The U.S. Department of the Treasury and IRS released Notice 2025-42 describing the beginning-of-construction (BOC) rules for purposes of terminating the sections 45Y and 48E credits for applicable wind and solar facilities.
Background: Clean energy tax credits under sections 45Y and 48E
Originally enacted by the Inflation Reduction Act of 2022, sections 45Y and 48E provide a tax credit for certain electricity facilities. Section 45Y provides for a tax credit for the electricity produced by facilities that are placed in service after Dec. 31, 2024, if such facility has a zero greenhouse gas emissions rate. Section 48E is a similar tax credit, but the credit is based on a taxpayer’s qualified investment (generally its tax basis) in the facility.
Following enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, solar and wind facilities that are placed in service after Dec. 31, 2027, are no longer eligible for either section 45Y or 48E. However, solar and wind facilities with a BOC date before July 5, 2026, are not subject to the Dec. 31, 2027, termination date.
Three days following OBBBA enactment, President Donald Trump issued an executive order directing the Treasury Department and IRS to issue guidance for BOC rules for applicable solar and wind facilities. The guidance, according to the executive order, intends to “ensure that policies concerning beginning of construction are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of the subject facility” was built.
Guidance specifying BOC date to qualify for section 48E and 45Y tax credits
Notice 2025-42 provides that all applicable wind or solar facilities may establish that construction has begun before July 5, 2026, by satisfying the physical work of a significant nature test (physical work test). Low-output solar facilities can establish that construction has begun by incurring 5% of the total cost of the facility (5% safe harbor).
Physical work test
Work related to the physical work test may occur on-site or off-site from the facility. No fixed minimum amount of work or monetary threshold is required to satisfy the physical work test.
Off-site work can include the manufacture of components—including mounting equipment; support structures, such as racks and rails; inverters; and certain transformers and other power conditioning equipment—as long as the components are not held in inventory by the seller of the component. Additionally, the off-site work must be performed by either the taxpayer or another person pursuant to a binding written contract.
The notice provides examples of on-site work that meets the physical work test for wind and solar facilities. For wind facilities, on-site physical work includes excavation of the foundation, setting anchor bolts into the ground or pouring the concrete pads of the foundation.
For solar facilities, on-site physical work includes installing racks or other structures to affix the photovoltaic panels, collectors or solar cells to a site. Preliminary activities—such as planning or designing, securing financing, exploring, and site clearance—are not activities that meet the physical work test.
Continuity requirement
As in prior BOC guidance, a taxpayer must engage in work that is continuous in nature. A taxpayer is deemed to meet this requirement if the solar or wind facility is placed in service by the end of the calendar year that is no more than four calendar years after the calendar year during which construction began (continuity safe harbor). Additionally, a taxpayer may demonstrate that it engaged in continuous construction even if it does not meet the continuity safe harbor based on relevant facts and circumstances.
A taxpayer that experiences construction disruptions and who does not meet the continuity safe harbor may be able to still meet the continuous construction requirement due to excusable disruptions. Notice 2025-42 provides a nonexclusive list of excusable disruptions. Those disruptions include delays due to severe weather conditions, natural disasters, delays due to obtaining permits, delays at the request of the government regarding matters of public safety, interconnection-related delays, delays in the manufacturing of custom components, etc.
5% safe harbor
Unlike with previous iterations of the BOC rules, the 5% safe harbor is not broadly available. The notice allows only “low-output” solar facilities to meet the BOC rules through application of the 5% safe harbor.
A low-output solar facility is an applicable solar facility that has a nameplate capacity with a maximum net output of not greater than 1.5 megawatt, measuring in alternating current (1.5-megawatt maximum). While the 1.5 megawatt maximum is generally measured at the level of a single solar facility, it is measured across multiple facilities if the facilities have integrated operations.
There are integrated operations if the following conditions are met: Facilities must be owned by the same or related taxpayers and must be placed in service in the same taxable year. Also, grid-connected facilities must have the same electricity interconnection point. Alternatively, non-grid-connected facilities that deliver electricity to an end user behind a utility meter must be able to support the same end user.
The cost of the facility used to determine the 5% safe harbor includes all functionally interdependent components of property owned by the taxpayer that are operated together and that can operate apart from other property to produce electricity. It also includes property that is an integral part of the qualified solar facility.
Single project
For purposes of determining whether BOC commenced, the notice allows taxpayers to group wind or solar facilities into a single project depending on relevant facts and circumstances. Factors indicating that multiple facilities are operated as part of a single project include, but are not limited to:
- The facilities are owned by a single legal entity
- The facilities are constructed on contiguous pieces of land
- The facilities are described in a common power purchase agreement or agreements
- The facilities have a common intertie
- The facilities share a common substation
- The facilities are described in one or more common environmental or other regulatory permits
- The facilities were constructed pursuant to a single master construction contract
- The construction of the facilities was financed pursuant to the same loan agreement
The notice instructs taxpayers that the determination of whether multiple facilities are operated as a single project with the same BOC date must be made in the calendar year during which the last of the multiple facilities was placed in service.
