After the One Big Beautiful Bill Act (OBBB) and recent IRS guidance, practitioners will need to shift their strategy to avoid jeopardizing a clean energy project’s eligibility for tax incentives. This is particularly true for wind and solar projects, which face accelerated deadlines, significant changes to the “beginning of construction” (BOC) rules, and new foreign entity restrictions.
Background
The Inflation Reduction Act created the tech-neutral production tax credit under IRC § 45Y and investment tax credit under IRC § 48E. To qualify, projects had to begin construction before a specific deadline, which taxpayers could establish by meeting either the physical work test or the 5% safe harbor, and then maintain continuity, typically by placing the project in service within four years.
The OBBB dramatically altered this landscape. Among other things, the law imposed an accelerated credit termination date for wind and solar projects – taxpayers now must begin construction before July 4, 2026, to qualify for the full credit. It also introduced significant new foreign entity of concern restrictions.
The IRS followed up with more details in August with Notice 2025-42, which is “very targeted only to the termination of sections 45Y and 48E,” according to Julie Chapel of KPMG, speaking on an October 20 panel of the ABA’s Tax Section. For wind and solar projects beginning construction on or after September 2, 2025, the notice eliminates the 5% safe harbor, except for small projects. “The big headline,” Chapel said, is that developers must now rely on the physical work test. The notice also tightens the continuity requirement for projects that fall outside the four-year safe harbor, imposing a more onerous “continuous program of construction” standard.
A Shift to Facts-and-Circumstances
Eliminating the 5% safe harbor was a direct response to legislative and administrative pressure to end what some lawmakers criticized as overly permissive “shovel in the ground” standards for starting construction, explained ABA panel moderator Ryan Phelps of Holland & Knight. While the new guidance retains the long-standing physical work test, practitioners should anticipate a higher level of scrutiny from the IRS.
“With getting rid of the 5% safe harbor, it is a more holistic test. It’s facts and circumstances,” said KPMG’s Praveen Ayyagari during the panel. He added that “it’s going to really turn on advisors to prove that beginning of construction has actually occurred, using a variety of factors.” Amid the uncertainty, practitioners recommend robust and comprehensive documentation to support a taxpayer’s BOC position.
The Rise of On-Site Work
For years, the industry has heavily favored using off-site manufacturing of components like transformers to establish BOC, panelists noted. However, with the 5% safe harbor gone and manufacturing queues potentially full, a new trend is emerging.
“I do think there’s going to be more and more on-site work being completed to establish BOC over the next year or two,” said Phelps.
On-site work, such as excavating foundations or building access roads, has the advantage of being clearly tied to a specific project, which may be “looked on more favorably under scrutiny,” according to Ayyagari. “I think it might be easier to … meet that facts-and-circumstances test,” he added.
Navigating Pitfalls and Strategies
ABA panelists also offered suggestions for taxpayers and their advisors moving forward in the new energy credit landscape.
Unintentional beginning of construction.
Practitioners must be wary of clients unintentionally starting construction too early, which can jeopardize a project’s timeline for meeting the four-year continuity safe harbor. This often occurs with on-site work. “You’ll have crews out there that are doing site prep … and sometimes they’ll end up constructing a maintenance road,” explained Hannah Hawkins of Deloitte. This can cross the line from preliminary activity into the beginning of physical work. While such mistakes can be fixed, for instance by abandoning and destroying the road, corrections can be expensive and create documentation headaches.
Defective binding written contracts.
For developers still relying on off-site manufacturing, a valid binding, written contract is critical, panelists stressed. “It’s so much harder to sort of reverse engineer yourself into a binding, written contract,” said Hawkins. She recommends having advisors involved “early in the process.” Phelps noted that another common oversight is failing to ensure that agreements with subcontractors also meet the binding written contract requirements, which can invalidate the entire BOC strategy.
Failing the continuity requirement.
For projects at risk of missing the four-year continuity safe harbor, the new, stricter “continuous program of construction” standard presents a significant hurdle. Unlike the old “continuous efforts” test, this standard requires ongoing physical work of a significant nature. “As early as possible, when I think the company is concerned that they may not be able to meet the safe harbor, … I think that’s the time to start thinking about how to document,” advised Jarrett Jacinto of Deloitte. If a project is at risk, developers should immediately begin documenting all ongoing work and any excusable disruptions to build a robust case, as it is “a lot harder to sort of catch up and to sort of recreate the history.”
Not asking the right questions upfront.
Given the new “facts-and-circumstances world,” Ayyagari stressed that it is “better to ask comprehensive questions at the outset and get tax advisors involved at the beginning of the process.” He also suggests asking clients what has to be customized. “Customized property has less of a risk of being seen as inventory if it’s offsite work,” he noted. Also on the list of questions to ask: Can the item “be somewhat standardized so that it could be used at an alternative site if needed?” This provides flexibility if a project plan changes, he said.
And Ayyagari recommends ensuring clients can enter into a contract in time for the manufacturer to meet the deadline. “It’s crucial to use written, binding contracts prior to the manufacturer’s construction or production.”
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