Update from IRS Clarifies Criteria to Secure Clean Electricity Investment Credit

“One Big Beautiful Bill” (OBBB) was signed into law on July 4, 2025, and significantly scaled back clean energy credits from the Inflation Reduction Act. The new law accelerates the phase-outs for solar and wind energy projects, ends consumer credits for clean vehicles, and credits for home energy efficiency. 

While OBBB accelerates the phase-outs for solar and wind energy projects, the U.S. Treasury and IRS released Notice 2025-42 which details how a developer is still able to qualify for the credits. The leaders of our Construction Practice summarize the details of Notice 2025-42.

Restriction of five percent safe harbor

The Notice was released on August 15, 2025, and restricts the methods developers of wind and solar projects can use to determine whether they have begun construction.

In the past, the “Physical Work Test” and the “5% Safe Harbor” were the two methods used to determine whether a project would qualify for the credit. The “5% Safe Harbor” allowed developers to delay physical work by paying at least 5% of the project costs and showing continuous work on the project.

Under notice 2025-42, the use of the “5% Safe Harbor” rule by wind and solar facilities has been limited to low-output solar facilities, defined as facilities with an output no greater than 1.5 MW. All other wind and solar projects must use the “Physical Work Test” to qualify for the clean energy tax credit.

Using the Physical Work Test

To use the newly required “Physical Work Test” for larger wind and solar projects, a developer must demonstrate that construction began prior to July 5, 2026, or was placed in service by the end of 2027.

This test requires either offsite or onsite physical work of a significant nature, including:

Off-site physical work:

• Manufacturing of components such as:
  • Mounting equipment
  • Support structures like racks and rails
  • Inverters
  • Transformers and other power conditioning equipment

On-site physical work:

• Excavation for the foundation
• Pouring concrete foundation
• Setting of anchor bolts into the ground

The definition of preliminary activities that are excluded from “physical work of a significant nature” includes:

• Planning or designing
• Securing financing
• Exploring and researching
• Mapping and modeling
• Permits and licenses

There are other activities listed, but they all generally apply to activities of an “administrative” nature.

The guidance also outlines a “Continuity Requirement,” mandating ongoing construction progress, with a safe harbor for facilities placed in service within four years of construction start. This guidance is critical for developers who are trying to qualify before the tax credit expires.

Begin planning to secure credit before expiration

With the acceleration of sunset dates from OBBB, plans for wind and solar facilities need to be reviewed to ensure that they meet the requirements for securing the credit before expiration. Fill out the form on this page to connect with our industry-leading Construction Practice to discuss how the changes in OBBB may impact those plans.