The IRS recently released updated guidance (Notice 2025-42, EO14315 Ruling) that significantly changes how wind and solar projects can qualify for clean electricity tax credits.
To understand the impact, it’s important to revisit what Safe Harbor means in this context.
In clean energy development, “Safe Harbor” refers to IRS rules that allow a project to lock in eligibility for tax credits by showing that construction has “begun” before a certain deadline.
Historically, developers had two options:
Physical Work Test – Demonstrating actual, meaningful construction (e.g., excavation, pouring foundations, installing racking).
Five Percent Safe Harbor – Establishing that at least 5% of total project costs were incurred before the deadline, even if no physical construction had started.
Once a project met either test, the developer also needed to maintain continuous progress toward completion to keep eligibility.
This flexibility, especially the Five Percent Safe Harbor, has long been a cornerstone of renewable energy project financing and investor confidence.
The new IRS guidance eliminates the Five Percent Safe Harbor for most wind and solar projects. Going forward, developers must rely primarily on the Physical Work Test to establish that construction began.
The Five Percent Safe Harbor is now available only for small solar projects ≤1.5 MW AC capacity.
Larger wind and solar projects must show real, physical progress on construction before the July 5, 2026 deadline.
This represents a major shift. The old 5% rule allowed developers to secure eligibility early with financial spend; now, tax credits hinge on actual construction activity.
Clean electricity credits for wind and solar expire for facilities placed in service after December 31, 2027.
Applies to projects that begin construction after July 4, 2026 (12 months after OBBBA enactment).
The IRS clarified which activities qualify under the Physical Work Test:
✅ On-site work: foundation excavation, anchor bolts, concrete pads, racking for solar panels.
✅ Off-site work: manufacturing custom turbines, inverters, or racks under binding contracts (not from inventory).
❌ Not included: planning, permits, financing, environmental studies, site clearing, or inventory purchases.
Projects must maintain progress after construction begins.
A four-year safe harbor applies: if placed in service within four years, continuity is presumed.
Certain delays (weather, permitting, supply chain, financing) are excused.
Transfers: Projects may be sold without losing eligibility, but unrelated buyers cannot carry over prior work.
Retrofitted facilities: Must meet the 80/20 rule (≥80% new components).
Single project treatment: Multiple facilities may count as one if factually integrated (ownership, interconnection, permits).
Solar projects ≤1.5 MW AC capacity retain both options:
The Physical Work Test, or
The Five Percent Safe Harbor (≥5% of costs incurred before July 5, 2026).
These rules apply to wind and solar facilities that did not begin construction before September 2, 2025 under the prior Safe Harbor rules.
The IRS has fundamentally reshaped how projects prove they’ve “begun construction.”
Five Percent Safe Harbor is eliminated for most projects, narrowing developers’ options.
Physical Work Test survives, making actual dirt-moving and equipment fabrication the critical path to preserving tax credits.
Small solar projects remain the only exception.
Action step: Developers should review their construction schedules, contracts, and procurement strategies now to ensure projects are positioned to meet the Physical Work Test before deadlines close.
With the IRS tightening Safe Harbor rules, developers face new challenges in planning, financing, and proving construction progress. These changes can create uncertainty around timelines and tax credit eligibility. Titan Energy partners with clients to evaluate project strategies, identify potential risks, and develop practical solutions tailored to each project’s scale and stage. Our role is to help you interpret the rules with confidence, align construction milestones with deadlines, and make informed decisions that safeguard long-term project value.
Contact Titan Energy today to discuss how these Safe Harbor changes may affect your projects and the strategies available to keep them on track.