Federal Court Reinstalls 5% Safe Harbor for Wind, Solar Projects

TL/DR –

The U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 on June 6, 2026, which had eliminated the “Five Percent Safe Harbor” method of establishing “beginning of construction” for federal energy tax credit purposes for all wind projects and solar projects exceeding 1.5 megawatts. This ruling comes just a month before the July 4 statutory deadline for certain wind and solar projects to begin construction, with projects that fail to begin construction by this date having to be in service by the end of 2027 or risk losing the Section 48E Investment Tax Credit (ITC) or Section 45Y Production Tax Credit (PTC). However, given the looming appeal and the fact that developers have been working towards compliance with Notice 2025-42 in the past year, most are expected to proceed with their existing strategies.

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IRS Notice 2025-42 Stricken Down, Posing Repercussions for Energy Developers

In an unanticipated Saturday afternoon verdict on June 6, 2026, the U.S. District Court for the District of Columbia declared IRS Notice 2025-42 null, remitting the case back to the IRS for additional proceedings. This IRS Notice, published in August of the previous year, had abolished the longstanding “Five Percent Safe Harbor” method of establishing “beginning of construction” for federal energy tax credit eligibility for all wind and solar projects exceeding 1.5 megawatts.

Summary of the Situation

Notice 2025-42 was issued to limit the means by which developers could show construction start to the “Physical Work Test”. This move occurred just shy of a month prior to the July 4, 2026 statutory deadline for several wind and solar initiatives to commence construction. Failure to start construction before this deadline would necessitate the projects being operational by the end of 2027 or risk forfeiture of the Section 48E Investment Tax Credit (ITC) or Section 45Y Production Tax Credit (PTC).

The ruling arrives too late for some developers who have already organized project pipelines compliant with Notice 2025-42. Even the Court itself acknowledged the precarious timing, noting that market participants will likely have to wait for the result of a potential appeal for a concrete understanding of the Notice’s legal impact. The Court also expressed doubt that the issue will be resolved before the July 4 construction commencement deadline.

Despite the ruling, most developers are expected to follow their existing plans. Although the Five Percent Safe Harbor provides a clear pathway to establishing “beginning of construction”, it requires a significant initial investment, which is a challenging proposition given the impending deadline and the possibility of the ruling being overturned on appeal.

Key Points

• The Court’s decision technically reinstates the Five Percent Safe Harbor as a means for proving the “beginning of construction” for wind and solar projects exceeding 1.5 megawatts that are pursuing federal clean energy tax credits. However, with the impending July 4, 2026 deadline and likely appeal, reliance on the ruling to pursue the Five Percent Safe Harbor carries considerable risk.
• The Court deemed Notice 2025-42 arbitrary and capricious as the IRS failed to justify why the Five Percent Safe Harbor was a form of “circumvention” or “manipulation”, irrationally singled out wind and solar, and disregarded notable taxpayer interests in previous IRS guidance that included the Five Percent Safe Harbor.
• An appeal is expected and could lead to a reinstatement of the Notice. The uncertainty will persist until the appellate process concludes, which is likely to be after July 4.
• The ruling does not directly affect other technologies or other “beginning of construction” deadlines. However, the Treasury could potentially take action with broader implications following the ruling.

Background Information

The ITC and PTC are the primary federal clean energy tax credits that solar, wind, and other clean energy developers rely on to finance and construct projects across the United States. In 2022, Congress enacted the Inflation Reduction Act, which established the Section 48E ITC and Section 45Y PTC and set the timeframe for claiming those credits into the mid-2030s.

In reaction to President Trump’s election, the “One Big Beautiful Bill Act” or “OBBBA” was enacted by Congress in 2025. It singled out solar and wind for early tax credit phase-outs. To claim these credits, wind and solar projects must be placed in service by the end of 2027. However, an exception was created for projects showing a “beginning of construction” before July 4, 2026 – exactly one year after the enactment of OBBBA.

The concept of “beginning of construction” wasn’t clearly defined in neither the Inflation Reduction Act nor the OBBBA. Since at least 2013, the IRS has recognized two “beginning of construction” methods for clean energy tax credit purposes. These include the “Physical Work Test”, where eligibility is demonstrated by performing “physical work of a significant nature” before the deadline, and the “Five Percent Safe Harbor”, which requires a taxpayer to pay or incur costs of at least five percent of total project costs to establish “beginning of construction”.

The IRS issued Notice 2025-42 in response to President Trump’s Executive Order 14315, issued on July 7, 2025. The Notice removed the Five Percent Safe Harbor for wind and solar projects over 1.5 megawatts, leaving the Physical Work Test seemingly untouched relative to previous guidance.

Summary of the Court’s Decision

The lawsuit was brought forward by a coalition of environmental organizations, energy consultants, a Tribal utility corporation, and governmental entities.

On the merits, the Court ruled Notice 2025-42 to be arbitrary and capricious due to a failure by the agency to provide a “reasoned explanation” for policy changes. Several reasons were stated for this conclusion including a lack of a reasoned explanation for the Notice, arbitrary disparate treatment of wind and solar, and failure to consider reliance interests and alternatives.

As a result, the Court declared Notice 2025-42 void in its entirety and referred the matter back to the IRS for further consideration.

Implications for Wind and Solar Projects

For the time being, the Court’s decision has annulled the guidelines eliminating the Five Percent Safe Harbor for wind projects and solar projects exceeding 1.5 megawatts under Sections 45Y and 48E.

However, the July 4 deadline is rapidly approaching, and a definitive appellate ruling is almost certain not to arrive until after the deadline has passed. The case will be closely monitored and potential impacts on ITC/PTC strategies will be discussed.

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