On August 15, 2025, the Internal Revenue Service (the "IRS") and the Department of the Treasury ("Treasury") released new guidance on the "beginning of construction" for wind and solar facilities under the clean electricity investment tax credit under Internal Revenue Code Section 48E ("ITC") and the clean electricity production tax credit under Code Section 45Y ("PTC"). The new guidance (Notice 2025-42) (the "Notice") revises the general guidance on establishing the beginning of construction for ITC and PTC purposes, discussed by us here (the "General BOC Guidance").
The Notice was issued as directed by a July 7, 2025 executive order, titled "Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources." The executive order also directed the Treasury to take prompt action as appropriate to implement the enhanced Foreign Entity of Concern ("FEOC") rules under the One Big Beautiful Bill Act ("OBBBA"), although the Notice does not include any such guidance.
The Notice is effective for wind and solar facilities that do not begin construction under the General BOC Guidance before September 2, 2025.
Limited Scope
The Notice is limited in scope. It provides guidance on determining when a wind or solar facility begins construction for purposes of the rapid termination of the ITC and PTC under the OBBBA, discussed by us here. Under the OBBBA, if a wind or solar facility begins construction after July 4, 2026, it must be placed into service on or before December 31, 2027 in order to be eligible for the ITC or the PTC.
The Notice does not apply for any other tax credit purposes, including for purposes of:
- Establishing the beginning of construction for batteries or any other energy technology, other than wind and solar;
- The FEOC rules on material assistance, applicable to facilities beginning construction after December 31, 2025;
- The prevailing wage and apprenticeship (PWA) requirements, including exemption from the PWA requirements for facilities beginning construction after January 29, 2023;
- The domestic content requirements, including with respect to the applicable "adjusted percentage" for manufactured product components and the availability of the new elective safe harbor (IRS Notice 2024-41) for facilities beginning construction before April 16, 2025; or
- The energy community requirements, including the special rule for facilities beginning construction after January 1, 2023 while located in an energy community.
The Notice applies prospectively. As stated above, it is effective for wind and solar facilities that do not begin construction, as determined under the General BOC Guidance, before September 2, 2025. Accordingly, wind or solar facilities that have already begun construction under the General BOC Guidance (or that can do so by September 1, 2025) will not be subject to the Notice.
Key Changes
The Notice adopts the physical work test under the General BOC Guidance with only minimal changes. However, the Notice makes the five percent safe harbor unavailable other than with respect to certain low output solar facilities.
For a general discussion of the physical work test and five percent safe harbor under the General BOC Guidance, see our prior client alert here.
Low Output Solar Facility
A low output solar facility is a solar facility that has a maximum net output of not greater than 1.5 megawatts. While this determination is made at the level of the "qualified facility" (generally, the group of solar panels that are connected to a common inverter), solar facilities having "integrated operations" are aggregated. Solar facilities have integrated operations if they are owned by the same or related taxpayers, are placed in service in the same taxable year, and transmit electricity generated by the facilities through the same point of interconnection or (if not grid connected) are able to support the same end user. Apart from rooftop solar, few solar facilities will fit within the definition of a "low output solar facility."
Initial Release of the Notice; Transformers
The initial version of the Notice, released on August 15, 2025, appeared to limit physical work on a step-up transformer to only those certain small-scale transformers that cannot step voltage up to more than 69 kilovolts. Fortunately, such limitation was promptly removed from the version of the Notice available on the IRS website. Any such 69-kilovolt limitation would have raised significant concerns regarding the continued viability of a safe harbor strategy with respect to a utility-scale transformer. We will monitor the official publication of the Notice in the Internal Revenue Bulletin to ensure the corrected version of the Notice is published without further changes.
The Notice does not indicate whether a transformer must be "custom designed," which traditionally has been a hallmark of any transformer strategy under the General BOC Guidance. The significance of this omission is unclear. Treasury may view the language as redundant, as the Notice retains the requirement that the safe harbor equipment cannot be an item of inventory.
Continuity Safe Harbor and Other Rules
The Notice makes only minimal changes to the remaining rules under the General BOC Guidance, including with respect to the continuity requirement and continuity safe harbor, the single project factors, the 80/20 rules, and the rules on transferring safe harbor equipment between related parties. Accordingly, any wind or solar facility beginning construction as determined under the Notice on or before July 4, 2026, will be deemed to satisfy the continuity requirement if it is placed in service by the end of the fourth calendar year after the year in which the facility begins construction.
Planning Strategies
A taxpayer pursuing a safe harbor strategy for a wind or solar facility under the General BOC Guidance should reevaluate its safe harbor strategy in light of the Notice. For any wind or solar facility that has not yet begun construction under the General BOC Guidance (or is not expected to do so before September 2, 2025), the taxpayer should evaluate whether such safe harbor strategy aligns with the Notice and, if not, consider whether to continue pursing such safe harbor strategy for other tax credit purposes (including the FEOC rules or domestic content eligibility). Accelerating efforts to establish the beginning of construction under the General BOC Guidance before September 2, 2025 (for example, under the five percent safe harbor) may be essential for any wind or solar facility that is expected to be placed in service after December 31, 2027 and for which satisfaction of the physical work test under the Notice on or before July 4, 2026 is uncertain.
We would be pleased to assist you in evaluating beginning of construction safe harbor strategies under the General BOC Guidance and the Notice. We will continue to monitor the OBBBA guidance from the IRS and Treasury and will provide further updates as guidance is released.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
