On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the OBBB), which significantly rolls back many of the core tax incentives that clean energy projects have relied on since the passage of the Inflation Reduction Act in 2022. (For more information, see this Latham Client Alert.) Under the new law, tax credits for wind and solar projects phase out sooner than those for other technologies, like storage. To qualify, these projects must either be completed by the end of 2027 or begin construction by July 4, 2026.
On July 7, 2025, President Trump issued an executive order titled “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources” (the Order), which directs the Treasury Department to issue guidance for purposes of determining whether a wind or solar project has started construction or is subject to the December 31, 2027, completion deadline. Prior to the Order, the parameters for starting construction were well understood, as these had been the subject of numerous Treasury Department Notices (collectively, the Old Guidance).
On August 15, 2025, the Treasury Department issued Notice 2025-42 (the New Guidance) in response to the Order. The New Guidance requires developers of wind and solar projects with a maximum net output of greater than 1.5 megawatts (MWs) to perform physical work of a significant nature (the Physical Work Test) to qualify a project as having started, and then meet a continuity test. The continuity test requires developers to place a project in service within four years after the end of the year in which construction starts, or else to show that construction has been continuous from and after the start.
The New Guidance applies only to wind and solar projects that seek to qualify for “technology neutral credits” under Sections 45Y and 48E of the Internal Revenue Code, and applies only for purposes of determining whether projects began construction before July 4, 2026. Projects that intend to claim the old production tax credit or investment tax credit under Sections 45 or 48 of the Internal Revenue Code as a result of having started construction before December 31, 2024, remain eligible for those credits, and the Old Guidance remains the standard for starting construction for this purpose. Moreover, the New Guidance only applies to projects that have not started by September 2, 2025, so projects may continue to rely on the Old Guidance to establish the beginning of construction before September 2, 2025.
Whereas the Old Guidance permitted taxpayers to establish the beginning of construction under the Physical Work Test or by incurring at least 5% of project costs (the 5% Test), the New Guidance requires wind and solar projects over 1.5 MWs to meet the Physical Work Test. While the Physical Work Test is more subjective than the 5% Test, financing parties are familiar with it and have been evaluating Physical Work Test qualification strategies for over a decade. The test can be satisfied by performing off-site manufacturing work on project components that are not inventory like items, such as main power transformers, or else by performing on-site physical work at the project site, such as foundation excavation. Work performed by someone else on behalf of a developer must be performed under a binding written contract.
Certain smaller solar projects may still rely on the 5% Test to establish start of construction after September 2, 2025, and before July 4, 2026. This method will be available for solar property that has a nameplate capacity of 1.5 MW or less. This capacity is generally measured at each inverter, though facilities that (i) are owned by the same taxpayer, (ii) are placed in service within the same year, and (iii) use the same point of interconnection will be required to aggregate their output for purposes of meeting the 1.5 MW threshold.
Once a project has started, construction must be continuous. This can be established either by placing the project in service within four years following the end of the year of construction or by maintaining a continuous program of construction. Under the four-year rule, a project that starts during 2025 will have until the end of 2029 to finish, and projects that start in 2026 (and before July 4, 2026) will have until the end of 2030 to finish. Because of the bright-line nature of this test, most projects will strive to meet the four-year deadline.
If a developer misses the four-year window, demonstrating continuity requires meeting a facts and circumstances test that is more stringent under the New Guidance. Whereas the Old Guidance would permit a developer simply to make continuous efforts to advance construction (including entering into binding contracts, obtaining permits, and demonstrating cost spend with respect to the project), the New Guidance requires a developer to perform physical work of a significant nature throughout the development cycle. This reflects a return to the Old Guidance as it existed before being relaxed during the COVID-19 pandemic, so developers and financiers should be familiar with the concept.