Wind and solar energy developers hoping to get the last squeeze out of expiring federal tax credits, which are now on the clock and under closer scrutiny. And the answer to the question of how to go about securing them may be a little murky. New U.S. Department of Treasury guidelines Sections 45Y and 48E Beginning of Construction Notice issued in mid-August say developers will have to ensure and demonstrate that “physical work of a significant nature” is undertaken in a timely fashion on prospective production or investment tax credit-eligible projects exceeding 1.5MW.
With that caution issued, there could be a rush of heavily tax break-dependent wind and solar projects suddenly taking shape on an expedited timeline, potentially impacting the nature and degree of participation of contractors and design firms in varying disciplines, including electrical. The new demand for clearer and earlier evidence of commitment could translate to more and faster work — and more certainty — for prospective project partners.
The new criteria, however, and the compressed time frame to demonstrate viability, could be a sticking point.
The new guidance, replacing a long-standing “under construction” test tied to actual expenditures totaling 5% of the project’s cost, took effect Sept. 2. It gives developers of any in-progress project between that date and July 4, 2026 a claim on the tax break and a four-year window to complete the project, but only if it has met the government’s new “start” test.
The Treasury notice distills Congressional debate on renewable energy tax credits that lingered after passage of the One Big Beautiful Bill Act in July. The OBBBA, along with presidential executive orders, phases out many of those tax breaks, but legislators lobbying for a smoother glide path for their expiration subsequently squared off against others supporting a quick end. A compromise, which included the change to the “construction start” test but mainly preserved the bill’s stance on curtailing the tax breaks, is embedded in the August guidance from the Treasury Department.
With the new test in place giving solar and wind developers the grace period before 45Y and 48E tax credits end on projects placed in service after 2027, clear evidence of construction progress will be required.
The Treasury guidance says the key “physical work” test “focuses on the nature of the work performed, not the amount or the cost.” Examples of qualifying “on-site” work include “excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation.”
Off-site work, including that by other entities, is also considered and significant elements can include “the manufacture of components, mounting equipment, support structures such as racks and rails, inverters, and transformers and other power conditioning equipment,” as long as a firm contract exists.
While those specifics offer some guidance on how to meet the critical “under construction” test, the subjective nature of it could prove problematic. In a Mintz Insights examination of the issue, published in the National Law Review on Sept. 16, Federal Clean Energy Tax Incentives Under the OBBBA, the authors cautioned that developers hoping to secure the tax break by their actions in a short time frame need to shift and fine tune their focus.
“For wind and solar projects, developers can no longer “begin construction” by satisfying a 5% safe harbor (other than certain small-scale solar projects of 1.5 MW or less). Paying or incurring costs for the manufacturing of project components is no longer enough — developers must plan for tangible, qualifying construction steps that constitute physical work of a significant nature, both for purposes of showing that construction began and for purposes of maintaining a continuous program of construction.”
One thing is clear, however, the authors note: A significant shift has occurred in policy on clean energy, and an end to tax breaks that have been critical to its development is imminent.
“The new law (the OBBBA) dismantles or narrows many of the clean energy tax credits introduced under the Inflation Reduction Act of 2022 (IRA). For developers, manufacturers, and investors, the message is clear: access to federal tax credits is shrinking, and the rules for eligibility are tightening.”
