The renewable energy sector faces significant regulatory changes following the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. Through IRS Notice 2025-42, issued under Executive Order 14315, the Treasury Department has substantially restructured the framework for determining when construction begins for wind and solar projects seeking certain renewable energy credits. These changes create both immediate challenges and planning opportunities.
The Legislative Framework: Credit Preservation Windows and Deadlines
The OBBBA eliminated clean electricity production credits under Section 45Y and investment credits under Section 48E for applicable wind and solar projects placed in service after December 31, 2027. However, this cut-off applies only to projects where construction begins after July 4, 2026, which is exactly twelve months after the OBBBA's enactment date. This framework creates a narrow but feasible window for developers to commence construction while preserving full eligibility for substantial federal tax credits.
Developers who successfully begin construction before the July 4, 2026, deadline can preserve credits, even if their projects are not placed in service until after the December 31, 2027, termination date.
The Construction Deadline Framework: Understanding Key Dates and Requirements
The regulatory landscape now operates under three distinct timeframes, each governed by different rules and offering varying levels of flexibility for project development.
- Projects Beginning Construction Before September 2,
2025
Projects beginning construction prior to September 2025, enjoy the most favorable status under the existing Notice 2022-61 and Notice 2013-19 framework. These projects, already in development, are subject to both the Physical Work Test and the Five Percent Safe Harbor and are not subject to the retroactive application of more restrictive standards under Notice 2025-42. - Transition Period: September 2, 2025, through July 4,
2026
Developers beginning construction during this window must navigate significantly more restrictive requirements under Notice 2025-42. Successful compliance preserves full credit eligibility. The elimination of the Five Percent Safe Harbor for most projects during this period represents a fundamental shift in project development financing, requiring earlier commitment of substantial resources to physical work activities. - Post-July 4, 2026, Projects
Developers starting projects after July 4, 2026, face the stark reality of credit termination for projects placed in service after December 31, 2027. This compressed timeline, just eighteen months from the construction deadline to the final placement in service date, effectively eliminates the feasibility of most large-scale wind and solar development.
Physical Work Test: The New Standard for Construction Commencement
Notice 2025-42 establishes the Physical Work Test as the sole method for determining the beginning of construction during the critical transition period, with narrow exceptions. This represents a significant departure from the permissive dual-track approach under prior guidance, where developers could choose between physical work activities and financial commitments to establish construction commencement.
The Physical Work Test focuses on the nature rather than the amount of work performed, but the regulatory definition of "significant nature" creates practical challenges. For wind projects, qualifying activities include foundation excavation, anchor bolt installation, or concrete pad pouring. Off-site manufacturing of wind turbine components can qualify, but only under binding written contracts for non-inventory items with clear project-specific allocation methods.
Solar projects face similar requirements, with qualifying on-site work including installation of mounting racks and panel affixing systems. The manufacturing of inverters, transformers, and mounting equipment can satisfy off-site work requirements under appropriate contractual arrangements. Notably absent from qualifying activities are preliminary development tasks such as permitting, financing, site preparation, and environmental studies, activities that previously could contribute to the beginning of construction determinations.
The Small Solar Exception: Limited Relief for Distributed Generation
Recognizing the different development patterns of smaller distributed solar projects, Notice 2025-42 provides a narrow exception preserving the Five Percent Safe Harbor for "low output solar projects" with maximum net output of 1.5 megawatts as measured in AC or less. This exception reflects practical realities of smaller project economics while maintaining restrictive rules for utility-scale development.
The 1.5 MW threshold applies at the project level, measured by nameplate generating capacity at the time of placement in service. However, the "integrated operations" rule requires aggregated measurement for related projects that share ownership, are placed in service in the same taxable year, and transmit electricity through the same interconnection point. This anti-gaming provision prevents developers from artificially segmenting larger projects to qualify for the small solar exception.
Continuity Requirements: Managing Development Risk
The Physical Work Test operates in conjunction with continuity requirements designed to ensure genuine project development rather than token compliance activities. The Continuity Safe Harbor provides that projects placed in service within four calendar years of construction commencement automatically satisfy continuity requirements, regardless of intervening delays or disruptions.
For projects beginning construction during the critical August 2025 through July 2026 window, this safe harbor creates a placement in service deadline extending through 2029 or 2030, well beyond the December 31, 2027, credit termination date. This timing provides essential flexibility for projects that successfully establish the beginning of construction before the July 4, 2026, deadline.
Notice 2025-42 includes an extensive list of excusable disruptions that will not disrupt continuity, including severe weather, natural disasters, government permit delays, interconnection issues, custom component manufacturing delays, labor stoppages, and supply shortages. These provisions recognize the complex realities of renewable energy development while maintaining pressure for continuous progress toward completion.
Strategic Implications for Project Development
The new framework creates a fundamental shift in prioritizing project development. Developers that successfully commence construction before July 4, 2026, preserve credit utilization, potentially worth 20-30% of total project value, while projects beginning construction afterward face either compressed development timelines or elimination of credit eligibility altogether.
This cut-off date demands immediate strategic reassessment of existing and immediate project pipelines. Developers must prioritize projects capable of satisfying Physical Work Test requirements before the July 4, 2026, deadline, potentially accelerating capital commitments and construction activities beyond normal development schedules. Projects unable to meet this timeline may require fundamental restructuring to account for reduced economic returns.
The elimination of the Five Percent Safe Harbor increases both capital requirements and development risk during the permitting and early development phases. Previously, developers could establish the beginning of construction through financial commitments while continuing to refine project designs and secure final approvals. The Physical Work Test requires actual commencement of construction activities, increasing exposure to regulatory and market risks during project development.
Compliance Strategies and Risk Management
Success under the new framework requires meticulous documentation and proactive risk management. Developers must maintain contemporaneous records of all physical work activities, ensuring clear evidence of compliance with both timing and substantive requirements. Binding written contracts for third-party work must be in place before activities commence, with explicit provisions linking work to specific project development.
For multi-project developments, component allocation becomes critically important. Where manufacturers produce equipment for multiple projects, Notice 2025-42 requires "reasonable methods" for associating individual components with particular projects. Clear contractual provisions and tracking systems are essential to avoid disputes during later examinations.
Transfer and assignment strategies require careful analysis under the new rules. While Notice 2025-42 generally permits project transfers without losing beginning of construction qualification, transfers between unrelated parties reset the Physical Work Test analysis. Strategic structuring of ownership and development arrangements can preserve qualification while accommodating commercial needs.
Conclusion: Navigating the Transition
The OBBBA and implementing guidance represent a substantial change to renewable energy tax credit eligibility. While the new rules significantly restrict pathways to credit qualification, they provide clear standards for developers willing to accelerate development timelines and commit substantial resources during the permitting phase.
Immediate Action is Necessary
Projects capable of commencing qualifying physical work before July 4, 2026, must prioritize activities and resource allocation to meet this critical deadline. Those unable to satisfy these requirements must reassess project economics and development strategies to account for a fundamentally altered incentive structure.
The current transition, while challenging, provides sufficient clarity and lead time for strategic planning. Developers who move quickly and strategically can preserve credits for projects placed in service beyond 2027.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
