By Josh Howes, CEO
Executive Summary
The clean energy landscape is evolving rapidly, with significant legislative and regulatory changes aimed at promoting sustainable development while ensuring fiscal responsibility. IRS Notice 2025-42, issued in response to the One Big Beautiful Bill Act (OBBBA) and Executive Order 14315, introduces stringent guidelines for determining when construction begins on applicable wind and solar facilities for purposes of the §45Y clean electricity production credit and §48E clean electricity investment credit. These credits are set to terminate for facilities placed in service after December 31, 2027, if construction begins after July 4, 2026.
This white paper provides a comprehensive analysis of Notice 2025-42, highlighting key changes from prior guidance, detailed requirements for establishing the beginning of construction, and practical implications for developers, investors, and taxpayers. By emphasizing physical work over financial safe harbors, the notice aims to prevent circumvention and ensure substantial progress on projects. At Walker Blue, LLC, we specialize in energy tax incentives and engineering, helping clients maximize benefits under provisions like §45Y, §48E, and related credits while navigating compliance challenges.
Introduction
The Inflation Reduction Act of 2022 (IRA) introduced transformative incentives for clean energy, including the §45Y production tax credit (PTC) and §48E investment tax credit (ITC) for qualified facilities generating electricity with zero greenhouse gas emissions. Wind and solar facilities qualify under these provisions, provided they meet emissions standards and are placed in service after December 31, 2024.
However, the OBBBA, enacted on July 4, 2025, amends §§45Y and 48E to terminate these credits for “applicable wind facilities” (e.g., wind turbines and towers) and “applicable solar facilities” (e.g., photovoltaic panels and collectors) placed in service after December 31, 2027, if construction begins after July 4, 2026 (the “beginning of construction deadline”). Executive Order 14315 directs the Treasury to enforce these terminations strictly, preventing artificial acceleration or manipulation of eligibility.
Notice 2025-42 responds to this directive by modifying prior IRS guidance (e.g., Notice 2022-61) for these facilities. It prioritizes tangible physical progress to qualify projects before the deadline, restricting broad safe harbors unless a substantial portion of the facility is built. This shift underscores the administration’s focus on reliable energy sources while phasing out subsidies for certain renewables.
Background on Pre-OBBBA Guidance
Prior to the OBBBA, IRS Notices (e.g., 2013-29 and 2022-61) allowed taxpayers to establish the beginning of construction for §§45Y and 48E via two methods:
- Physical Work Test: Starting significant on-site or off-site physical work.
- Five Percent Safe Harbor: Paying or incurring at least 5% of the facility’s total cost.
A Continuity Requirement ensured ongoing progress, with a four-year safe harbor for placement in service and excusable disruptions for delays beyond the taxpayer’s control.
These flexible approaches supported rapid deployment of clean energy projects. However, concerns about potential abuse—such as minimal financial commitments without real construction—prompted the changes in Notice 2025-42.
Key Provisions of Notice 2025-42
The notice applies to applicable wind and solar facilities where construction did not begin under prior guidance before September 2, 2025. It modifies Notice 2022-61 by limiting its application and introduces targeted rules to enforce the credit termination.
Method for Establishing Beginning of Construction
For most facilities, the Physical Work Test is the sole method to prove construction began before July 5, 2026 (the day after the deadline). This test requires physical work of a significant nature on property integral to electricity production (e.g., turbines, panels, inverters, but not transmission lines).
- Qualifying Work:
- Off-site: Manufacturing custom components like mounting equipment, racks, inverters, transformers (stepping up voltage to less than 69 kilovolts), or other power conditioning equipment (not from inventory). Additional examples include the production of wind turbine blades, nacelles, or tower sections under a binding contract, as well as the fabrication of solar photovoltaic modules or collectors.
- On-site Examples:
- Wind: Excavating for foundations, setting anchor bolts, pouring concrete pads, assembling tower units from off-site components (if not from inventory), or installing turbine nacelles and rotors.
- Solar: Installing racks or structures to affix PV panels, collectors, or solar cells; mounting solar panels on-site; or connecting inverters and other essential electrical components integral to the facility’s operation.
- Non-Qualifying Activities: Preliminary tasks such as planning, permitting, site clearing, or test drilling for soil conditions do not count, even if capitalized.
Work under binding written contracts (enforceable, with damages at least 5% of contract price) counts, including master contracts assigned to affiliates.
Continuity Requirement
Once construction begins, a continuous program of significant physical work must be maintained. The notice provides a non-exclusive list of excusable disruptions (e.g., weather, permitting delays from agencies like FERC or EPA, supply shortages, financing issues), evaluated in the year the facility is placed in service.
- Continuity Safe Harbor: Facilities placed in service within four calendar years of the start year are deemed compliant (e.g., begin in 2025, place in service by December 31, 2029). If missed, facts-and-circumstances analysis applies.
Special Rules and Exceptions
- Low-Output Solar Facilities: For solar facilities with ≤1.5 MW output (measured in alternating current by nameplate capacity, aggregating integrated operations among related taxpayers), the Five Percent Safe Harbor remains available alongside the Physical Work Test.
- Retrofitted Facilities (80/20 Rule): Facilities with up to 20% used components qualify as new if the Physical Work Test applies only to new parts.
- Transfers: Work carries over between related parties; for unrelated parties, prior work on transferred tangible property does not count.
- Single Project Treatment: Multiple facilities operated as one (based on factors like common ownership, permits, or financing) are treated as a single facility, with determinations made upon final placement in service.
Changes from Prior Interpretations
Notice 2025-42 tightens rules to prevent circumvention:
- Eliminates the Five Percent Safe Harbor for non-low-output facilities.
- Excludes inventory items and expands non-qualifying preliminary activities.
- Specifies excusable disruptions with agency examples.
- Restricts transfers between unrelated parties.
These changes ensure “substantial portion” progress, aligning with EO 14315’s anti-manipulation goals.
Implications for Developers and Taxpayers
For wind and solar projects, the notice creates urgency: To preserve credit eligibility, significant physical work must commence before July 5, 2026. Developers should:
- Prioritize custom manufacturing and on-site foundations over preliminary steps.
- Document work meticulously, including contracts and progress reports.
- Monitor continuity, leveraging excusable disruptions for unavoidable delays.
- Consider low-output solar for flexibility if applicable.
Non-compliance risks credit loss for facilities placed in service after 2027, impacting ROI and financing. However, opportunities remain for pre-deadline projects, especially with Walker Blue’s expertise in ITC compliance and energy engineering.
Conclusion
IRS Notice 2025-42 represents a pivotal shift in clean energy incentives, balancing innovation with accountability. By focusing on physical progress, it ensures credits support genuine development. As the deadline approaches, proactive planning is essential.
At Walker Blue, LLC, we are committed to guiding clients through these changes. Our team provides end-to-end support, from beginning-of-construction certifications to full incentive optimization. Contact us to discuss how we can secure your project’s eligibility.
About Walker Blue, LLC
Walker Blue, LLC is a national expert in energy tax incentives and engineering services. We assist commercial, residential, industrial, and institutional clients in achieving energy efficiency, sustainability, and financial success through certifications, compliance, and strategic consulting. Visit www.walker-blue.com for more information or to register for our webinars on energy policy updates.
References
- IRS Notice 2025-42
- One, Big, Beautiful Bill Act (Public Law 119-21)
- Executive Order 14315
- Prior IRS Notices: 2022-61, 2013-29
