Notice 2025-42: Beginning of construction requirements for termination of clean electricity tax credits under sections 45Y and 48E
Guidance on the "beginning of construction" requirements for wind and solar facilities
The IRS today released Notice 2025-42, providing guidance on the "beginning of construction" requirements for wind and solar facilities in relation to the termination of clean electricity production credits (section 45Y) and clean electricity investment credits (section 48E).
The guidance aligns with Executive Order 14315, which directed the Secretary of the Treasury to issued revised guidance to “strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E” for wind and solar facilities and “to ensure that policies concerning the ‘beginning of construction’ are not circumvented” (read TaxNewsFlash). Under the “One Big Beautiful Bill Act” (OBBBA), facilities placed in service after December 31, 2027, and whose construction begins after July 4, 2026, will no longer qualify for the credits (read the KPMG report).
The notice tightens the “beginning of construction” requirements in various ways:
- The “Five Percent Safe Harbor,” previously available under IRS notices, is largely excluded, except for low-output solar facilities (1.5 megawatts or less).
- Instead, taxpayers must use the “Physical Work Test” to demonstrate construction has begun before July 5, 2026. This test requires physical work of a significant nature, such as excavation or installation of key components, and excludes preliminary activities like planning or permitting.
- The guidance also outlines a “Continuity Requirement,” mandating ongoing construction progress, with a safe harbor for facilities placed in service within four years of construction start.
The guidance applies to facilities whose construction begins (as determined under section 5 of Notice 2022-61) on or after September 2, 2025.