On June 6, 2026, a federal court vacated IRS Notice 2025-42 (the “2025 BOC Notice”), which purported to eliminate the “five percent safe harbor” (first established in IRS Notice 2013-29) for wind and certain solar projects seeking to establish beginning of construction (“BOC”) for tax purposes on or before July 4, 2026.
This ruling may permit developers claiming section 45Y and 48E1 tax credits to:
- Once again rely on the five percent safe harbor as an alternative to the physical work test to establish BOC through qualifying expenditures made on or before July 4, 2026, to avoid application of the 2027 placed in service deadline;
- Satisfy the Continuity Requirement (defined below) through facts and circumstances demonstrating continuous efforts towards completion; and
- Reassess whether existing projects may have already established BOC under the five percent safe harbor and explore opportunities to reallocate safe harbor equipment intended to meet the off-site physical work test to other projects without such equipment.
Background of BOC guidance
Beginning in 2013, the IRS prescribed two methods for taxpayers to establish BOC:
- Performing physical work of a significant nature, either onsite or offsite (the “Physical Work Test”), or
- Paying or incurring five percent or more of the total cost of the credit-eligible property (the “Five Percent Safe Harbor”).
Under either method, a taxpayer must make continuous progress to complete construction of the project (the “Continuity Requirement”). A project is generally deemed to satisfy the Continuity Requirement if it is placed in service by the end of the fourth calendar year after which it begins construction for tax purposes (the “Continuity Safe Harbor”).2 If the Continuity Safe Harbor is not met, it is a facts-and-circumstances determination as to whether a project met the Continuity Requirement through a continuous program of construction or continuous efforts towards completion.
Over the next 12 years, the IRS issued further guidance that generally expanded taxpayers’ ability to establish BOC under either method (the “Historical BOC Notices”).3 For example, IRS Notice 2021-41 provided that a taxpayer may demonstrate facts and circumstances to comply with the Continuity Requirement through either a continuous program of construction or continuous efforts towards completion regardless of whether construction began under the Physical Work Test or the Five Percent Safe Harbor.
One, Big, Beautiful Bill Act, Executive Order No. 14315, and IRS Notice 2025-42
Under the One, Big, Beautiful Bill Act (the “OBBBA”), section 45Y and 48E tax credits terminate for wind and solar facilities that are not placed in service by the end of 2027, but this phase down does not apply to projects that begin construction on or before July 4, 2026. On July 7, 2025, President Trump issued an executive order (the “Executive Order”) titled “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources” directing the Secretary of the Treasury (“Treasury”) to strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E for wind and solar technologies, including by issuing “new and revised” guidance to ensure that policies concerning the beginning of construction are not circumvented and to “prevent[] the artificial acceleration or manipulation of eligibility” and “restrict[] the use of broad safe harbors unless a substantial portion of a subject facility has been built.”4 The OBBBA codified the Historical BOC Notices “as in effect on January 1, 2025,” but only explicitly for purposes of the restrictions related to “prohibited foreign entities.”
Treasury subsequently issued the 2025 BOC Notice, which eliminated the Five Percent Safe Harbor for wind and certain solar projects that began construction on or after September 2, 2025, leaving just the Physical Work Test. Small-scale solar facilities with maximum net output of up to 1.5 MWac could still use the Five Percent Safe Harbor. The 2025 BOC Notice also provided that, for purposes of the continuity facts-and-circumstances test, a taxpayer must maintain a continuous program of construction (that is, continuing physical work of a significant nature), eliminating the more straightforward continuous efforts test.
Oregon Environmental Council v. Internal Revenue Service
In Oregon Environmental Council v. Internal Revenue Service,5 the United States District Court for the District of Columbia reviewed a challenge under the Administrative Procedure Act6 to the 2025 BOC Notice brought by a consortium of governmental and private organizations that asserted harm from the 2025 BOC Notice. The plaintiffs successfully established standing by demonstrating that the 2025 BOC Notice would cause them harm due to higher electricity prices (both for the stakeholders and the plaintiffs themselves), additional air pollution from gas plant operations, and interference with project development of solar or wind projects that would have otherwise qualified for tax credits. The Court largely rejected the IRS’s attempt to use the Anti-Injunction Act to bar the suit.7
The Court found several defects in the IRS’s process and the substance of the 2025 BOC Notice. The Court found it significant that the Five Percent Safe Harbor was a longstanding part of the Historical BOC Notices, as the IRS itself acknowledged in January 2025 in the preamble to the proposed hydrogen tax credit regulations.8 The Court noted that Congress applied a “beginning of construction” approach to the tax credit phasedown in 2012, and in repeated, subsequent amendments to the tax credit rules, Congress chose not to modify the IRS’s implementation. As a result, the plaintiffs had a serious reliance interest in the Historical BOC Notices.
The Court also took issue with the IRS’s procedural record in reviewing and responding to industry and other feedback that the IRS received prior to the publication of the 2025 BOC Notice. The 2025 BOC Notice contained a single paragraph explaining the IRS’s decision to depart from the Historical BOC Notices, which merely restated the language in the Executive Order:
“The Treasury Department and the IRS have determined that the guidance contained in this notice is necessary and appropriate to properly enforce the credit termination date for applicable wind and solar facilities. Congress provided a beginning of construction deadline after which the new credit termination date for applicable wind and solar facilities applies. This notice provides beginning of construction guidance to prevent taxpayers from circumventing the statutory credit termination date, prevent the artificial manipulation of eligibility for the § 45Y credit and § 48E credit for applicable wind and solar facilities, and ensure that a substantial portion of any applicable wind or solar facility not subject to the credit termination date is built by the beginning of construction deadline. Accordingly, except as provided in section 6 of this notice, the Five Percent Safe Harbor provided under the IRS notices is not available for purposes of determining whether an applicable wind or solar facility has met the beginning of construction deadline and, thus, is not subject to the credit termination date.”
The Court described the IRS’s stated explanation for eliminating the Five Percent Safe Harbor as a “cursory explanation” that was insufficient to show the “path” that led the IRS to eliminate the Five Percent Safe Harbor for wind and large-scale solar projects. Citing United States Supreme Court precedent, the Court held that the IRS had failed to articulate a reasoned explanation for its change in longstanding policy or consider the reliance interests affected by the 2025 BOC Notice.9 Accordingly, the Court vacated the 2025 BOC Notice because it was “arbitrary and capricious."
The Court’s decision leaves the IRS with limited options besides acquiescence. The IRS may appeal the Court’s decision to the D.C. Circuit. Alternatively, the IRS could issue new guidance that cures the defects in the 2025 BOC Notice identified by the Court. Given that the statutory deadline for solar and wind projects to “begin construction” to avoid the 2027 placed in service deadline is July 4, 2026, it is unlikely that the IRS could engage in a meaningful rulemaking process that would survive judicial review under the Administrative Procedure Act. Any new guidance would likely have to be prospective to avoid harming the reliance interests the Court recognized in the Historical BOC Notices.
Assuming the IRS does not appeal the Court’s decision, or is unsuccessful in an appeal, developers have a new opportunity to “begin construction” through the Five Percent Safe Harbor by July 4, 2026. For an equipment purchase to count toward the Five Percent Safe Harbor, generally (i) the purchase must be for depreciable equipment that is integral to the project, and (ii) the developer must take physical delivery of the equipment (or title transfer and risk of loss) on or before July 4, 2026.10 Under a special “105-day” rule, certain developers that reasonably expect to take physical delivery (or title transfer and risk of loss) prior to the 105th day following payment can treat the transfer as having occurred on the payment date.11
Some developers that may have already established BOC through normal project development CapEx on some projects may want to consider reallocating safe harbor equipment intended to meet the off-site physical work test to other projects without such equipment.
1 All references are to the applicable section of the Internal Revenue Code of 1986, as amended.
2 Under the Historical BOC Notices (defined below), projects that began construction for tax purposes in 2016–2019 have an extended six-year continuity safe harbor, projects that began construction for tax purposes in 2020 have an extended five-year continuity safe harbor, and offshore wind projects generally have a ten-year continuity safe harbor.
3 See IRS Notices 2013-29, 2013-60, 2014-46, 2015-25, 2016-31, 2017-04, 2018-59, 2019-43, 2020-12, 2020-41, and 2021-41.
4 Exec. Order No. 14315, 90 Fed. Reg. 30821 (July 7, 2025).
5 Oregon Env't Council v. IRS, No. 25-4400 (CKK) (D.D.C. June 6, 2026).
6 5 U.S.C. § 706.
7 26 U.S.C. § 7421(a). The Anti-Injunction Act generally prevents taxpayers from suing to restrain the assessment or collection of a federal tax; normally, a taxpayer may only sue once there has been an IRS disallowance.
8 90 Fed. Reg. 2224, 2246 (Jan. 10, 2025).
9 Motor Vehicle Manufacturers Ass’n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983).
10 Notice 2013-29, Section 5.01; Notice 2018-59, Section 5.01; 26 CFR 1.461-1(a)(1).
11 26 C.F.R. § 1.461-4(d)(6). Many investors take the view that physical delivery (or title transfer and risk of loss) must occur on or before the 105th day after payment as evidence of the reasonableness of the taxpayer’s original delivery expectation and in light of uncertainty in how the reasonableness of a taxpayer’s expectation could otherwise be ascertained.
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