Beginning of Construction Guidance Eliminates 5% Safe Harbor (for Wind and Solar), but Physical Work Test Survives

As background, the One Big Beautiful Bill (H.R. 1, 119^th Congress (2025), “OBBB”) amended the Tech-Neutral Tax Credits by terminating such credit for wind and solar facilities that are placed in service after December 31, 2027, unless such facilities begin construction before July 5, 2026.¹ Only three days after the OBBB’s passage, President Donald Trump signed the Executive Order directing the Secretary of the Treasury to release new and revised guidance that would ensure that the beginning of construction rules could not be circumvented by wind and solar facilities “unless a substantial portion of a subject facility has been built.”²

In response, the Notice eliminates the 5% Safe Harbor “beginning of construction” option for all wind facilities and most solar facilities,³ but thankfully leaves the Physical Work Test unchanged.

Moreover, the Notice makes it clear that facilities can meet the Physical Work Test through onsite construction (such as through excavation of foundations, setting of anchor bolts, pouring pads, and installing support structures) or using offsite work performed pursuant to a binding written contract (such as through the manufacture of racks and rails, inverters, transformers,⁴ and other power conditioning equipment);⁵ both well-understood strategies commonly implemented by developers.

The Notice also does not change the “Continuity Safe Harbor” – i.e., if a facility is placed in service within four years following the end of the year in which construction begins, it will be deemed to satisfy the “continuity” requirements within the original Beginning of Construction Guidance. However, if this safe harbor is not met, wind and solar facilities need to maintain a continuous program of construction until the facility has been placed in service. The Notice does not include any requirement as to how to document this continuous program of construction, but we believe at least quarterly contemporaneous documentation remains prudent.

The Notice only applies prospectively for any wind or solar facility that begins construction on or after September 2, 2025; meaning that any wind or solar facility that satisfies the 5% Safe Harbor prior to September 2, 2025, will retain its beginning of construction qualification. Furthermore, solar facilities that have a maximum net output of not greater than 1.5 megawatts may still use the 5% Safe Harbor. Additionally, the Notice’s narrow applicability means the 5% Safe Harbor and the Physical Work Test remain available for purposes of “beginning construction” for all other technologies.

While the 5% Safe Harbor will certainly be missed, developers can breathe easier now that we have more clarity on how wind and solar facilities can begin construction for the purposes of the Tech-Neutral Tax Credits termination deadline. And, while we are still expecting additional guidance in the coming weeks on the implementation of the “prohibited foreign entity” restrictions in the OBBB, wind and solar developers can now focus on qualifying their facilities for the Tech-Neutral Tax Credits before the July 5, 2026 deadline.

¹ For our previous coverage of the OBBB, please see here.

² Initially, the industry assumed that the long-standing beginning of construction guidance would govern the termination deadline, specifically because the OBBB codified such long-standing “beginning of construction rules” as they pertains to the “prohibited foreign entity” restrictions. The “Beginning of Construction Guidance” is a set of guidance from the IRS that defines how projects can begin construction for the purposes of different energy tax credits. These notices define two general methods — the “Physical Work Test” and the “5% Safe Harbor.” Under the Physical Work Test, a project begins construction when physical work of a significant nature begins, and under the 5% Safe Harbor, a project begins construction when the taxpayer pays or incurs 5% or more of the total cost of the facility or energy property. Projects must also meet a continuity requirement which requires a project to maintain a continuous program of construction from that date that it begins construction. While this can be determined based on facts and circumstances, the Beginning of Construction Guidance also provides for a “Continuity Safe Harbor” which is met if a project is placed in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the applicable wind or solar facility began.

For the full Beginning of Construction Guidance, please see Notice 2013-29, 2013-20 I.R.B. 1085; clarified by Notice 2013-60, 2013-44 I.R.B. 431; clarified and modified by Notice 2014-46, 2014-36 I.R.B. 520; updated by Notice 2015-25, 2015-13 I.R.B. 814; clarified and modified by Notice 2016-31, 2016-23 I.R.B. 1025; updated, clarified, and modified by Notice 2017-4, 2017-4 I.R.B. 541; Notice 2018-59, 2018-28 I.R.B. 196; modified by Notice 2019-43, 2019-31 I.R.B. 487; modified by Notice 2020-41, 2020-25 I.R.B. 954; clarified and modified by Notice 2021-5, 2021-3 I.R.B. 479; clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17; Notice 2022-61, 2022-52 I.R.B. 560.

³ Note that the Notice does still allow “Low Output Solar Facilities” to utilize the 5% Safe Harbor. This newly defined category consists of solar facilities that have maximum net output of not greater than 1.5 megawatts (as measured in alternating current).

⁴ Interestingly, the initial release of the guidance restricted the size of the transformer to transformers that step up voltage to less than 69 kilovolts. While this limitation appeared in some of the earliest Beginning of Construction Guidance, this limitation has not been in place for many years, and it was a surprise to many to see this limitation on transformer size reinstated in the Notice. Thankfully, though, the 69-kilovolts limitation was quietly removed after the release of the Notice (without any acknowledgement by the IRS), and the limitation no longer appears in the Notice. 

⁵ Please note that, as provided for in previous guidance, the equipment manufactured offsite pursuant to a binding written contract can only qualify for the Physical Work Test if the equipment is not in the manufacturer’s existing inventory or is not normally held in inventory by the party selling the equipment to the taxpayer.