Five key insights for meeting end-of-year Safe Harbor deadlines

 With the release of IRS Notice 2025‑42 by the Internal Revenue Service, developers of wind and solar projects, and their advisers, must sharpen their focus on the need to begin construction as soon as possible. Notice 2025-42 established modified “beginning of construction” timetables, which drive Safe Harbor strategies under the new tax law regime for sections 45Y and 48E. Below are five key items that every project team should finalize before year-end.

1. Understand the deadline: Begin construction by July 4, 2026 or earlier for additional benefits

Under the One Big Beautiful Bill Act (OBBBA), tax credits for applicable solar and wind facilities will terminate for projects placed in service after Dec. 31, 2027, unless construction begins by the “beginning of construction deadline” of July 4, 2026.  Understanding notice – 2025 – 42 and what it means for your wind and solar projects

Notice 2025-42 establishes that for purposes of determining the beginning of construction date, the new guidance generally applies for facilities the construction of which did not begin, under prior guidance, before Sept. 2, 2025.

In practical terms, projects should aim not only to satisfy this beginning of construction requirement and begin by July 4, 2026, but ideally to lock in that status before Dec. 31, 2025, to maximize planning certainty and thereby avoid being subject to foreign entity of concern (FEOC) compliance rules that kick in on Jan. 1, 2026, for most companies.

Take-away: If you haven’t already begun construction on your solar or wind project by Dec. 31, 2025, you should treat July 4, 2026, as your back-stop window to ensure you have plenty of time to build your project and still earn section 45Y and 48E tax credits.

2. Safe Harbor methods: Physical Work Test vs 5 % Safe Harbor — with major changes

Historically, taxpayers could establish beginning of construction by either the “Physical Work Test” (begin physical work of a significant nature) or the “5% Safe Harbor” (pay/incur at least 5% of total project cost) under earlier guidance (e.g., Notice 2013-29 and successors).

Notice 2025-42 retains the Physical Work Test as the main route for wind and solar projects that begin construction after Sept. 2, 2025. The 5% Safe Harbor is eliminated for large solar and wind facilities, except for “low-output” solar facilities. “Low-output” solar facilities are defined as solar facilities with a maximum net output of less than 1.5 MW AC.

For example, a rooftop solar project with a capacity of less than 1.5 MW AC may still rely on the 5% Safe Harbor test to establish its date of beginning of construction. A larger solar or any wind project cannot rely on the 5% Safe Harbor after the effective date and must instead rely on the Physical Work Test.

Take-away: If you are working on a wind or large solar project, focus on satisfying the Physical Work Test as soon as feasible, as the 5% spend route is effectively unavailable to you.

3. What counts as “physical work of a significant nature” and how to document it

Under the Physical Work Test, beginning of construction is when physical work of a significant nature begins. Such work may be performed on-site or off-site under a binding written contract established before the manufacturing or construction activities take place.

On-site physical work examples may include, but are not limited to, beginning excavation of the foundation, setting anchor bolts and pouring concrete pads for a wind project. For a solar project, examples may include installing racks or other structures to mount PV panels. It’s important to note that the IRS provides only a few examples, but many other physical work activities can also qualify.

Examples of off-site physical work may include manufacturing components (e.g., transformers, racking, other equipment) pursuant to a binding contract. The key for off-site physical work is that the components produced off-site must be purchased and manufactured under a binding written contract and are products that are not normally held in inventory by the manufacturer.

Preliminary activities, such as design, securing financing, environmental studies, surveying, permitting and site clearing, do not count as physical work of a significant nature.

Take-away: Develop your documentation strategy now. Gather contracts, manufacturing work orders, site mobilization photos, invoices and other relevant documents as soon as possible. This will allow you to clearly show when physical work began and what physical work was performed.

4. Continuity requirement and Safe Harbor for placement in service

Once the beginning of construction date is established, the project must meet a “continuity of construction” requirement to maintain eligibility, subject to excusable delays. The Notice clarifies excusable disruptions (e.g., severe weather, permitting delays, interconnection delays, labor stoppages, supply shortages) that will not result in a failure of continuity of construction.

Notice 2025-42 retains the Safe Harbor that the project is treated as meeting continuity if the facility is placed in service by the end of the fourth calendar year following the calendar year in which construction began (Continuity Safe Harbor). For example, if construction begins in 2025, the Continuity Safe Harbor will be in place by the end of 2029. If construction begins in early 2026, the Continuity Safe Harbor will be in place by the end of 2030.

The exception to the four-year timeline is based on the beginning of construction date. If a wind or solar project starts construction after July 4, 2026, credits will terminate for projects placed in service after Dec. 31, 2027.

Take-away: In your project plan, map out your placed-in-service target based on when you expect your beginning of construction date to be. If your project plan exceeds four years, ensure you can demonstrate ongoing physical progress to maintain the beginning of construction date.

5. Action plan before year-end and key strategic decisions

Given the timing and changes introduced in Notice 2025-42, here are recommended actions as you prepare for year-end:

• Immediately review projects in your pipeline: Identify which wind and solar projects are currently planned but have not yet begun physical work. For those projects, determine whether you can begin physical work before Dec. 31, 2025 (or early 2026) to secure beginning of construction under the new rules.
• Switch your beginning of construction strategy if necessary: If you were relying on the 5% Safe Harbor for a large solar or wind project, pivot now to the Physical Work Test route by beginning contracting, manufacturing or site work.
• Document everything: Update your milestone tracker to reflect when physical work begins (dates, site mobilization, manufacturing start, binding contracts), and collect evidence (contracts, invoices, manufacturing schedules, delivery records, time-stamped site construction photos).

Take-away: As the end of 2025 approaches, ensure your beginning of construction strategy is airtight. We can help you confirm your beginning of construction date, assemble audit-ready documentation and identify red flags before they jeopardize credit eligibility or investor expectations. Don’t wait until 2026. Proactive support now can save time, budget and compliance risk later.

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Notice 2025-42 represents a meaningful tightening of the beginning of construction rules for wind and solar projects, particularly by eliminating the 5% Safe Harbor for many projects and emphasizing actual physical work and continuity. For projects still in development, the end of 2025 (and certainly early 2026) is a critical juncture. Your development team, tax advisers, engineers and construction leads need to be aligned now on beginning of construction strategy, documentation and schedule to preserve credit eligibility under sections 45Y and 48E.

Five key insights for meeting end-of-year safe-harbor deadlines | Baker Tilly