How to Navigate the New Restrictions on Clean Energy Tax Credits

Recent IRS guidance for wind and solar projects explains how to define the beginning of construction, or BOC, under the new termination deadlines to qualify for an investment tax credit under Section 48E of the federal tax code or a production tax credit under Section 45Y.

For tax planning purposes, it’s important for companies to figure out whether they’ll be eligible or if they need to move up their construction timeline.

The biggest change is between the “placed in service” standard and the BOC standard. Therefore, anyone wishing to construct a wind or solar energy generating facility will have three paths forward:

• Place the facility in service on or before Dec. 31, 2027
• Achieve the “physical work test” before July 4, 2027, and place in service within four years
• Obtain the safe harbor using 5% of overall project cost by July 4, 2026, if a solar project under 1.5 megawatt hours

For non-solar and wind energy projects not covered by IRS Notice 2025-42, we must all wait for additional guidance and clarification. For Section 45V clean hydrogen credits, Section 179D energy-efficient commercial building credits, and other incentives, the IRS has issued no guidance, nor has there been any official request for guidance from the White House.

Beginning of Construction

The earliest definition of BOC dates back to IRS Notices 2013-29 and 2018-59. The Foreign Entity of Concern rules in the 2025 GOP tax law incorporates the 2013 definition of BOC as effective since Jan. 1.

The new IRS guidance for solar and wind states that the sole method for determining BOC under the physical work test requires “construction of a significant nature” and a “continuous construction” program directly tied to the energy project.

Qualifying off-site work may include the manufacture of custom components. The physical work definition doesn’t include preliminary activities such as engineering, survey, demolition, site clearing, or soil conditioning.

Under the old guidance, a solar or wind facility could take advantage of the 5% Cost Safe Harbor. The 5% ratio was applied against the entire cost related of the energy project, such as tax basis for federal depreciation purposes.

Therefore, pre-construction engineering and design costs and/or the ordering of equipment would create a safe harbor even though construction, such as physical work test, hadn’t yet started. For most companies, the 5% cost safe harbor was obtained when executing the construction contract and paying (or incurring) the initial down payment.

This means the biggest change is the elimination of the 5% cost safe harbor for all wind projects and all solar projects over 1.5 megawatts. The notice also provides a three-part test where a taxpayer avoided the 1.5 megawatt limit for solar projects that were:

• Owned by the same or related taxpayers
• Placed in service in the same taxable year
• Transmitting electricity generated by the facilities through the same directly to the same end user.

The guidance is effective for projects that haven’t started construction before Sept. 2, 2025; therefore, if construction has already begun on your solar or wind project, you can still use the 5% safe harbor even if wind or solar over 1.5 megawatts.

For context, a standard office building or parking lot using solar should have no problems staying under 1.5 megawatts. However, a large utility scale ground mount solar development or solar on top of a large warehouse, data center, or industrial center should be well over this limit.

The 1.5 megawatt allowance of the 5% safe harbor for small solar is great for most projects under Section 48E but could have a devastating effect on large Section 45Y solar projects.

Congressional Intent

The IRS has taken the position that the BOC language in the 2025 GOP tax law is only effective for compliance with Foreign Entity of Concern rules and not applicable to solar and wind projects.

However, it’s unclear whether Congress intended the 2013 BOC standard to apply to all energy projects and not just foreign entities of concern, or that the BOC should be universally the same in the tax code to avoid confusion and uncertainty.

One might argue that the removal of the 5% safe harbor for wind and solar over 1.5 megawatts short-circuits the intent of the GOP Congress. The BOC with the 5% safe harbor was intended for all uses of the BOC standard in the tax code, and that the IRS seems to be unilaterally punishing specifically large Section 45Y solar developments over the new 1.5 megawatt limit.

This creates a level of uncertainty for wind and solar developers while leaving open challenges to the Notice 2025-42 in federal court. This could be a major focus of future lobbying attempts in the next budget bill or tax extenders bill.

What’s Next

The latest IRS guidance on the updated BOC standard for solar and wind was a partial response to President Donald Trump’s July executive order on eliminating subsidies for certain green energy sources in the GOP megabill. We expect the IRS to issue additional guidance within the next few weeks.

Other tax incentives facing early termination—Section 179D deductions use the same language as the deductions that are being eliminated. So it’s unclear whether a commercial builder developing an energy-efficient office building will be able to use the BOC standard from the energy property tax credits, for example.

Other code sections such as Section 45V for clean hydrogen have a BOC based termination date of Jan. 1, 2028, so the same questions apply. Notice 2013-29 for Sections 45 48 or even the newer Notice 2025-42 specifically referencing Sections 45Y and 48E don’t address other related production tax credits or investment tax credits.

As a result, we will need new guidance to define what the BOC would look like. Given all of these uncertainties, we would advise builders to move up their construction timeline if possible.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ian Boccaccio is a principal and income tax practice leader at Ryan LLC in New York focused on green energy investing and tax credit transfer monetization.

Scott Stogsdill is national leader of Ryan LLC’s green energy incentives practice in Dallas.

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