On August 15, 2025, the IRS issued Notice 2025-42 (the Notice), providing updated guidance on how to determine beginning of construction (BOC) for wind and solar facilities following the significant changes made to Sections 45Y and 48E by the One Big Beautiful Bill Act (OBBBA). The Notice was issued in response to President Donald Trump’s July 7, 2025 executive order titled "Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources," directing the Secretary of the Treasury (Treasury) to issue revised guidance on determining BOC for wind and solar technologies within 45 days of the enactment of the OBBBA.
Prior to the Notice, there were traditionally two methods used to determine BOC for these facilities: the “Physical Work Test” and the “Five Percent Safe Harbor.” There are a series of Notices issued (including Notice 2013-29 and Notice 2022-61) that provide explanations of both. Generally speaking, the Physical Work Test establishes a BOC date when “physical work of a significant nature begins.” The Five Percent Safe Harbor, however, allows a taxpayer to meet BOC when “five percent or more of the total cost of the facility” is incurred by the taxpayer, followed by a continuous effort to complete the facility. This continuous effort is referred to as the “Continuity Requirement” and can be met by using the “Continuity Safe Harbor.” Notice 2025-42, however, makes changes to this previous status quo for certain facilities.
The following are some of the most significant changes implemented by the Notice.
- Eliminates the “Five Percent Safe Harbor” (except for low output solar facilities of 1.5MWs or less) when establishing whether BOC has occurred before the July 5, 2026 deadline for applicable solar and wind facilities.
- A modified physical work test remains, with construction beginning when “physical work of a significant nature” begins (whether by the taxpayer or by persons contracting with the taxpayer under a written binding contract with certain requirements). Note that the focus is on the nature of the work rather than its cost or the amount of the work.
- Physical work can include either on-site or off-site work but excludes production of components normally held for inventory.
- The Notice provides specific examples of both on-site and off-site work that qualifies for the revised BOC guidelines.
- Exclusion of preliminary activities such as site clearing, securing financing, surveying, designing, and permitting are still not considered “physical work of a significant nature.”
- To maintain the BOC date established, taxpayers must still either place the facility in service within four years of the start of construction year, or demonstrate continuous progress has been made toward completion. Exceptions may apply for disruptions outside of the taxpayer’s control for the Continuity Requirement, but not for the Continuity Safe Harbor.
- If multiple facilities are operated as a single project, then for BOC determination they should be considered one applicable wind or solar facility.
- If construction begins (per Notice 2022-61) prior to September 2, 2025 (including those that satisfied the Five Percent Safe Harbor prior to such date), the facility will not be impacted by the Notice.
- Non-solar or wind clean energy facilities, e.g., geothermal and battery storage, are not impacted by the Notice.
While the Notice did limit options for taxpayers to establish BOC for wind and solar facilities, the updated guidance does still allow for opportunities for tax planning to meet the revised BOC implementation date of July 4, 2026 (dates established in OBBBA to extend placed-in-service date limitations) or being exempt from the updated guidance if the traditional rules are met by September 2, 2025. Speak to a tax professional about any clean energy project-related plans you may have, including the impacts the Notice might have on projects to be started before July 4, 2026.
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