Aug 19, 2025
Treasury Significantly Restricts Solar and Wind Tax Credit Access with New "Beginning of Construction" Rules
The U.S. Treasury Department and IRS have issued sweeping new guidance that fundamentally changes how solar and wind projects can qualify for critical federal tax credits, creating immediate challenges for clean energy developers and potentially reducing renewable energy deployment at a time when America needs it most.
The Bottom Line: 5% Safe Harbor Eliminated for Most Projects
Effective September 2, 2025, the Treasury has eliminated the widely-used "5% Safe Harbor" test for virtually all solar and wind projects seeking the 48E Investment Tax Credit (ITC) and 45Y Production Tax Credit (PTC). This rule change affects projects that must begin construction by July 4, 2026, to qualify for these valuable credits worth 30% or more of project costs.
The only exception? Solar projects of 1.5 megawatts or smaller can still use the 5% safe harbor test, but larger projects—which represent the vast majority of commercial renewable energy development—must now rely solely on the more stringent "Physical Work Test."
What's Changed: From Financial to Physical Requirements
Previously, developers could demonstrate "beginning of construction" through two pathways:
- 5% Safe Harbor: Pay or incur at least 5% of total project costs
- Physical Work Test: Begin physical work of significant nature on-site or off-site
Now, most projects can only use the Physical Work Test, which requires:
On-site work examples:
- Foundation excavation (not general site preparation)
- Setting anchor bolts into the ground
- Pouring concrete foundation pads
- Installation of racks/structures to affix solar panels
- Installation of collectors or solar cells
Off-site work qualifies only if:
- Done under binding written contract entered before work begins
- Components not held in manufacturer's inventory
- Reasonable allocation method exists for components across multiple facilities
Stricter Continuity Requirements
Projects must also maintain "continuous progress" for up to four years to qualify, with the definition of continuous progress becoming more restrictive. While excusable disruptions like weather delays, permitting delays, and supply shortages are recognized, the burden of proof for maintaining progress has increased.
The new rules appear particularly harmful to:
- Rural electric cooperatives and tribal entities who may struggle with federal permitting timelines
- Smaller private developers who lack the market power of large utilities
- Municipal utilities who are less familiar with evolving federal requirements
Clean energy advocates argue the guidance exceeds Treasury's authority and contradicts Congressional intent in the One Big Beautiful Bill Act (OBBBA). The changes appear to treat wind and solar technologies more restrictively than other clean energy technologies eligible for the same credits, raising questions about arbitrary regulatory treatment.
What This Means for Giraffe Financial Clients
For our clients involved in renewable energy financing or development:
1. Immediate action required: Projects must demonstrate physical construction activity by critical deadlines
2. Financing complexity increases: The elimination of the cost-based safe harbor complicates project financing structures
3. Due diligence intensifies: More rigorous documentation of construction progress will be essential
4. Supply chain urgency: Earlier equipment procurement and contractor engagement become critical
Looking Ahead
While these changes create near-term headwinds for clean energy deployment, projects that can adapt to the new Physical Work Test requirements may still qualify for significant federal tax benefits. Success will require earlier project development, more sophisticated construction planning, and enhanced documentation processes.
The Treasury guidance represents a significant shift in federal clean energy policy implementation. As the regulatory landscape continues evolving, staying informed about these changes and their implications for renewable energy investments will be crucial for market participants.
For specific guidance on how these changes might affect your renewable energy investments or projects, reach out to us at info@giraffe.financial today for a consultation.