On August 15, 2025, the IRS released Notice 2025-42, which brings significant changes to the way we determine the beginning of construction (BOC) for solar and wind facilities. This update follows major amendments made to Sections 45Y and 48E through the One Big Beautiful Bill Act (OBBBA). The notice addresses President Trump’s executive order from July 7, directing revised guidance on BOC within a tight timeframe. Understanding these updates is crucial for taxpayers involved in clean energy projects as they navigate new compliance requirements and tax planning strategies.
Understanding Notice 2025-42: Key Changes
The IRS’s Notice 2025-42 fundamentally alters previous approaches to establishing BOC for renewable energy projects. Traditionally, two methods were employed: the Physical Work Test and the Five Percent Safe Harbor. The Physical Work Test determined BOC based on when “physical work of a significant nature” commenced. In contrast, the Five Percent Safe Harbor allowed taxpayers to establish BOC once they incurred five percent or more of total project costs while demonstrating continuous efforts towards project completion.
Elimination of the Five Percent Safe Harbor
One of the most notable changes introduced by Notice 2025-42 is the elimination of the Five Percent Safe Harbor for most solar and wind facilities, effective before July 5, 2026. The only exception applies to low output solar facilities with a capacity of 1.5 MW or less. This modification means that taxpayers can no longer rely on simply incurring a portion of costs as a means to establish BOC under new guidelines.
The Modified Physical Work Test
The modified Physical Work Test remains in place, asserting that construction begins when “physical work of a significant nature” starts—this can be physical work performed by either taxpayers or contracted individuals under specific written agreements. Importantly, this focus shifts from cost considerations to evaluating the actual nature and significance of work being undertaken.
It is also essential to note that while physical work may include on-site or off-site tasks, it does not encompass production activities typically reserved for inventory purposes. Examples provided in the notice clarify what constitutes qualifying physical work under these updated guidelines.
Clarifications Surrounding Preliminary Activities
The IRS has reiterated that preliminary activities such as site clearing, financing arrangements, surveying, design processes, and permitting do not count as “physical work of a significant nature.” This clarification helps delineate between preparatory actions and actual construction efforts impacting BOC determinations.
Continuity Requirement for Project Completion
To maintain an established BOC date under Notice 2025-42, taxpayers must either ensure that their facility is in service within four years from their construction start date or demonstrate continuous progress toward completion. Certain exceptions may apply for disruptions beyond taxpayers’ control concerning continuity requirements; however, this flexibility does not extend to those utilizing the Continuity Safe Harbor.
Treatment of Multiple Facilities
If multiple facilities are developed as part of a single project initiative—whether wind or solar—they will be assessed collectively for determining BOC status. This approach simplifies compliance by treating grouped developments as one entity rather than separate installations.
Impacts on Existing Projects and Non-Solar/Wind Facilities
If construction commenced prior to September 2, 2025—including those meeting previous Five Percent Safe Harbor criteria—the associated facility remains unaffected by these recent updates per Notice 2022-61 guidelines. However, it’s vital to recognize that non-solar or wind clean energy projects like geothermal or battery storage systems do not fall under this updated guidance from Notice 2025-42.
Navigating Tax Planning Under Revised Guidelines
Although Notice 2025-42 limits options regarding how taxpayers can establish BOC for wind and solar facilities moving forward, there are still avenues available for strategic tax planning aiming at meeting implementation deadlines set forth in OBBBA—specifically extending placed-in-service date limitations until July 4, 2026. For any clean energy projects anticipated before this deadline or concerns related to impacts stemming from these changes in guidance—consultation with tax professionals is highly advised.
Conclusion
The release of Notice 2025-42 marks a pivotal shift in how beginning construction dates are determined for solar and wind facilities under U.S. tax law. By eliminating certain safe harbor provisions and clarifying definitions surrounding physical work standards—and requiring timely project completions—the IRS aims to streamline compliance processes while navigating towards sustainable energy initiatives outlined in recent legislation. Staying informed about these changes will empower stakeholders engaged in renewable energy sectors to effectively plan their projects amid evolving regulatory landscapes.