Treasury Tightens Start Rules for Wind, Solar Projects
TL/DR –
President Trump signed the One Big Beautiful Bill Act (OBBB) on July 4, 2025, which decreases tax incentives for clean energy projects, making solar and wind credits phase out sooner than other technologies. Under the OBBB, these projects must be finished by 2027 or construction must start before July 4, 2026. The Treasury Department issued Notice 2025-42 which requires developers of wind and solar projects with an output greater than 1.5 megawatts to perform physical work of significant nature and meet a continuity test, meaning the project must be in service within four years after construction starts or show that construction has been continuous.
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New US Legislation Affects Tax Incentives for Wind and Solar Energy Projects
On July 4, 2025, President Trump enacted the One Big Beautiful Bill Act (OBBB), rolling back a number of central tax incentives that clean energy projects have been dependent on since the Inflation Reduction Act was passed in 2022. Under this new legislation, tax credits for wind and solar projects will cease sooner than those for other technologies like storage. In order to qualify, these projects must either be completed by the end of 2027 or begin construction by July 4, 2026. Further details are available in a Latham Client Alert.
Subsequent Executive Order Impacts Construction Timeline
Three days later, on July 7, 2025, President Trump issued an executive order titled “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources”. This order tasked the Treasury Department with determining whether a wind or solar project had initiated construction or was subject to the December 31, 2027 completion deadline. This came as a shift since earlier guidelines for starting construction were well understood and had been outlined in numerous Treasury Department Notices.
The Treasury Department’s Response to The Order
In response to the executive order, the Treasury Department issued Notice 2025-42 (New Guidance) on August 15, 2025. The New Guidance requires wind and solar project developers with a maximum net output exceeding 1.5 MWs to conduct considerable physical work to qualify a project as having started. After which, a project must meet a continuity test, mandating the placement of a project in service within four years after the year in which construction begins or proving continuous construction from the start.
The New Guidance is particularly relevant for wind and solar projects that aim to qualify for “technology neutral credits” under Sections 45Y and 48E of the Internal Revenue Code. It determines whether these projects commenced 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 due to having begun construction before December 31, 2024, remain eligible for these credits. The Old Guidance is still the standard for starting construction for these projects. The New Guidance does not apply to projects that have started by September 2, 2025.
Changing Construction Guidelines
Unlike the Old Guidance, which allowed taxpayers to establish construction commencement under the Physical Work Test or by incurring at least 5% of project costs, the New Guidance requires wind and solar projects of over 1.5 MWs to meet the Physical Work Test. Although this test is more subjective, financiers are familiar with it and have been assessing Physical Work Test qualification strategies for over a decade. The test can be satisfied by performing either off-site manufacturing work on project components that aren’t inventory like items, or by conducting on-site physical work at the project site.
Certain smaller solar projects may still use the 5% Test to establish start of construction after September 2, 2025, and before July 4, 2026. This applies to solar property that has a nameplate capacity of 1.5 MW or less. Facilities that are owned by the same taxpayer, are placed in service within the same year, and use the same point of interconnection will be required to aggregate their output to meet the 1.5 MW threshold.
Continuous Construction is Crucial
Once construction commences, it must be continuous. This can be demonstrated either by delivering the project into service within four years following the end of the year of construction or by maintaining a continuous construction program. 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. If a developer fails to meet the four-year window, they must meet a stringent facts and circumstances test under the New Guidance, requiring continuous physical work of a significant nature throughout the development cycle.
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