- The court vacated IRS Notice 2025-42, restoring the Five Percent Safe Harbor as a potential path for certain wind and solar projects to establish beginning of construction.
- Taxpayers and market participants should reassess project documentation, transaction risk, and potential reliance on the safe harbor ahead of the July 4, 2026 deadline.
The U.S. District Court for the District of Columbia recently vacated IRS Notice 2025-42 and remanded it to the IRS, putting the longstanding “Five Percent Safe Harbor” back on the table as a method for establishing beginning of construction for certain wind and solar projects seeking to qualify for clean energy tax incentives under Sections 45Y and 48E.
The decision arrives just weeks before the July 4, 2026 statutory beginning-of-construction deadline and may provide a renewed pathway for projects that have incurred significant development costs but may not satisfy the physical work test.
Background
For years, IRS’s beginning-of-construction guidance generally permitted taxpayers to establish beginning of construction by paying or incurring at least five percent of a facility’s total cost and subsequently satisfying applicable continuity requirements “Five Percent Safe Harbor.”
In 2025, the IRS issued Notice 2025-42, effectively eliminating the availability of the Five Percent Safe Harbor for wind projects and large-scale solar projects and requiring that such projects rely on the physical work test instead.
What the Court Held
Various industry groups challenged the notice under the Administrative Procedure Act (APA), arguing that the IRS acted arbitrarily and capriciously when it eliminated the Five Percent Safe Harbor for certain technologies without adequately explaining its reasoning, it singled out wind and solar projects without justification, and the IRS failed to address the significant reliance interests created by more than a decade of administrative guidance.
The court agreed finding that the IRS acted arbitrary and capricious. The court’s decision does not address the underlying policy merits of the safe harbor. Rather, it focuses on whether the IRS complied with administrative law requirements when changing existing guidance. The court vacated the Notice in full and remanded it back to the IRS for further consideration.
Practical Implications
The ruling may provide some relief for project sponsors that have already incurred substantial project costs but may be unable to demonstrate sufficient physical work before the statutory deadline.
Nevertheless, uncertainty remains.
The government may appeal the decision or issue revised guidance addressing the APA challenges. As a result, taxpayers should carefully evaluate the extent to which they are willing to rely on the Five Percent Safe Harbor.
Project sponsors should consider:
- Reviewing whether previously incurred costs satisfy the Five Percent Safe Harbor requirements.
- Evaluating documentation supporting cost incurrence and continuity.
- Assessing the impact of potential appellate proceedings on transaction timelines.
- Coordinating with lenders, investors, insurers, and tax credit purchasers regarding acceptable beginning-of-construction positions.
Transferability Transactions
The practical impact of the ruling may extend well beyond project development and into the broader transferability marketplace.
For many transferability transactions, beginning-of-construction status affects underwriting assumptions, diligence procedures, insurance coverage, and overall transaction pricing. Credit purchasers and insurers frequently evaluate whether a project has satisfied applicable beginning-of-construction requirements and whether those positions are likely to withstand IRS scrutiny.
Although the court’s ruling restores the Five Percent Safe Harbor, market participants may continue to evaluate projects through a risk-adjusted lens until the possibility of appeal or further administrative action is resolved.
Looking Ahead
The decision restores a familiar framework for affected wind and solar projects, but it is unlikely to be the final chapter.
For taxpayers approaching the July 4, 2026 beginning-of-construction deadline, the ruling may create opportunities that appeared unavailable only weeks ago. At the same time, the possibility of further litigation or administrative action underscores the continued importance of careful documentation, diligence, and risk allocation. Dinsmore’s Tax Group will continue to monitor developments and provide updates as additional guidance becomes available.