Trump Order Sends Wind, Solar Sectors Reeling After Tax Law (1)

Wind and solar developers are rethinking what it means to qualify for the clean energy tax credits after President Donald Trump ordered strict enforcement of the credits’ termination.

Trump’s Monday executive order requires the Treasury secretary to enforce the new GOP tax law’s end of clean electricity production and investment tax credits, also referred to by the section codes 45Y and 48E. That includes issuing new and revised guidance related to the beginning of construction rules within 45 days of the law’s enactment.

Trump’s order is another blow to the wind and solar industries, some of the biggest losers in the renewable energy sector after the passage of Republicans’ massive tax-and-spending package. Wind and solar projects must start construction within a year or be placed in service by the end of 2027 to qualify for the credits. Republicans largely gutted the renewable energy credits Democrats passed in 2022.

The wind and solar industries now face a new layer of uncertainty because they can’t take at face value the years-old IRS guidance outlining the beginning of construction requirements.

“Companies have two choices this morning. One is to press forward and hope that the change—if there is one—would be prospective,” said Keith Martin, co-head of projects specializing in tax and project finance at Norton Rose Fulbright US LLP. “The other choice is to wait.”

Beginning Construction

Developers have long relied on IRS notices to define the starting point of construction to qualify for electricity production and investment tax credits. There are two tests: physical work or a safe harbor where developers can delay physical work by paying at least 5% of the project costs and showing continuous work on the project.

Most projects use the physical work test, Martin said. Rooftop solar typically uses the 5% safe harbor.

It’s unclear just how much the Treasury Department and the IRS will change those rules around beginning of construction. The executive order said the revised guidance should “ensure that policies concerning ‘beginning of construction’ are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”

Congress codified in the tax-and-spending law the IRS notices 2013-29 and 2018-59 that outline the construction requirements after a push from key Republican senators. That provides some protection against the Trump administration completely changing the beginning of construction rules.

The law also notes that beginning of construction rules will rely on “any subsequently issued guidance clarifying, modifying, or updating either such Notice” as of Jan. 1, 2025.

Jorge Medina, a Vinson & Elkins LLP tax partner, said Treasury won’t likely release guidance that completely changes the current tests because of the codification. But the department could tweak certain definitions around the edges of the rules, making it more difficult to meet the requirements.

Treasury rules are typically prospective, meaning they wouldn’t affect projects that have already met the current beginning of construction rules, tax practitioners said.

“It would be really difficult to pull the rug up from under people,” said Carina Federico, a Crowell & Moring LLP tax partner. “That’s unlikely to happen.”

The biggest worry is for projects still in the planning stages. Some companies may want to wait for new guidance, but others that are further along may want to make sure they exceed the current beginning of construction requirements—such as spending 15% instead of 5% of project costs—in an effort to anticipate the new rules.

The executive order also directs Treasury to release rules within 45 days to implement the enhanced foreign entity of concern restrictions in the law.

Those restrictions on wind and solar projects begin next year, causing developers to contend with new compliance challenges. For example, projects will have to trace their ownership structure to ensure that it doesn’t include any specified foreign entities or foreign-influenced entities, which include companies owned or controlled by the government or citizens of China, Russia, Iran, or North Korea, among other restrictions.

Investors and Enforcement

The executive order may spook tax equity investors or tax credit buyers, Martin said. Tax equity typically provides between 30% and 60% of the total capital for clean energy projects, according to the American Council on Renewable Energy.

“You need to factor in the conservatism of the financing community” when considering whether to move forward with wind and solar projects, Medina said.

The executive order also foreshadows more IRS enforcement into the energy tax credits, an area that was already a likely target for the IRS. Energy tax credit claims have specific forms, and the IRS could easily flag all claims of certain credits, Federico said.

But given that the IRS is losing about a quarter of its workforce and has already seen significant turnover of senior leadership this year, it’s unclear how quickly or effectively the tax agency could start this enforcement work. Plus, any audits would happen years after the credits are claimed.

“The risk factor is more about the financing of these projects,” said Jamie Wickett, a Hogan Lovells partner.