The end of the 5% safe harbor for energy credits

If you work with clients in the renewable energy space, you know that the “beginning of construction” rules have always been a hot-button issue. For years, the 5% safe harbor gave developers a simple way to lock in credits, spend 5% of the project’s cost, and you’re in. That’s changing.

With the One Big Beautiful Bill Act (OBBBA) and the IRS issuing Notice 2025-42 in August, the wind and solar ground rules just got much tougher. Here’s what you need to know and what you’ll want to know for your clients.

A quick recap

OBBBA didn’t just grab headlines, it pulled forward the sunset of clean electricity credits. For projects that begin construction after July 4, 2026, credits will only be available if they’re placed in service by Dec. 31, 2027. That’s a very short window. For example, if you are building a wind farm with a signed contract, and the construction starts next year on July 25, 2026, you’ll need to have it up and running by the end of Dec. 2027.

Notice 2025-42, which says, in essence, no more easy outs. For projects beginning construction on or after Sept. 2, 2025, you can’t lean on the old safe harbor (with one small exception). Instead, you’ve got to show real, tangible construction activity.

The 5% safe harbor is mostly gone

The headline change is clear; the 5% safe harbor is history for wind and most solar projects. The only survivors are small solar facilities with a maximum net output of 1.5 MW (AC) or less, such as residential or small commercial systems.

Everyone else is now pushed into the Physical Work Test lane. Developers can’t just front-load a modest spend and call it a day. They need to roll up their sleeves, break ground and lock in custom manufacturing if they want credits.

The physical work test takes center stage

What does the IRS consider “real work”?

• Digging foundations or driving piles for turbines
• Installing racking or anchoring structures for solar panels
• Manufacturing custom components under a binding written contract (not pulling something off the shelf)

If you’re advising clients, it’s worth stressing that planning, permitting, site clearing or environmental studies don’t count. It has to be substantial, physical activity that ties directly to the project’s generation capacity.

Also important, the IRS kept familiar rules like the 80/20 retrofit test, aggregation principles, and the master contract concept. Those tools still matter, but they all orbit around the Physical Work Test now.

Continuity still matters

Even with the new rules, the continuity requirement hasn’t gone away. The IRS still uses the four-year safe harbor: get the project placed in service within four years of when construction starts, and you’re presumed to have maintained continuous progress.

Delays caused by weather, permitting, or supply chain hiccups can be excused, but they don’t extend that four-year clock. If a project drifts past it, you’re left making a “facts and circumstances” case. Translation: keep meticulous records.

The supply chain factor

For many clients, the riskiest piece is going to be off-site manufacturing. Since the Physical Work Test allows credit for custom equipment produced under contract, many developers will lean heavily on suppliers. But that creates challenges:

• Supply chain fragility: If custom parts aren’t delivered, the project’s “construction start” might be questioned.
• Contract language: Agreements need to clearly state that the work is custom and not inventory.
• Investor concerns: Without the bright-line 5% rule, tax equity investors may see more risk and demand stronger evidence before committing.

This is where tax professionals can play a huge role by reviewing contracts, ensuring documentation is airtight and helping clients anticipate IRS scrutiny.

Straight from the IRS

The IRS published FAQs alongside OBBBA, and two stand out:

Q: If my client relies on these FAQs in good faith and the IRS later changes course, are they exposed?

A: No. Good-faith reliance protects them from negligence or accuracy-related penalties, even if it leads to an underpayment.

Q: Do the FAQs carry official weight, like guidance in the Internal Revenue Bulletin?

A: No. They don’t resolve disputes or override the law. But relying on them in good faith still shields taxpayers from penalties.

Bottom line: FAQs aren’t bulletproof, but they’re a safe compass for now.

What tax pros should be doing now

This is a moment for proactive client conversations. Here are five practical steps:

1. Audit project pipelines — spot which solar projects (≤1.5 MW) can still use the 5% safe harbor before it disappears
2. Encourage early action — push clients to get shovels in the ground or sign binding custom manufacturing contracts sooner rather than later
3. Emphasize documentation — help clients build a paper trail: contracts, site photos, supplier logs
4. Map continuity — plan timelines to fall well within four years, and if not, start building the facts-and-circumstances record now
5. Educate stakeholders — make sure investors, lenders and suppliers understand that the burden of proof just got heavier

Conclusion

For tax professionals, Notice 2025-42 and OBBBA aren’t just legal footnotes, they’re game changers. The loss of the safe harbor means clients will need hands-on advice about what counts as construction, maintaining continuity and structuring supplier contracts.

Position yourself as the guide through this new terrain, helping clients adapt quickly and document thoroughly. You’ll be invaluable in ensuring they don’t leave critical credits on the table.