Developers Adapt Timelines and Strategies for Wind and Solar Projects Following Recent IRS Guidance and Expected IRS Enforcement Activity

On August 15, 2025, the Treasury Department and IRS released updated guidance concerning Beginning of Construction requirements to qualify for clean energy tax credits. This new guidance is critical for developers to consider as they rush to qualify for the tax credits before they expire entirely. The much-anticipated guidance followed the July 7, 2025 Executive Order 14315, Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources (“July 7, 2025 Executive Order”), which signaled that the Trump Administration was planning to strictly enforce the termination of production and investment tax credits for solar and wind facilities that are set to expire under the One Big Beautiful Bill Act (OBBB Act), covered in more detail here. The new guidance comes at a time when many in the industry are struggling to keep up with the myriad ways that the new administration is working to roll back wind and solar tax credits, leaving developers to piece through the recent guidance to determine how best to structure and invest in clean energy projects given the volatile position of the current administration vis-a-vis wind and solar energy.

Notice 2025-42 (the “IRS Notice”) states in relevant part that the 5% Safe Harbor Test is no longer available as a basis for determining whether a wind or solar facility has met the Beginning of Construction requirements. Clean energy projects must now rely solely on the Physical Work Test. Under the OBBB Act, all wind and solar projects must start construction by July 5, 2026, or be placed in service by December 31, 2027, to qualify for production credit or investment tax credit.

Historically, under the Biden administration, the IRS guidance provided two methods for establishing that construction had begun:

(1) the taxpayer could establish that construction on a qualified facility, including a wind or solar facility, had begun by starting physical work of a significant nature (“Physical Work Test”) or

(2) the taxpayer could establish that construction had begun on a qualified facility by paying or incurring 5% of eligible project costs (“5% Safe Harbor Test”).

The taxpayer needed only to satisfy one of these two tests, but often taxpayers sought to meet both. Construction was deemed to have begun on the date that the taxpayer first satisfied one of the two tests. The ultimate determination of whether a taxpayer had satisfied one or both of these tests relied on the relevant facts and circumstances specific to a particular energy project.

Following the IRS Notice, developers must now ensure that significant work on their energy property has commenced within the timeframe outlined by the IRS guidance to qualify for a tax credit pursuant to the Physical Work Test. Preliminary work does not satisfy the Physical Work Test. Preliminary activities include, but are not limited to, planning, designing, financing, and researching. Multiple energy properties operated as a single project may be treated as a single energy property where they are collectively designed as a single project. A taxpayer may enlist the work of other entities to construct the energy property so long as the other person or entity is working under a binding written contract. The only qualifying physical work that counts towards the Physical Work Test is work performed after the binding written contract has been executed by the parties.

The IRS Notice maintains the Continuity Requirement, requiring that the taxpayer maintain a continuous program of construction or makes continuous efforts to advance completion of the energy property barring unforeseen circumstances outside of the taxpayer’s control.

Low solar outfit facilities, where the maximum net output is equal to or below 1.5 megawatt, may continue to make use of the 5% Safe Harbor Test, in addition to the Physical Work Test.

Energy project developers and others in the supply chain are awaiting forthcoming guidance from the Treasury and IRS regarding the prohibited foreign entity restrictions, which also limit the availability of clean energy tax credits.

Recent developments, including the passage of the OBBB Act, the July 7, 2025 Executive Order, and the IRS Notice, signal that the IRS will likely increase audit activity related to clean energy credits notwithstanding reduced staffing at the IRS. Clean energy credit project developers and companies in the supply chain should closely review existing agreements, adhere to diligent recordkeeping, and prepare audit files in advance of possible IRS enforcement activity.