IRS Notice 2025-42: New beginning of construction guidance for clean energy credits
On August 15, 2025, the IRS released an advance copy of Notice 2025-42. The notice clarifies beginning of construction for applicable wind and solar facilities under the One Big Beautiful Bill (OBBB) Act’s termination provisions for the Clean Electricity Production Credit (Section 45Y) and Clean Electricity Investment Credit (Section 48E).
Notice 2025-42 applies to facilities where construction did not begin before September 2, 2025, as determined under IRS Notice 2022-61. This guidance aligns with Executive Order 14315, which aims to end subsidies for foreign-controlled energy sources.
Here are five key highlights from the new guidance and how it may impact your clean energy credits:
1. Termination timeline and summary
The OBBB sunsets the 45Y and 48E clean energy production and investment credits for qualified facilities that begin construction after July 4, 2026, and are placed in service after December 31, 2027.
In general, applicable wind and solar facilities must begin construction before July 5, 2026, to follow the tax credit phaseout schedule beginning in 2032.
Executive Order 14315 directed the Treasury to strictly enforce the beginning of construction-based termination provisions for applicable wind and solar facilities. Notice 2025-42 does this by eliminating the safe harbor approaches available under prior IRS guidance except for low-output solar facilities.
Notice 2025-42 does not apply to the beginning-of-construction determination when applying the foreign entity of concern/prohibited foreign entity rules under OBBB.
2. Beginning-of-construction criteria
Except for low-output solar facilities, the physical work test is now the sole method to establish beginning of construction for applicable wind and solar facilities.
The previously available 5% safe harbor has been eliminated.
The physical work test states that:
- Physical work must be of a significant nature, and can include both on-site (e.g., excavation or foundation work) and off-site (e.g., component manufacturing) activities under written binding contracts.
- Physical work of a significant nature for component manufacturing does not apply to components currently or normally held in the manufacturer’s inventory.
The beginning-of-construction determination is made at the level of a single project, which may include multiple facilities, based on all relevant facts and circumstances.
3. Continuity requirement
Included in the guidance is a continuity requirement that states taxpayers must maintain a continuous program of construction. Certain delays, such as weather, permitting or supply chain issues, are considered excusable disruptions.
The continuity safe harbor allows facilities to meet the continuity requirement if placed in service by the fourth calendar year after the beginning of construction. Excusable delays cannot extend this four-year period.
4. Low-output solar exception
Facilities with a maximum net output of less than 1.5 megawatts (AC) may still use the 5% safe harbor.
Output is measured by nameplate capacity and considers integrated operations across related facilities.
5. Transfer and retrofitting rules
A partially or fully developed applicable wind or solar facility can be transferred without losing its qualification under the physical work test. However, the transferee may have limited credit eligibility based on their qualified investment. If the transfer is between unrelated parties, pre-transfer work is not taken into account for the physical work test.
Retrofitted facilities must meet the 80/20 rule, in which used components comprise less than or equal to 20% of the total value.
How Wipfli can help
With key credits phasing out and new deadlines looming, Wipfli is here to help you navigate the OBBB’s sweeping changes to energy incentives. Our experienced team can guide you through eligibility, compliance and planning of new and existing projects to help you maximize savings before time runs out.
Reach out today to help protect your investments and unlock energy tax advantages.
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