Wind and Solar Safe Harbor Fight Outlives Credit Deadline

 Monday, August 3, 2026 

 

By Environment+Energy Leader | Infrastructure + Energy Systems

 

Wind and Solar's Safe Harbor Fight Outlives the Tax Credit Deadline

The July 4 deadline decided which wind and solar projects tried to qualify for federal tax credits, but it never decided which legal rule they qualified under, and that gap is now sitting on someone's balance sheet as an open liability with no expiration date.

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The deadline did not decide which legal rule these projects qualified under, and that unresolved question is now an open liability with no expiration date. A federal court restored a cheaper path to establish tax credit eligibility just four weeks before the deadline, but the ruling itself remains under appeal. Any project that used the restored rule to qualify is carrying a tax credit position that could still be reversed, retroactively, once a higher court weighs in. That is not a closed question left over from a passed deadline. It is a live exposure that will sit on balance sheets for years, tracking a four-year construction clock that started ticking the moment each project made its bet.

The U.S. District Court for the District of Columbia ruled on June 6, 2026, in Oregon Environmental Council v. IRS that Notice 2025-42, the Treasury guidance issued the prior August, was arbitrary and capricious under the Administrative Procedure Act. Treasury had used that notice to eliminate the so-called 5% safe harbor for wind projects and solar projects larger than 1.5 megawatts. That left the physical work test as the only way for most developers to establish that construction had begun in time to qualify for production and investment tax credits under Internal Revenue Code Sections 45Y and 48E.

IRS Notice 2025-42 Left Only One Path to Lock In Tax Credit Eligibility

The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, accelerated the phaseout of those credits: wind and solar facilities placed in service after December 31, 2027 lose eligibility entirely unless construction begins on or before July 4, 2026. Developers had historically had two ways to prove construction had begun. One was paying or incurring 5% of total project costs. The other was performing physical work of a significant nature, on-site or off-site. An executive order issued days after the law's passage directed Treasury to narrow that standard, and Treasury responded with Notice 2025-42 that August, eliminating the 5% option for all wind projects and larger solar projects. The physical work test was slower to document and more capital-intensive to satisfy on a compressed timeline. It became the only route left for most large projects racing the clock. Lending markets adjusted fast, as Lenders Moved the Goalposts. Borrowers Have Not Noticed. 

A District Court Called the Rule Arbitrary and Capricious Weeks Before the Deadline

The court held that the IRS failed to justify singling out wind and solar for the change. It found that the agency ignored more than a decade of industry reliance on the 5% safe harbor and did not meaningfully engage with alternatives that commenters had proposed during the rulemaking process. It vacated the notice in full and remanded the matter to the IRS. On paper, that restored the 5% safe harbor as an available path for any wind or large solar project that had not yet locked in its beginning-of-construction date. In practice, the win is fragile. The government is widely expected to appeal, and the court itself acknowledged that the appellate timeline would likely extend past July 4. A reversal could apply retroactively to any project that relied on the restored safe harbor in the meantime. That is why Gibson Dunn and other firms advising developers have described the ruling as backup optionality rather than a foundation for a project's tax position. That legal whiplash compounds a queue problem already reshaping project timelines, as covered in 11 GW of Clean Energy Got Stuck Last Year. It Is Getting Worse.

Developers Split Into Two Capital-Risk Camps Ahead of the Deadline

Some developers had already spent the capital required to satisfy the physical work test before the ruling came down. That path is more durable against a possible appellate reversal, but it was also faster and costlier to execute under deadline pressure. Others were still finalizing their beginning-of-construction positions when the notice was vacated. They now face a choice between the newly cheaper 5% option and the safer but costlier physical work route, without knowing which one a higher court will ultimately uphold. Multiple advisory firms have recommended documenting both tests wherever feasible, so a project's eligibility does not turn entirely on which rule prevails. The numbers behind that caution are not abstract. A report BW Research prepared for the nonprofit E2, released in the past two weeks, found that 216 major clean energy and clean vehicle projects have been canceled, closed, or downsized since January 2025, erasing an estimated $68.2 billion in capital investment and 468,000 supported jobs. Those figures describe projects that never reached this legal fork in the road at all. The planning assumptions behind projects still in motion have already shifted once this year, a theme The Assumptions Behind This Year's Plans No Longer Hold examined in June.

The Four-Year Placed-in-Service Clock Won't Forgive a Wrong Bet

Whichever test a developer used, the eligibility question does not end at the July 4 deadline. Projects that establish beginning of construction on or before that date generally have four years to be placed in service under a separate continuity safe harbor. Miss the deadline, and the placed-in-service window compresses to the end of 2027. That continuity requirement is unforgiving. Permitting delays, weather, and supply chain disruptions do not automatically extend the four-year window. If a project misses it, the burden shifts to the developer to prove construction was continuous under a facts-and-circumstances test. For capital already committed to these projects, execution risk on the back end has become the more consequential exposure, ahead of the credit eligibility test that consumed everyone's attention through July 4.

What isn't yet known is whether an appeals court will rule before market participants face irreversible decisions, or whether the IRS will instead use the remand to issue new guidance that reaches the same result with a fuller explanation. Either outcome would resolve the ambiguity that has, in practice, turned the restored safe harbor into little more than a hedge. For finance and investment teams holding exposure to wind and solar developers, or evaluating tax equity and power purchase commitments tied to specific projects, the live question is no longer whether a project cleared the July 4 deadline. It is which version of the beginning-of-construction rules will still be standing by the time that claim has to hold up.

 

Wind and Solar Safe Harbor Fight Outlives Credit Deadline - Environment+Energy Leader