. And, it must be real.
Five Percent Safe Harbor
With the court’s ruling, the Five Percent Safe Harbor is once again available for wind and solar projects.
Under this approach, a project may establish beginning of construction by paying or incurring at least 5% of total project costs, followed by continuous efforts to complete the project.
This path may be more practical where:
- Physical construction cannot begin in time
- Equipment procurement is already underway
- Project timelines are constrained by permitting or logistics
Some teams may choose to pursue both the physical work test and the safe harbor to reduce risk, particularly given the compressed timeline.
Qualifying activities defined
For purposes of the Physical Work Test, the 2025 notice provided a detailed taxonomy of qualifying and non-qualifying activities, drawing a bright line between preparatory work and actual construction while targeting “warehouse-to-qualify” strategies.
| Qualifying activities |
|
|---|---|
|
Wind facilities |
|
| Solar facilities (on-site) |
|
| Off-site (conditional) |
|
| Non-qualifying activities |
|---|
|
Continuity requirement enforced
Beginning construction is not enough. Taxpayers must also maintain a “continuous program of construction.”
Treasury offers a continuity safe harbor: if the facility is placed in service within four calendar years of the year construction began, the requirement is deemed satisfied.
But there’s a catch. The safe harbor is rigid. Excusable disruptions — such as severe weather, permitting delays, or supply chain issues — do not extend the four-year window. They may be considered under a facts-and-circumstances test if the safe harbor is missed, but the burden of proof shifts squarely to the taxpayer.
Other key aspects of energy tax credits could impact your business. Watch our webinar on tax credit transferability.
How CLA can help
As the July 4, 2026, deadline approaches, the court has reopened a critical pathway for preserving Sections 45Y and 48E credits — but taxpayers must act quickly, and with an appreciation that the rules may not yet be settled.
CLA’s renewable energy practice can help you understand how this latest guidance impacts your organization, evaluate project begin-construction dates, and document your available tax credits.
Contact us
Get help claiming energy tax credits under the new rules. Complete the form below to connect with CLA.