Treasury/IRS Issues “Beginning of Construction” Guidance for Wind and Solar Under OBBBA (Notice 2025-42)
In the wake of the One, Big, Beautiful Bill Act (OBBBA) enacted on July 4, 2025, the Administration moved quickly to implement its wind and solar credit termination provisions. On July 7, 2025, President Trump issued Executive Order 14315, directing the Treasury Department to strictly enforce the new “beginning of construction” deadline and related restrictions, and to issue clarifying guidance within 45 days. On August 15th, Treasury and the IRS released Notice 2025-42, which sets out the controlling standards for when construction is treated as having begun, narrows reliance on prior safe harbors, and details continuity, contracting, transferring, and low-output solar rules. Below are key takeaways from the guidance issued on August 15th. Pierson Ferdinand is here to partner with stakeholders to navigate these rules with confidence—designing tailored development timelines, contracting strategies, and transaction structures that protect tax benefits and keep projects on track.
Key Takeaways
Credit termination trigger locked to July 5, 2026 “begin construction” deadline
The §45Y clean electricity production credit and §48E investment credit terminate for applicable wind and solar facilities placed in service after December 31, 2027, if construction begins after July 4, 2026 (12 months post-OBBBA enactment). Notice 2025-42 sets the operative “beginning of construction” standards tied to this deadline.
Physical Work Test is now the sole path (with one narrow exception)
For applicable wind and solar projects, taxpayers must satisfy the Physical Work Test to establish construction began before July 5, 2026; the traditional Five Percent Safe Harbor is unavailable except for qualifying “low output solar facilities.”
Narrow exception: Five Percent Safe Harbor permitted only for low output solar
A “low output solar facility” is ≤1.5MW AC maximum net output (measured at the qualified facility level), subject to aggregation where operations are integrated and certain common-ownership/same-year/service point criteria are met.
What qualifies as “physical work of a significant nature”
On-site examples include: wind—foundation excavation, setting anchor bolts, concrete pad pours; solar— installing racks/structures to affix PV modules.
Off-site manufacturing can qualify (e.g., turbines, mounting, inverters, transformers) if done under a binding written contract entered into before the manufacturing begins and the parts are not taken from inventory.
What does not qualify
Preliminary activities (planning, permitting, site clearing, studies, financing, test drilling, grading not tied to foundations) do not count.
Inventory does not count—components normally held in inventory, or produced into inventory, are excluded.
Continuity Requirement and 4-year safe harbor retained
Taxpayers must maintain a continuous program of construction; placing the facility in service within 4 years after the year construction began is deemed to satisfy continuity.
Excusable disruptions (e.g., severe weather, permitting delays, interconnection delays, supply shortages, labor stoppages) can support continuity on a facts-and-circumstances basis if outside the 4-year safe harbor.
Contracting and transfers
Work by contractors under binding written contracts counts if the contract is executed before work begins; “master contract” assignments to project SPVs are respected.
Transfers: A project can be sold without losing begin-construction status; however, bare equipment transfers to unrelated parties don’t carry over prior work for the buyer’s Physical Work Test.
Single project and integral property rules
Multiple facilities may be treated as a single project for begin-construction purposes based on factors such as common ownership, contiguous land, common PPA/intertie/substation/permits, single construction contract, or shared financing.
Only work done on tangible property integral to electricity production (not transmission) counts.
Retrofitted facilities and the 80/20 rule
A retrofit can qualify as “originally placed in service” if used-property value ≤20% of total value; for begin- construction, only work on new components counts.
Effective date and interaction with prior guidance
Effective for facilities that did not begin construction (under prior Notice 2022-61 rules) before September 2, 2025.
Updates the prior “begin-construction” rules to align with the OBBBA deadline. Under the new framework, the Five Percent Safe Harbor is generally unavailable—except for qualifying low output solar projects, which remain eligible for that safe harbor.
Action Items
Reassess project pipelines to confirm Physical Work Test milestones can be achieved before July 5, 2026; avoid reliance on procurement alone unless qualifying off-site manufacturing under binding contracts and non- inventory treatment.
For solar projects ≤1.5MW AC, evaluate eligibility for the Five Percent Safe Harbor; confirm nameplate and integration tests to avoid inadvertent aggregation above 1.5MW.
Tighten contracting: ensure enforceable, binding written contracts are executed before manufacturing or on-site work begins; review damages clauses to meet binding standards.
Document continuity: maintain contemporaneous records of ongoing significant physical work and any excusable disruptions; target in-service within 4 years of the start year.
Structure transfers carefully: avoid bare equipment-only transfers to unrelated parties if relying on predecessor Physical Work Test; consider project-level transfers or related-party structures.
For retrofits, track new-versus-used components to satisfy the 80/20 test and limit Physical Work Test claims to new property.
How Pierson Ferdinand LLP Can Assist
Pierson Ferdinand LLP understands the critical importance of navigating this evolving legislative and regulatory landscape. Our team, with deep experience in federal income tax and international taxation for the renewable energy sector, is prepared to assist clients, including in:
Evaluating current project timelines to meet eligibility deadlines and criteria under the new guidance.
Structuring organizations and transactions to maximize remaining tax benefits.
For clients in the renewable energy industry, including those focused on sustainable energy solutions, we are ready to provide tailored guidance to mitigate risks posed by these legislative and regulatory changes. Please contact us to discuss how the OBBBA and this Guidance may impact your operations and to explore strategic options for compliance and optimization.
Contact Us: For further information or to schedule a consultation, please contact Pierson Ferdinand’s Energy, Renewables, and Sustainability team at Renewables@pierferd.com or contact Liz Delnegro directly at Elizabeth.delnegro@pierferd.com. We remain committed to supporting your success in the face of these challenging legislative shifts.
This publication and/or any linked publications herein do not constitute legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, the author(s) and PierFerd assume no liability whatsoever in connection with its use. Pursuant to applicable rules of professional conduct, this publication may constitute Attorney Advertising. © 2025 Pierson Ferdinand LLP.
