New Treasury guidance on “beginning of construction” rules
On Aug. 15, 2025, Treasury issued Notice 2025-42 under the One Big Beautiful Bill Act (OBBBA) and pursuant to Executive Order 14315 Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources (EO) to define when a §45Y/48E solar or wind facility is considered to have “begun construction” for purposes of the credit termination provisions of the OBBBA.
Under the OBBBA, solar and wind developers can avoid the Dec. 31, 2027, phaseout of the Clean Electricity Investment Tax Credit (CEITC) and Clean Electricity Production Tax Credit (CEPTC) if they begin construction on a facility prior to July 5, 2026. While the language of the EO had caused concern that the Notice would make beginning construction more difficult, the Notice generally follows existing guidance on this topic, with some modifications noted below. The Notice is effective for wind and solar facilities that the construction of which does not begin (as determined under previous guidance) prior to Sep. 2, 2025.
Physical work text and 5% safe harbor
Prior guidance allowed for beginning construction under one of two methods – the physical work test or the 5% safe harbor. The Notice removes the 5% safe harbor as an option for all facilities, except those with an output of less than 1.5 MW, as measured in alternating current. The Notice counts all facilities sharing integrated operations toward the 1.5 MW limit.
The physical work test is a subjective “facts and circumstances” test that looks to determine whether onsite, and in some cases, offsite physical work of a significant nature begins.
The 5% safe harbor is an objective test and is satisfied when the taxpayer incurs 5% of the total cost of the energy property or facility incorporated into the project. Such total cost generally includes all direct and indirect costs properly capitalizable into the depreciable tax basis of such energy property or facility.
Some taxpayers prefer to begin construction under this method because it creates certainty, while others prefer the physical work test, which creates some uncertainty but generally requires less of a capital outlay.
Over the years, developers, tax equity providers and credit transfer buyers have established norms regarding the work required to satisfy the physical work test. While the Notice does not seem to materially change the physical work test or 5% safe harbor (outside of limiting the applicability of the 5% safe harbor), its impact on these norms is uncertain.
The continuity requirement
According to previous guidance, the beginning of construction date is only valid in respect of a facility if construction proceeds on a continuous basis until it is placed in service; this is referred to as the continuity requirement. Also as under previous guidance, a facility that is placed in service by the end of the fourth calendar year after the beginning of construction date is deemed to be constructed on a continuous basis. For instance, a facility that began construction on July 4, 2026, would qualify for CEITC/CEPTC if it is placed in service by Dec. 31, 2030. Longer construction periods beyond Dec. 31, 2030, could also satisfy the continuity requirement, but that would require a facts-and-circumstances inquiry of continuous construction, as under current guidance.
Additional considerations
The Notice permits physical work on certain facilities within a larger project to qualify, if “single project” factors are met, for determining the beginning of construction date. Buyers of partially completed projects may also retain the seller’s beginning of construction date, so long as the purchase involves more than just equipment.
The Notice does not address when a facility begins construction to avoid material assistance rules that prevent qualification when a facility has too many components manufactured by foreign entities of concern (FEOC). These rules will apply to projects that begin construction after Dec. 31, 2025, with further FEOC guidance expected as ordered by the EO. Since Treasury may have limited flexibility to make those requirements materially more restrictive due to OBBBA’s requirements, developers who rely on heavily FEOC-based supply chains should consider moving quickly to start construction before such guidance is issued.
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