What New Treasury Guidelines mean for Solar Tax Credits
- Nick Andrade
- Aug 21, 2025
- 2 min read
On August 15, 2025, the IRS released Notice 2025-42, reshaping how solar projects qualify as having “begun construction” (BOC) for clean energy tax credits. The update narrows what counts and eliminates the 5% safe harbor for most projects. Here’s what solar developers should know now.
Physical Work Test Remains
Projects must show physical work of a significant nature to qualify for tax credits.
Off-site work: manufacturing of racking, inverters, transformers, or other non-inventory custom components under binding contracts.
On-site work: installation of racking or structures that will support solar panels.
Doesn’t count: permitting, design, grading, site clearing, or inventory production.
Four-Year Continuity Safe Harbor Stays
Facilities must be placed in service within four years of starting construction to meet continuity requirements. Delays (like interconnection or supply chain issues) may be excused on a case-by-case basis.
The 5% Safe Harbor Is Gone for Larger Projects
The familiar “5% of costs incurred” path is eliminated for most solar projects. It remains only for “low-output” solar facilities with ≤ 1.5 MWac capacity.
Aggregation Rules Close Loopholes
Developers can’t split larger projects into multiple ≤ 1.5 MWac facilities to qualify for the 5% safe harbor. If projects are tied by ownership, interconnection point, or end-use, they’re treated as one facility.
Effective September 2, 2025
These rules apply to solar projects that haven’t begun construction before this date. Looking ahead, developers must rely on physical work pathways. To beat the OBBBA termination schedule, projects must begin construction by July 4, 2026.
The Three Routes to Secure Solar Tax Credits
The Treasury’s new guidelines outline three main ways solar projects can demonstrate they’ve begun construction and remain eligible for clean energy tax credits. Each path comes with its own requirements and deadlines:
Safe Harbor by 9/2 – Projects that qualify before the September 2, 2025 effective date.
Physical Work Begun by 12/31 – Demonstrating significant on-site or off-site work by year-end.
FEOC: Physical Work Begun by 7/4 – Projects impacted by Foreign Entity of Concern (FEOC) restrictions must begin physical work by July 4, 2026.
What This Means for Solar Developers
Lock in binding contracts early for off-site equipment manufacturing.
Prioritize on-site racking installation where feasible to establish BOC.
Re-evaluate pipeline strategy—especially projects that relied on the 5% safe harbor.
Double-check small-scale projects against aggregation rules.
The IRS has made it clear: for solar, BOC now means real, physical progress. The 5% safe harbor is now a niche exception, not the norm. Developers should act quickly to align timelines, contracts, and site work before the September 2 deadline.
Our CEO/Founder Todd Fryatt breaks down these treasury guidelines and what they mean for developers, how they affect timelines, and the impact on the development of upcoming solar projects here: