IRS Issues New Beginning of Construction Rules for Wind and Solar Projects Under Sections 45Y and 48E

The IRS has released Notice 2025-42, a major update that reshapes how wind and solar project developers determine whether their facilities begin construction in time to qualify for the clean electricity production credit under section 45Y and the clean electricity investment credit under section 48E. These rules matter because the One, Big, Beautiful Bill Act (OBBBA) terminates both credits for applicable wind and solar facilities placed in service after December 31, 2027, unless construction began before July 5, 2026.

This guidance, issued in response to Executive Order 14315, tightens the rules significantly and eliminates the broad flexibility developers previously relied on. The notice also clarifies the limited circumstances in which the Five Percent Safe Harbor still applies and introduces stricter standards to prevent artificially speeding up project eligibility.

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Why These Rules Matter

Under OBBBA, wind and solar developers have a narrow window to begin construction if they want to secure eligibility for credits in 2028 and beyond. The IRS was directed to enforce these termination provisions aggressively, and Notice 2025-42 is the result. The notice replaces the previous flexible rules with a stricter approach that focuses on actual physical work, sustained construction activity, and preventing manipulation through early contracts or minimal preliminary work.

The result is a much higher bar for proving that construction truly began before the statutory deadline.

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Only the Physical Work Test Counts, With One Limited Exception

The IRS makes clear that, with the exception of low output solar facilities, the Five Percent Safe Harbor is no longer available. Developers must now rely on one method only:

The Physical Work Test

Construction begins when physical work of a significant nature starts, either on site or off site. It does not matter how much has been spent, only whether meaningful physical work has taken place.

Examples of qualifying work include:

• Excavation for turbine foundations

• Setting anchor bolts or pouring concrete pads

• Installing solar racks, rails, or mounting structures

• Manufacturing custom components like towers, inverters, or transformers under a binding contract

Work that does not count includes planning, design, permitting, site clearing, geotechnical surveys, mapping, financing, and any work involving components held in inventory.

To qualify, the work must be associated with property integral to the actual facility, not to transmission equipment or unrelated site uses.

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What Counts as Physical Work of a Significant Nature

The IRS lists both on site and off site activities that qualify, provided they relate to property integral to producing electricity.

Qualifying off site work may include:

• Manufacturing towers or blades for wind turbines

• Building inverters, transformers, or power conditioning equipment

• Assembling racking systems for solar modules

But the components cannot come from inventory. Manufacturers must build them specifically for the project under a binding written contract.

Qualifying on site work may include:

• Laying foundations for wind turbines

• Installing PV mounting structures

• Setting up support structures for solar arrays

These examples show that simply preparing a site is not enough. The IRS expects a meaningful step that advances the project toward producing electricity.

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Preliminary Activities Do Not Count

Notice 2025-42 emphasizes that many common early stage project activities do not meet the Physical Work Test. These include:

• Site clearing

• Environmental studies

• Engineering design

• Permitting

• Financing

• Geotechnical drilling

• Land contouring

• Removing older equipment

• Mapping and modeling resource potential

These tasks may be necessary for a project but cannot be used to establish the beginning of construction.

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New Requirements for the Continuous Construction Standard

Starting physical work is not enough. Developers must also maintain continuous construction until the project is placed in service.

The IRS allows certain delays beyond the taxpayer's control, such as:

• Severe weather

• Supply chain disruptions

• Labor shortages

• Transmission upgrade delays

• Government requested delays

• Natural disasters

• Financing delays

However, the four year Continuity Safe Harbor still applies. If a project is placed in service within four calendar years of starting physical work, it automatically meets the continuity requirement.

For example, if construction begins in 2025, the project must be placed in service by the end of 2029.

If it slips into 2030, the IRS will examine facts and circumstances to determine whether continuity was met, which creates risk and uncertainty.

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Rules for Contracts and Component Manufacturing

Work performed under a binding written contract can count toward beginning of construction, but only if:

• The contract is enforceable under local law

• It does not limit damages below five percent of the contract price

• The contract is entered into before work begins

Master contracts may still be used, followed by assignment to a special purpose vehicle, as long as the equipment is not inventory and the relationship rules are satisfied.

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Multiple Facilities Can Be Treated as One Project

If several facilities operate as part of a single project, they can be treated as one facility for purposes of the beginning of construction rules. Factors that indicate a single project include:

• Common ownership

• Contiguous land parcels

• Common substation or interconnection

• Shared permits

• Single power purchase agreement

• Unified construction contract

• Shared financing arrangements

This determination must be made in the year the final facility is placed in service.

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The 80-20 Rule for Retrofitted Facilities Still Applies

Retrofitted wind or solar facilities can qualify as new, provided the value of the new components exceeds eighty percent of the total value of the facility. Only work on the new components counts for beginning construction.

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Transfer Rules for Wind and Solar Projects

Taxpayers do not need to own a facility when construction begins. A facility can be transferred without losing its beginning of construction status. However:

• Work performed by an unrelated party before the transfer does not count toward the transferee's Physical Work Test.

• Moving equipment from one site to another is allowed, as long as the original work counts toward the same taxpayer.

• Transfers of equipment alone between unrelated parties do not carry over beginning of construction status.

These rules prevent developers from purchasing early manufactured components solely to claim the start of construction.

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A Limited Exception: Five Percent Safe Harbor for Low Output Solar

The only facilities permitted to use the Five Percent Safe Harbor are low output solar facilities with nameplate capacity of 1.5 megawatts or less, measured in alternating current.

To qualify, the facility must meet:

• The 1.5 MW maximum output test

• Measurement rules for AC versus DC

• Restrictions on integrated operations across related taxpayers

This exception is narrow and targeted toward residential and small commercial solar installations rather than utility scale facilities.

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Effective Date and Interaction With Prior Guidance

These rules apply to facilities whose construction did not begin before September 2, 2025, using the older Notice 2022-61 standards.

Other portions of Notice 2022-61 are modified or replaced by this new guidance. Developers can no longer rely on the broad pre-OBBBA beginning of construction rules for projects attempting to meet the July 5, 2026 deadline.

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How Margen Helps Developers Apply These New Construction Rules

Beginning of construction rules under sections 45Y and 48E now involve strict tests, detailed factual analysis, and narrower pathways for claiming credit eligibility. Margen helps developers, tax professionals, and investors determine compliance by answering questions such as:

• "Which activities qualify as physical work for my specific wind or solar project?"

• "How do I confirm whether a work stoppage counts as an excusable disruption?"

• "Does my solar installation qualify for the 1.5 MW safe harbor?"

• "Can I treat multiple phases or sites as a single project?"

• "Do my component contracts count for beginning construction?"

• "How do these rules apply to retrofits, transfers, or master contracts?"

Margen automatically references the latest IRS notices and regulations, helping teams verify eligibility, document compliance, and avoid costly misinterpretations as the 2026 deadline approaches.

For full details, see IRS Notice 2025-42.