Under the latest Treasury regulations, renewable energy sources such as wind and solar must deliver substantial progress, yet there is no predetermined minimum benchmark for their performance.
The U.S. Department of the Treasury has released new guidance regarding wind and solar projects, providing clarity on the construction-start rules and the qualification criteria for the 45Y and 48E tax credits.
According to the IRS Notice 2025-42, the revised Physical Work Test requires that construction begins when physical work of a significant nature starts, whether it's off-site or on-site. The focus is on the nature and significance of the work performed, rather than the amount of money spent.
For projects over 1.5 MW, the 5% cost test has been eliminated, and such projects must now meet the Physical Work Test to establish the beginning of construction. Significant physical work includes foundation excavation, setting anchor bolts, pouring concrete pads, installing racking and support structures on-site, and off-site manufacturing of custom components under a binding written contract.
Routine preliminary activities like design, permitting, environmental studies, financing, or general site clearing do not qualify as significant physical work. The assessment is fact-specific and subjective, focusing on whether work is “significant” rather than any fixed threshold in dollars or percentage of costs.
Solar projects with a net output of less than 1.5 MW can still qualify for the 5% cost threshold test. However, aggregation rules apply for multiple facilities under common ownership and interconnection to prevent fragmentation.
Jeff Cramer, president and CEO of Coalition for Community Solar Access, states that the guidance effectively rewrites the law passed by Congress under the One Big Beautiful Bill. Heather O'Neill, president and CEO of Advanced Energy United, says the new rules create new federal red tape and eliminate long-standing precedent for how companies demonstrate they've begun project development.
Following the publication of the guidance, Senator Chuck Grassley expressed satisfaction, stating it offers a "viable path" for the wind and solar industries to meet increased energy demand. Attorneys with law firm Norton Rose Fulbright, however, state that the new guidance leaves uncertainty about the amount of work required for wind and solar projects to qualify for tax credits.
Meanwhile, Arizona regulators have begun the process to repeal the state's renewable standard, and NV Energy seeks FERC approval to give wind and solar developers free exit from the interconnection queue. Gone with the Wind: Ordinances in Arkansas, Louisiana, and Mississippi discourage renewable investments.
As homeowners rush to install solar ahead of expiring tax credits, the new guidance provides a clearer path for the wind and solar industry. However, the uncertainties surrounding the amount of work required and the potential for new federal red tape may pose challenges for developers.
[1] https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/IRS-Notice-2025-42.pdf [2] https://www.energy.gov/eere/articles/irs-issues-notice-2025-42-providing-guidance-start-construction-rules-wind-and [3] https://www.renewableenergyworld.com/2023/02/23/irs-issues-guidance-on-beginning-of-construction-for-wind-and-solar-projects/ [4] https://www.law360.com/articles/1646845/irs-issues-guidance-on-start-of-construction-for-wind-and-solar-projects [5] https://www.greentechmedia.com/articles/read/irs-issues-guidance-on-start-of-construction-for-wind-and-solar-projects#gs.4d7y2bk
