Treasury Reduces Solar and Wind Projects Eligible for Remaining Tax Credits
The Treasury Department made it more difficult for wind and solar projects to be eligible for energy tax credits that the One Big Beautiful Bill Act (OBBB) repealed. The beginning construction requirement under the energy tax credits for wind and solar projects will depend on work actually performed rather than on costs.
New Treasury Department guidance on when a project begins construction eliminates the “5% safe harbor” for the Section 45Y clean electricity production tax credit (PTC) and the Section 48E investment tax credit (ITC) for all wind projects and for solar projects of more than 1.5 megawatts (MW). The guidance leaves in place the tougher “physical work” test, which considers the amount of work done on a project. It also implements strict continuity rules. The rules apply to projects that begin construction on or after September 2, 2025 through July 4, 2026.
OBBB repealed the PTC and ITC for wind and solar projects unless they are placed in service before 2028. Wind and solar projects that have not started construction by July 4, 2026, must be in service by the end of 2027. For projects placed in service after 2027, construction must begin before July 4, 2026 to qualify for the credits. In July, President Trump issued an executive order titled “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources,” which directed the Treasury to issue guidance to determine whether a project began or subject to the December 31, 2027 deadline.
“Physical Work” Replaces 5% Safe Harbor
The new guidance eliminates the 5% safe harbor, under which a project begins construction when the taxpayer pays or incurs 5% or more of the total cost of the facility. The guidance adopts a “physical work” test with a “facts-and-circumstances” approach to consider the amount of physical work done on a project. A key change is that a developer must have performed “physical work of a significant nature,” while, under the prior method, the develop need only to have started this work.
Both off-site and onsite work can be used to demonstrate that physical work of a significant nature has begun. Qualifying work includes:
Off-site work may include the manufacture of components, mounting equipment, support structures such as racks and rails, inverters, and transformers and other power conditioning equipment;
On-site work for wind projects may include such activities as the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation. On-site work for solar projects may include the installation of racks or other structures to affix photovoltaic (PV) panels, collectors, or solar cells to a site.
Physical work of a significant nature does not include preliminary activities, including planning, designing, permitting, site clearing, financing, and warehousing.
Given that the rules apply to projects that begin construction on or after September 2, 2025, wind and solar projects can start construction before September 2, 2025 by beginning physical work of a significant nature or by incurring 5% of project costs.
Continuity Requirements
Projects developers will have four years to finish construction. If an applicable wind or solar facility is not placed in service within four years, the project developer will have to show continuous construction to be allowed more time to finish the project. Disruptions such as weather delays, permitting, supply chain shortages, and labor stoppages are allowed. Whether a taxpayer maintains a continuous program of construction to satisfy the Continuity Requirement will be determined by the relevant facts and circumstances.
Rooftop Solar Exclusion
The changes apply to utility-scale solar and provide a significant exclusion for smaller solar facilities, such as rooftop solar for homes and businesses. Solar projects with a maximum net output of 1.5 MWs or less can continue to claim the 5% safe harbor if they begin construction after September 2, 2025, and before July 4, 2026. The exemption for smaller solar projects is highly favorable to residential solar, as the purchase of equipment is often more than 5% of the total cost of the project.