Navigating safe-harbor rules for solar and wind Sec. 48E facilities

H.R. 1, P.L. 119-21, also known as the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, amended the expiration dates for a variety of the renewable energy tax credits that were included in the Inflation Reduction Act of 2022, P.L. 117-169. Among the most notable changes is the early termination of the wind and solar energy tax credits under the Sec. 48E clean electricity investment credit. The OBBBA also added a variety of prohibit foreign entity (PFE) requirements. Taxpayers need to understand how start-of-construction dates surrounding wind and solar qualified facilities may affect the time period for placing the facilities into service and the application of prohibited-foreign-entity requirements.

Earlier start-of-construction dates

As enacted by the Inflation Reduction Act, Sec. 48E(e)(2) generally provided for the clean electricity investment credit to start to phase out as early as 2034 for any qualified investment made to a qualified facility, the construction of which begins after the 2033 calendar year. That is, as originally enacted, the credit would have begun to phase out for construction started in 2034, with only 75% of the credit allowed; for construction starting in 2035, this percentage fell to 50% of the credit; and the credit was disallowed for construction starting in 2036 and after. However, the beginning of the phaseout was dependent upon the achievement of certain emissions targets.

Altering these rules, Sec. 48E(e)(4), added by the OBBBA, accelerates the termination of the credit for wind and solar facilities whose construction begins after July 4, 2026. If the construction of the wind and solar facility begins after July 4, 2026, the qualified property must be placed in service by the taxpayer by Dec. 31, 2027, to qualify for the credit. To avoid the accelerated placed-in-service date of Dec. 31, 2027, taxpayers would need to demonstrate they started construction on or before July 4, 2026. Note that the OBBBA’s amendment does not affect related energy storage technology.

If the start of construction occurred prior to Dec. 31, 2025, and the continuity safe-harbor provision of Notice 2022-61 is relied upon, the wind and solar facilities receive an extended placed-in-service date of Dec. 31, 2029. If the start of construction began on or after Jan. 1, 2026, but on or before July 4, 2026, and assuming the continuity safe-harbor provision of Notice 2022-61 is relied upon, the wind and solar facilities receive an extended placed-in-service deadline of Dec. 31, 2030.

On July 7, 2025, the administration issued an Executive Order (EO 14315) directing Treasury to issue new and revised guidance within 45 days of the OBBBA’s enactment to ensure “policies concerning ‘beginning of construction’ are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”

Notice 2025-42, issued on Aug. 15, 2025, in response to EO 14315, provides beginning-of-construction guidance to prevent taxpayers from circumventing the statutory credit termination date and prevent the artificial manipulation of eligibility for the Sec. 48E credit for applicable wind and solar facilities. Notice 2025-42 modifies the application of the physical-work test and 5% safe harbor previously provided in Notice 2022-61 and clarified by other notices for wind and solar facilities for which construction began on or after Sept. 2, 2025 (see Notice 2013-29, as clarified, modified, and updated. 

Under Notice 2022-61, Sec. 48E projects could determine when construction began by using the 5% safe harbor or the physical-work test. Under the 5% safe harbor, construction of a facility will be considered as having begun if a taxpayer pays or incurs 5% or more of the total cost of the facility and subsequently makes continuous efforts to complete the facility. The physical-work test focuses on the nature of the work performed. If physical work performed is significant, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the test.

The Notice 2022-61 rules provide that taxpayers must also satisfy the continuity requirement, regardless of whether the physical-work test or the 5% safe harbor is met, to establish the beginning of construction. A safe harbor was provided to meet the continuity requirement if the solar or wind facility is placed in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the energy property began. (Except as otherwise specified in Notice 2021-41, the guidance provided in the prior IRS notices continues to apply, including guidance provided in Notice 2018-59.)

Modifying these rules, Notice 2025-42 limits the beginning-of-construction safe-harbor tests to include only the physical-work test for solar and wind facilities that began construction on or after Sept. 2, 2025. The notice makes an exception for a low-output solar facility, which is a solar facility with a maximum net output of not greater than 1.5 megawatts (MW). If a solar facility has a maximum net output of not greater than 1.5 MW, it can still use the 5% safe harbor or the physical-work test to prove construction begins prior to July 4, 2026.

Example 1: A taxpayer started construction of a solar facility exceeding 1.5 MW in August 2025 by meeting the 5% safe harbor. Notice 2025-42, limiting the beginning-of-construction test to only the physical-work test, does not apply. The 5% safe harbor is still available for determining the start of construction because it occurred prior to Sept. 2, 2025. Therefore, the solar facility will not have to be placed in service before Dec. 31, 2027, as the solar facility started construction prior to July 4, 2026. The continuity requirement must also be satisfied. If applying the safe harbor for continuity, the solar facility will need to be placed in service by Dec. 31, 2029, in order to claim the Sec. 48E credit.

Example 2: The facts are otherwise the same as Example 1, but the 5% safe-harbor test was met in December 2025, and no physical work has started prior to July 4, 2026. Notice 2025-42, limiting the beginning-of-construction test to only the physical-work test, applies. Therefore, the solar facility will not have started construction by July 4, 2026. The solar facility must be placed in service by Dec. 31, 2027, in order to obtain the Sec. 48E credit.

Example 3: The facts are otherwise the same as Example 2, but the solar facility produces less than 1.5 MW, and the 5% safe-harbor test was met in January 2026. Notice 2025-42, limiting the beginning-of-construction safe harbor to only the physical-work test, does not apply because the solar facility falls under the low-output exception. Therefore, the solar facility will be deemed as starting construction prior to July 5, 2026. Still, the continuity requirement must also be satisfied. If applying the safe harbor for continuity, the solar facility will need to be placed in service by Dec. 31, 2030, in order to claim the Sec. 48E credit.

PFE material assistance and start of construction

When evaluating the PFE requirements that were added to Sec. 48E under the OBBBA, taxpayers must emphasize the start of construction of the facility. The OBBBA added two new PFE rules to Sec. 48E. Under Sec. 48E(d)(6), effective for tax years beginning after July 4, 2025, a credit is not allowed if the taxpayer is a PFE, which is either a specified foreign entity (including foreign entities of concern) or a foreign-influenced entity. In addition, under Sec. 48E(b)(6), a credit is not allowed for any qualified facility or qualified interconnection property if the construction begins after Dec. 31, 2025, and the facility or property’s construction, reconstruction, or erection includes any material assistance from a PFE.

Under Sec. 7701(a)(52), a credit cannot be claimed if material assistance was received from a PFE, which occurs when a certain percentage of the value of the manufactured products or components in the project are sourced from a PFE. A PFE includes specified foreign entities and foreign-influenced entities (Sec. 7701(a)(51)). For example, a specified foreign entity would include an entity owned by, controlled by, or incorporated or headquartered in North Korea, China, Russia, or Iran (see Sec. 7701(a)(51)(B)). A foreign-influenced entity would include an entity that is owned at least 25% by a PFE, although there are several other ways to be treated as a foreign-influenced entity (Sec. 7701(a)(51)(D)).

The percentage of value sourced from a PFE is determined by dividing the total costs of all manufactured products, less the total costs of all manufactured products from a PFE, by the total costs of all the manufactured products. Material assistance is deemed to have been provided from a PFE when the cost ratio is less than the threshold percentage of:

For example, if the total costs of manufactured products going into a solar facility starting construction in 2026 is $150, and, of that amount, $84 of manufactured product is obtained from a PFE, then the material assistance cost ratio would be 44% ([150 – 84] ÷ 150]). As the cost ratio is 44%, the manufacturing would not be deemed as receiving material assistance from a PFE in 2026, and the Sec. 48E credit could be claimed for the tax year. However, if the same construction took place in the 2027 tax year, the 44% would be less than the 45% threshold, the solar facility would be deemed as receiving material assistance from a PFE, and a Sec. 48E credit would not be available.

The need to calculate material assistance from a PFE for facilities and property beginning construction after Dec. 31, 2025, means that an additional level of analysis and documentation is required to prove eligibility for the Sec. 48E credit. Many taxpayers may have looked to start construction prior to Dec. 31, 2025, in order to limit the applicability of the material-assistance rules. It is important to highlight that Notice 2025-42 does not apply when determining the beginning-of-construction rules for purposes of Sec. 7701(a)(52). Instead, under Sec. 7701(a)(51)(J), the beginning-of-construction rules applied should be similar to those of Notices 2013-29 and 2018-59, as subsequently modified, clarified, or updated as in effect on Jan. 1, 2025. Therefore, either the 5% safe harbor or physical-work test can be used to determine the start of construction, and the continuity requirement still applies.

Example 4: The facts are otherwise the same as in Example 1. Under the 5% safe harbor test, the solar facility began construction before in August 2025. If applying the safe harbor for continuity, the solar facility will need to be placed in service by Dec. 31, 2029, in order to claim the Sec. 48E credit. In addition, there is no need to assess whether Sec. 48E(b)(6) material assistance was received from a PFE, as construction started prior to Dec. 31, 2025.

Example 5: The facts are otherwise the same as in Example 2. The solar facility will not have started construction by July 4, 2026. The solar facility must be placed in service by Dec. 31, 2027, in order to obtain the Sec. 48E credit. However, as the 5% safe-harbor test is an eligible safe harbor when applying the PFE material-assistance limitations and was completed by Dec. 31, 2025, there is no need to assess whether Sec. 48E(b)(6) material assistance was received from a PFE.

Example 6: The facts are the same as in Example 3. The solar facility will be deemed as starting construction prior to July 4, 2026. The continuity requirement must also be satisfied. If applying the safe harbor for continuity, the solar facility will need to be placed in service by Dec. 31, 2030, in order to claim the Sec. 48E credit. However, construction did not start until after Dec. 31, 2025, and the taxpayer will need to assess whether Sec. 48E(b)(6) material assistance was received from a PFE before claiming the Sec. 48E credit.

Notice 2025-42 limits taxpayers’ ability to claim the start of construction began on or before July 4, 2026, for wind and solar facilities and thereby accelerates placed-in-service dates to Dec. 31, 2027, in order to claim the Sec. 48E credit. Taxpayers involved in solar projects exceeding 1.5 MW and wind projects starting on or after Sept. 2, 2025, are limited to the physical-work safe-harbor test to prove the start of construction. In addition, the added PFE material-assistance requirements need to be taken into account. Taxpayers must now navigate a more complex regulatory landscape, balancing construction timelines, sourcing decisions, and continuity requirements.

Early action and thorough documentation will be critical to securing credit eligibility and managing compliance risks.

— Lynn Mucenski-Keck, CPA, MST, is a principal in Withum’s National Tax Service Group and leader of Withum’s Clean Energy practice in New York City. She is also a member of the AICPA ESG Tax Task Force and the AICPA S Corporation Tax Technical Resource Panel. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.