News Summary
The IRS has announced tighter construction requirements for wind and solar energy projects to qualify for tax credits. The updated guidelines, effective for projects commencing after September 2025, heavily restrict the five percent safe harbor provision. Only small solar projects are eligible for this provision, while larger projects must meet the Physical Work Test. Developers need to be aware of impending deadlines and the impact of new regulations aimed at ensuring domestic energy project eligibility, reflecting a broader initiative to enhance U.S. energy independence.
IRS Tightens Construction Requirements for Wind and Solar Energy Projects
Washington, D.C. – The Internal Revenue Service (IRS) has announced new guidance that tightens the “beginning of construction” requirements for wind and solar facilities. The announcement, issued as Notice 2025-42 on August 15, 2025, stipulates that projects must adhere to updated regulations to qualify for clean electricity tax credits under Sections 45Y and 48E of the Internal Revenue Code.
This change comes in response to Executive Order 14315, enacted on July 7, 2025, which aims to end subsidies for foreign-controlled energy sources. The new IRS rules will take effect for energy projects that do not commence construction under previous guidelines before September 2, 2025.
Key Changes to the Five Percent Safe Harbor
While the latest notice maintains the existing Physical Work Test, it introduces limitations for the five percent safe harbor provision. Under this new guidance, the five percent safe harbor will be applicable only to small solar projects with a nameplate capacity of 1.5 megawatts (MW) or less. Larger wind and solar projects will no longer have access to this safe harbor; instead, they must meet the Physical Work Test requirements to qualify for tax credits.
Developers who planned to rely on the five percent safe harbor for larger projects must ensure that construction commenced under the previous guidelines before the September 2, 2025 deadline.
Physical Work Test Overview
The Physical Work Test allows significant physical work to take place on site or off-site for both wind and solar energy projects. Acceptable activities include tasks such as excavation for wind turbine foundations, pouring concrete pads, and assembling structures for solar panels. This test is integral to determining whether a project can qualify for the tax credits outlined in the IRS regulations.
Continuity Requirement and Future Guidance
The continuity requirement within the guidance remains unchanged, requiring that projects need to be operational by the end of the calendar year that is four years after the start of construction. However, the current notice does not clarify how the new Foreign Entities of Concern (FEOC) framework affects the beginning of construction standard, indicating that further guidance is anticipated.
Additionally, developers should be aware of the stipulations under the One Big Beautiful Bill Act (OBBBA), which mandates that wind and solar facilities must initiate construction before July 5, 2026, or become fully operational by December 31, 2027, to be eligible for tax credits.
Background and Previous Guidance
The IRS previously provided guidance on beginning construction criteria through Notice 2013-29 and Notice 2018-59. The intent of this updated clarity is to impose stricter regulations and enhance eligibility for both the Section 45Y clean electricity production credit and the Section 48E clean electricity investment credit.
The IRS’s clarification reflects a broader initiative to ensure that domestic energy projects qualify for available tax credits, especially amidst growing concerns surrounding foreign control of energy resources. As the renewable energy sector continues to evolve, developers are encouraged to stay updated on IRS requirements to successfully navigate the changing landscape.
Ultimately, these changes serve to reinforce U.S. energy independence and support local clean energy initiatives, as policymakers and lawmakers look toward a sustainable future.
Deeper Dive: News & Info About This Topic
HERE Resources
New IRS Guidelines Alter Renewable Energy Tax Credits
How to Choose the Right Lighting for Your Home Renovation Project: Key Considerations
Additional Resources
- OurQuadCities: IRS to Keep Wind, Solar Companies from Tax Breaks
- RTO Insider: IRS Guidance on Wind and Solar Credits
- New York Times: IRS Wind, Solar Tax Credits
- PwC: IRS Sheds Light on Construction Rules for Wind and Solar Credits
- Wikipedia: Renewable Energy in the United States
Author: STAFF HERE MILWAUKEE WRITER
MILWAUKEE STAFF WRITER The MILWAUKEE STAFF WRITER represents the experienced team at HEREMilwaukee.com, your go-to source for actionable local news and information in Milwaukee, Milwaukee County, and beyond. Specializing in "news you can use," we cover essential topics like product reviews for personal and business needs, local business directories, politics, real estate trends, neighborhood insights, and state news affecting the area—with deep expertise drawn from years of dedicated reporting and strong community input, including local press releases and business updates. We deliver top reporting on high-value events such as Summerfest, Milwaukee Film Festival, and the Milwaukee Boat Show. Our coverage extends to key organizations like the Metropolitan Milwaukee Association of Commerce and Visit Milwaukee, plus leading businesses in manufacturing and brewing that power the local economy such as Harley-Davidson and MillerCoors. As part of the broader HERE network, we provide comprehensive, credible insights into Wisconsin's dynamic landscape.
