News Summary
The IRS has announced new guidance that tightens construction requirements for tax credits related to wind and solar energy projects. This change eliminates the 5% Safe Harbor option and emphasizes physical construction activities. Critics worry these new regulations may hinder low-carbon energy developments and raise electricity costs. All facilities must commence construction by July 5, 2026, to qualify for credits, reflecting deeper tensions within the Republican party over energy legislation. Stakeholders are urged to adapt to the new rules to ensure access to important tax incentives.
Washington, D.C. – New guidance from the Department of Treasury and the Internal Revenue Service (IRS) has tightened the construction requirements for tax credits available to wind and solar energy projects, responding to an executive order aimed at eliminating subsidies for foreign-controlled energy sources. Released on August 15, 2025, IRS Notice 2025-42 outlines new definitions for “beginning construction” under the Tech-Neutral Tax Credits in Sections 45Y and 48E, with a deadline for construction activities set for July 4, 2026.
The new regulations are significant for the renewable energy sector, as they eliminate the previously applied 5% Safe Harbor option for demonstrating that construction has commenced for all wind facilities and most solar projects. Instead, the IRS will now focus more on the nature of the construction activities undertaken, as outlined in the latest guidance. The Physical Work Test remains an option for facilities looking to qualify. This test can be satisfied through actual onsite construction work or offsite activities under a binding contract, which includes the manufacturing of necessary equipment.
The IRS’ consideration comes after the One Big Beautiful Bill was enacted in July 2025, ending tax credits for wind and solar facilities that begin operations after December 31, 2027, unless construction on these projects starts by July 5, 2026. The regulations apply to any wind or solar facilities commencing construction on or after September 2, 2025, while projects that met the previous 5% Safe Harbor criteria prior to this date will retain their qualification.
The guidance also includes a Continuity Safe Harbor provision, indicating that a facility placed in service within four years after construction starts will still satisfy the continuity requirements. However, no specific documentation requirements for continuous construction programs were detailed in the new regulations. Additionally, solar facilities with a maximum output of less than 1.5 megawatts can still utilize the now-abolished 5% Safe Harbor.
Industry experts have expressed concern over the newly articulated standards, viewing them as more restrictive than past regulations. The emphasis on physical work, rather than a financial threshold to demonstrate construction commencement, raises worries that these changes will slow down the development of low-carbon energy projects and contribute to rising electricity costs. Critics from within the renewable energy sector have stated the new rules introduce hurdles to wind and solar projects and undermine earlier compromises made during legislative negotiations.
According to reports, these changes in guidance reflect existing tensions within the Republican party, particularly between moderate and conservative members during the development of the tax credit legislation. Senator Chuck Grassley has noted that the guidance offers a workable approach for the industry to meet future energy demands.
Furthermore, the new requirements imply a stricter interpretation of the standards for proving that construction has begun—now necessitating demonstrable ongoing construction activities rather than merely showing financial investment. Activities such as surveys and test drilling will not qualify as “physical work of significant nature,” impacting many projects relying on these tasks as preliminary steps.
As the deadline for construction approaches, stakeholders in the renewable energy sector are urged to prepare for these regulatory changes carefully. Companies will need to keep detailed documentation and ensure compliance with the new standards to avoid losing access to vital tax credits that can significantly affect their financial outlook in what is a rapidly evolving energy landscape.
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Additional Resources
- The Hill: Treasury Guidance on Wind and Solar Tax Credits
- Utility Dive: Treasury Commence Construction for Wind and Solar Tax Credits
- Wall Street Journal: European Renewable Stocks Rise After U.S. Tax Credit Guidance
- Recharge News: Wind Power Stocks Surge After U.S. Tax Credit Specification
- Politico Pro: Treasury Reportedly Tightens Screws on Tax Credits for Renewables
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