After passage of the One Big Beautiful Bill Act (OBBBA), IRS Notice 2025-42 eliminated the “Five Percent Safe Harbor” allowance for solar facilities with more than 1.5 MWac of generation capacity. As a result, most commercial solar projects must now meet rigorous “physical work of a significant nature” requirements to establish federal tax credit eligibility. Projects that miss this deadline face an 18-month placed-in-service window that could be difficult to meet.
In a post-OBBBA environment, solar project tax credit optimization is fundamentally an exercise in meeting the U.S. Department of Treasury’s so-called “beginning of construction” requirements ahead of a fast-approaching July 4, 2026, deadline. Here is a high-level overview of IRS standards pertaining to Notice 2025-42, along with an overview of critical success factors for establishing and maintaining solar project tax credit eligibility.
Beginning Construction Date
Solar power generation projects that commence construction after Sept. 2, 2025—the effective start date for Notice 2025-42—only qualify for Five Percent Safe Harbor if the installed capacity does not exceed 1.5 MWac. Per IRS guidance, solar facilities that exceed 1.5 MWac must now satisfy a new Physical Work Test to establish eligibility for the Section 48E investment tax credit (ITC) or Section 45Y production tax credit (PTC). In other words, the Physical Work Test is a new IRS standard used to determine when construction officially “begins” for tax credit qualification purposes.
As the name suggests, the Physical Work Test focuses on the nature of physical work activities performed. To meet the Physical Work Test, owners must demonstrate that “physical work of a significant nature” has started. Importantly, project owners can meet this standard using qualifying onsite physical work activities, carefully qualified offsite manufacturing activities, or a combination of both. (For a deep dive on qualifying work activities, see VDE Americas’ technical memorandum, “Navigating Beginning of Construction Requirements for Solar Projects,” available at bit.ly/VDE-POWER.) While the Physical Work Test is available to all commercial solar projects, it is the exclusive means of establishing start of construction for tax credit eligibility for facilities larger than 1.5 MWac.
Federal Tax Credit Impacts
Under Notice 2025-42, a solar project’s beginning of construction date affects a wide range of critical tax credit parameters. Generally, the earlier a project establishes its beginning of construction date the more it can benefit from improved project economics and reduced execution risks.
For both the ITC and PTC, the official beginning of construction date locks in applicable prevailing wage rates and apprenticeship level requirements. Moreover, the beginning of construction date also sets the U.S.-made content requirements for the 10% Domestic Content Bonus Credit. For PTC purposes, the beginning of construction date locks in a project’s ability to access the 10% Energy Community Tax Credit Bonus.
Importantly, the beginning of construction date also impacts a project’s exposure to Foreign Entity of Concern (FEOC) tax credit restrictions. On one hand, projects that started construction prior to Sept. 2, 2025, have limited exposure to supply chain risks associated with foreign companies linked to China, Russia, Iran, or North Korea. On the other hand, Notice 2025-42 introduced FEOC credit restrictions that escalate over time based on the official beginning of construction date.
Note that Section 48E triggers a full ITC recapture in the event of prohibited payments, whereas Section 45Y appears to deny PTC credits only in specific years when prohibited payments occur. These differences may be relevant to projects with Chinese supply chain exposure. Treasury recently released long-awaited Notice 2026-15 to provide further guidance on credit restrictions.
Placed in Service Date
In the wake of the OBBBA, project stakeholders should endeavor to meet the July 4 beginning of construction deadline wherever practicable. Projects that meet this deadline qualify for a four-year continuity safe harbor triggered based on the beginning of construction calendar year. In other words, projects that meet the July 4 deadline and began or will begin construction last year or this year automatically satisfy Treasury’s continuous program of construction requirements so long as they are placed in service by the end of 2029 or 2030, respectively.
Qualifying projects that extend beyond this four-year continuity safe harbor period can still qualify for tax credits. However, the administrative burden increases significantly, as these projects must be able to demonstrate continuous construction progress.
Strategies for demonstrating progress include performing physical construction activities, documenting timelines for work performed, maintaining financial evidence of ongoing progress, and thoroughly tracking unavoidable work delays. Examples of potentially excusable delays include transformer supply constraints, utility interconnection backlogs, regulatory approval bottlenecks, and force majeure events.
Projects that fail to meet the July 4 beginning of construction deadline must be placed in service by Dec. 31, 2027. If stakeholders cannot meet this compressed commissioning and construction timeline, the project will not qualify for federal tax credits. Meeting the beginning of construction deadline will not only mitigate acute execution risks but also help prevent the construction quality issues that often accompany a rush to completion.
—Brian Grenko is CEO and president of the technical advisory firm VDE Americas.
