On Friday, the US Department of the Treasury and the Internal Revenue Service (IRS) released comprehensive guidance (Notice 2025-42) regarding the beginning of construction of wind and solar energy projects for the purposes of qualifying for the §45Y production tax credit (PTC) and §48E investment tax credit (ITC) under the One Big Beautiful Bill Act (OBBBA). This guidance was issued pursuant to the White House’s July 7 Executive Order (EO) 14315 directing both the Treasury and Interior Departments to strictly enforce the phasedown of the wind and solar credits as directed in the OBBBA.
The changes eliminate the longstanding 5% beginning-of-construction safe harbor for solar projects larger than 1.5 MW and all wind projects but are not retroactive, as some had speculated. Instead, the new guidance applies only to projects that start construction on or after September 2.
The Foreign Entity of Concern (FEOC) rules under the OBBBA are not addressed in this guidance. Instead, the Treasury note states that they are currently drafting additional guidance to implement those restrictions.
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Key elements of Notice 2025-42
The longstanding “beginning of construction” rules allow solar and wind projects to “safe harbor” qualifying for the ITC or PTC based on when construction began and assuming some level of continuous activities, versus when they are placed in service. The July EO required the Treasury Department to update longstanding guidance determining when a project has begun construction.
Treasury’s guidance sought to implement changes consistent with the EO’s guidance. Key takeaways include:
- Guidance is prospective, not retroactive. The new rules go into effect September 2, 2025 and apply only to projects that begin construction on or after that date. Under the OBBBA, any project that does not begin construction by July 4, 2026 must be placed in service by December 31, 2027 to be eligible for the tax credit.
- Eliminates the 5% safe harbor test for solar facilities larger than 1.5 MW and all wind facilities.
- Preserves the 5% safe harbor test for solar facilities that are 1.5 MW and smaller.
- The “physical work test” is now the sole method to establish that construction has begun for solar projects larger than 1.5 MW and all wind projects. The physical work test in this guidance is similar to previous guidance.
- The physical work test requires that “physical work of a significant nature” be performed and does not consider the amount or the cost. The guidance allows both on-site and off-site work to be taken into account and lists “preliminary activities” that may not count toward the physical work test.
- Retains the four-year “continuity safe harbor” if the project is placed in service no more than four calendar years after the calendar year during which construction began. Excusable disruptions, such as delays in permits and interconnection, natural disasters, supply shortages, and financing, will not disqualify a project from meeting the continuous construction requirement.
Update on US Department of the Interior actions
The Interior Department has continued to implement Executive Order 14315, which directs agencies to eliminate rules and practices that could be seen as giving wind and solar preferential treatment. The result is a series of new actions that shift the regulatory landscape and could complicate the ability of some projects to meet commence-construction or placed-in-service deadlines.
Key developments
- New “capacity density” standard. On August 1, the Interior Department issued an order requiring all reviews of solar and wind projects to incorporate “capacity density,” a new measure of the amount of land a project occupies per megawatt of generation. Because the metric excludes upstream fuel production and downstream waste storage, fossil fuel and nuclear facilities appear more land-efficient than wind and solar under this approach.
- Rescission of offshore leasing schedule. On August 4, Interior rescinded its obligation to publish a five-year schedule for offshore renewable energy leasing. This removes a planning tool developers had previously relied on to anticipate lease offerings.
- Expanded wildlife scrutiny. That same day, Interior issued new requirements mandating that wind projects be assessed for impacts on bald and golden eagles, adding a new layer of review and potential permitting risk.
- Restrictions on Bureau of Land Management (BLM) renewable spending. Also on August 4, Interior was informed that the BLM must reduce spending on renewable energy programs to the statutory minimum. This prohibition extends to contracts, cooperative agreements, interagency agreements, travel, charge cards, and miscellaneous obligations.
Impact
While the actions by the Treasury and Interior Departments present new challenges for wind and solar projects, the additional clarity should provide certainty to developers seeking to meet the new requirements and help keep projects moving forward.
Of course, forthcoming rules regarding implementation of the new Foreign Entity of Concern requirements will remain as an open question. We will continue to monitor developments related to the OBBBA and its implementation and keep our clients and partners apprised.
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