As previewed in our previous alert, the clean energy industry was eagerly awaiting IRS guidance regarding how wind and solar projects may avail themselves of the Section 45Y Clean Electricity Production Credits (PTC) and Section 48E Clean Electricity Investment Credits (ITC) prior to their phase-out. To qualify for the credits, construction must begin on or before July 4, 2026. Therefore, the meaning of the phrase “beginning of construction” is critical in determining whether this test is met.
In Notice 2025-42, the Internal Revenue Service substantially modified the prior notices that had set forth two tests for satisfying the beginning of construction test (i.e., the “Physical Work Test” and the “Five Percent Safe Harbor”). In Notice 2025-42, the Internal Revenue Service provided that the Five Percent Safe Harbor will no longer be available in determining whether an applicable wind or solar facility has met the beginning of construction deadline; however, the test is still available for “low-output solar facilities.”
Under the Physical Work Test, construction of a wind or solar facility begins when physical work of a significant nature begins. Although dependent on the relevant facts and circumstances, work performed by the taxpayer or for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction, or production of the applicable facility is taken into account in determining whether construction has begun. This test focuses on the nature of the work performed not the amount or cost. Therefore, there is no fixed minimum amount of work or monetary or percentage threshold required.
Both on-site and off-site work are taken into account when determining the significant nature of construction. However, preliminary activities are expressly excluded from the analysis (e.g., planning or designing, securing financing, obtaining permits and licenses, clearing a site, etc.). Physical work of a significant nature also does not include work to produce a component or part of an applicable facility that is either in existing inventory or is normally held in the vendor’s inventory.
In addition to the nature of the work, taxpayers must satisfy a Continuity Requirement, which provides that a taxpayer maintain a continuous program of construction with respect to an applicable wind or solar facility. Within the Continuity Requirement, there is a safe harbor for those events beyond the taxpayer’s control (e.g., delays due to severe weather conditions or natural disasters, labor stoppages, financing, supply shortages, etc.). If a taxpayer places an applicable facility in service by the end of the calendar year that is no more than four calendar years after the calendar year in which construction began, the facility will be considered to satisfy the Continuity Requirement.
The IRS notice provides an alternative to the Physical Work Test only for low-output solar facilities, defined as an applicable facility that has maximum net output not greater than 1.5 megawatts. For these projects, the Five Percent Safe Harbor remains an option for establishing whether construction begun before July 5, 2026. To satisfy this test, a taxpayer must pay or incur five percent or more of the total cost of the energy project prior to July 4, 2026, and also meet the Continuity Requirement.
The notice further clarifies that the guidance is not intended to address the beginning of construction rules for purposes of foreign entity restrictions. The Treasury Department and IRS intend to issue additional guidance as necessary.
Attorneys at Barclay Damon will continue to monitor any updates to this guidance and its impact on clean-energy tax projects.
If you have any questions regarding the content of this alert, please contact Danielle Katz, counsel, at dkatz@barclaydamon.com; Matt Moses, Project Development Practice Area co-chair, at mmoses@barclaydamon.com; or another member of the firm’s Energy, Regulatory, and Tax Practice Areas.