News Summary
The IRS has issued new regulations requiring wind and solar facilities to adhere to tighter construction standards in order to qualify for tax credits. Effective for projects starting from September 2, 2025, the changes eliminate previous 5% Safe Harbor provisions and introduce a Physical Work Test that emphasizes substantial onsite or contractual activities. Critics express concern that the stricter rules may hinder renewable energy development, potentially leading to higher electricity prices. The new guidelines come amid ongoing tensions within the Republican party regarding oversight of renewable energy tax credits.
Washington, D.C. – New guidance issued by the Department of Treasury and the Internal Revenue Service (IRS) has introduced tighter construction requirements for wind and solar facilities that aim to qualify for tax credits under Sections 45Y and 48E, effective for projects starting construction on or after September 2, 2025. This regulatory move follows an executive order from President Donald Trump, issued on July 7, 2025, which seeks to eliminate subsidies for foreign-controlled and unreliable energy sources.
The new guidelines were released on August 15, 2025, through IRS Notice 2025-42, and come in response to the legislation known as the One Big Beautiful Bill passed in July 2025. This bill concluded tax credits for wind and solar facilities placed in service after December 31, 2027, unless construction commences by the July 5, 2026 deadline.
Among the significant changes outlined in the new guidance is the elimination of the 5% Safe Harbor option for beginning construction for all wind facilities and the majority of solar facilities. The previous standard, which allowed facilities to qualify for tax credits by demonstrating that at least 5% of the total cost had been incurred, will no longer be applicable. These facilities must now satisfy a more stringent requirement known as the Physical Work Test.
The Physical Work Test stipulates that construction must involve substantial onsite activities or offsite work conducted under binding contracts, such as equipment manufacturing. This marks a shift in focus from a monetary threshold for proving that construction had started to a more defined standard that emphasizes the nature of the work performed. Meanwhile, activities like surveys and test drilling will no longer qualify as acceptable forms of construction.
Despite the increased rigor of these guidelines, the Continuity Safe Harbor remains intact. This provision allows projects that begin construction to meet the associated tax credit requirements if they are placed in service within four years of the construction commencement date. However, the new guidance does not provide extensive details on the documentation necessary to demonstrate a continuous construction program, leaving room for ambiguity.
While the regulations will apply prospectively, projects that meet the previous 5% Safe Harbor requirement before the September 2, 2025 cutoff will retain their eligibility. Moreover, solar facilities with a maximum output of less than 1.5 megawatts will still be able to utilize the 5% Safe Harbor under the new guidelines.
The renewable energy sector has raised alarms about these new rules, with industry advocates warning that the stricter regulations could hinder the development of low-carbon energy sources and consequently lead to higher electricity prices for consumers. Critics have argued that the guidance adds new obstacles for wind and solar projects and undermines previously established standards that were negotiated during legislative discussions.
This shift in regulatory policy reflects ongoing tensions within the Republican party, particularly between moderate Republicans and their more conservative counterparts, who have pushed for stricter oversight of renewable energy tax credits. In contrast to this perspective, some proponents of the guidance, including Senator Chuck Grassley, have expressed approval of the regulations, suggesting that they provide a viable pathway for the industry to meet escalating energy demands.
As the energy landscape continues to evolve, the enforcement of strict construction start requirements through this new guidance signals a pivotal moment for the wind and solar sectors, potentially impacting the future of renewable energy initiatives in the United States. Stakeholders in the industry will need to adapt quickly to align with the new standards as they navigate the complexities of compliance and project planning.
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Additional Resources
- The Hill: Treasury Guidance on Wind and Solar Tax Credits
- Utility Dive: Treasury Commence Construction for Wind and Solar Tax Credits
- Wall Street Journal: European Renewable Stocks Rise After U.S. Tax Credit Guidance
- Recharge News: Wind Power Stocks Surge After U.S. Tax Credit Specification
- Politico Pro: Treasury Reportedly Tightens Screws on Tax Credits for Renewables
Author: STAFF HERE INDIANAPOLIS WRITER
INDIANAPOLIS STAFF WRITER The INDIANAPOLIS STAFF WRITER represents the experienced team at HEREIndianapolis.com, your go-to source for actionable local news and information in Indianapolis, Marion County, and beyond. Specializing in "news you can use," we cover essential topics like product reviews for personal and business needs, local business directories, politics, real estate trends, neighborhood insights, and state news affecting the area—with deep expertise drawn from years of dedicated reporting and strong community input, including local press releases and business updates. We deliver top reporting on high-value events such as the Indianapolis 500, Indy Jazz Fest, and the Indiana State Fair. Our coverage extends to key organizations like the Indy Chamber and Visit Indy, plus leading businesses in motorsports and healthcare that power the local economy such as Indianapolis Motor Speedway and IU Health. As part of the broader HERE network, we provide comprehensive, credible insights into Indiana's dynamic landscape.
