Federal Court Restores 5% Safe Harbor for Wind, Solar Projects
TL/DR –
On June 6, 2026, the U.S. District Court for the District of Columbia ruled against IRS Notice 2025-42, thus vacating it entirely. The notice, issued in August 2025, had eliminated the “Five Percent Safe Harbor” for establishing the “beginning of construction” for federal energy tax credit purposes on all wind projects and solar projects exceeding 1.5 megawatts. The court ruled that the Notice was arbitrary and capricious because it (1) failed to explain why the Five Percent Safe Harbor could be manipulated, (2) singled out wind and solar projects without justification, and (3) ignored significant taxpayer reliance interests in prior IRS guidance.
US District Court Overturns IRS Notice 2025-42 on Energy Tax Credit
In a rare move on Saturday, June 6, 2026, the U.S. District Court for the District of Columbia nullified IRS Notice 2025-42, directing it back to the IRS for review. The ruling occurred less than a month before the July 4, 2026 statutory beginning of construction deadline for particular wind and solar projects.
About IRS Notice 2025-42 and its Impact
Introduced in August 2025, Notice 2025-42 cancelled the long-standing “Five Percent Safe Harbor” that permitted developers to establish “beginning of construction” for federal energy tax credit purposes. This impacted all wind projects and solar projects beyond 1.5 megawatts. Consequently, developers had to rely solely on the “Physical Work Test” to meet this safe harbor.
Projects that fail to commence construction by the deadline risk losing the Section 48E Investment Tax Credit (ITC) or Section 45Y Production Tax Credit (PTC) if not in service by the end of 2027. This ruling could mean complications for developers who have spent the past year developing their project pipelines in accordance with Notice 2025-42.
Implications of the Ruling and Potential Appeal
Though the ruling technically reinstates the Five Percent Safe Harbor as an option, the Court has determined that Notice 2025-42 was arbitrary and capricious. Its grounds include a lack of explanation from the IRS on why the Safe Harbor constituted “circumvention” or “manipulation,” unjustifiable singling out of wind and solar projects and disregard for significant taxpayer reliance interests in previous IRS guidance that included the Safe Harbor.
A likely appeal from the IRS could result in the reinstatement of the Notice. Until the appeals process concludes, developers contemplating the Five Percent Safe Harbor will face uncertainty.
ITC and PTC, Inflation Reduction Act, and OBBBA
The Inflation Reduction Act was enacted by Congress in 2022, establishing the Section 48E ITC and Section 45Y PTC and setting the timeframe for claiming those credits into the mid-2030s. The 2025 “One Big Beautiful Bill Act” (OBBBA) singled out solar and wind for early tax credit phase-outs. To claim the credits, wind and solar projects seeking the Section 48E ITC or Section 45Y PTC must be in service by the end of 2027. However, the OBBBA created an exception for projects that establish “beginning of construction” before July 4, 2026.
The Current Status of Notice 2025-42
As it stands, IRS Notice 2025-42 is no longer in effect due to the Court’s ruling. However, its final status depends on whether the IRS seeks to appeal the ruling to the U.S. Court of Appeals for the D.C. Circuit and successfully obtains a stay pending appeal. The outcome is likely to cause near-term uncertainty, as the District Court recognized that its ruling was unlikely to be the last word on the issue, and that any appellate ruling would likely post-date the OBBBA’s July 4 “beginning of construction” deadline for wind and solar projects.
What This Means for Wind and Solar Projects
For now, the Five Percent Safe Harbor for “beginning of construction” for wind projects and solar projects exceeding 1.5 megawatts under Sections 45Y and 48E is restored. Developers could theoretically pay and incur five percent of total project costs before the July 4, 2026 deadline to establish “beginning of construction.” However, practical considerations like time limitations and potential risks associated with future court decisions may make this challenging.
While the Court’s ruling vacates Notice 2025-42, the outcome may impact other clean energy technologies and deadlines. The Court’s primary holding is that differing “beginning of construction” tests for different technologies and deadlines without more compelling statutory support or a more extensive “reasoned explanation” by Treasury/IRS is arbitrary and capricious. This could lead to broader changes by the Treasury and IRS in the application of the Five Percent Safe Harbor.
This article is intended to provide a general understanding of the subject matter. Specialist advice should be sought about your specific circumstances.
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