Overview
On August 19, 2025, McDermott Will & Schulte Partners Philip Tingle and Heather Cooper hosted a webinar to discuss the new Internal Revenue Service (IRS) guidance on “begin construction” rules for renewable energy projects.
Top takeaways included:
Policy background
- The One Big Beautiful Bill Act introduced both:
- Foreign Entity of Concern (FEOC) and material assistance rules.
- A repeal of wind and solar credits for projects placed in service after 2027.
- Both provisions included the following begin construction exemptions:
- Projects starting construction on or before December 31, 2025, are exempt from FEOC material assistance rules.
- Projects starting construction before July 5, 2025, are exempt from the wind/solar repeal.
IRS mandate and guidance
- On July 7, 2025, the president issued an executive order directing the US Department of the Treasury and the IRS to strengthen enforcement of the wind/solar repeal.
- The IRS was given 45 days to act and issued updated guidance on August 15, 2025.
- Notice 2025-42 clarifies how begin construction exemptions apply and resets expectations for developers.
Key chances and impacts
- 5% safe harbor removed for larger projects. Facilities over 1.5 megawatts (MW) may no longer use the 5% safe harbor. Instead, they must rely solely on the physical work test.
- Physical work test preserved. Despite criticism, the IRS left the physical work test unchanged. Activities like foundation excavation and transformer work continue to qualify.
- Continuity safe harbor narrowed. The four-year safe harbor remains, but the “continuous efforts” fallback was eliminated. Projects missing the four-year cutoff must satisfy the more rigorous “continuous construction” standard.
- Small facilities retain flexibility. Facilities under 1.5 MW can still use the 5% safe harbor, subject to the integrated operations test.
- Limited scope. The new rules apply only to the wind/solar repeal. Other provisions (FEOC, domestic content, prevailing wage, and other technologies) continue under existing guidance.
- No retroactivity. Projects that began construction before September 2, 2025, remain governed by prior rules.
- Market may react conservatively. Investors, lenders, and insurers may demand stricter interpretations, even though IRS rules remain familiar.
- Strategic timing. Developers should consider beginning physical work on or before December 31, 2025, to ensure protection under both FEOC/material assistance and wind/solar repeal exemptions.
