Complying with the rules for beginning construction on a new clean energy project – often referred to as “begun construction” – could make or break eligibility for the entire tax credit endeavor. This is especially true now that the One Big Beautiful Bill has been enacted, and the “Executive Order: Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources” was issued on July 7. It may be necessary to revisit the process of complying with the rules for beginning construction.

Understanding Begun Construction

In normal parlance, “begun construction” might mean the official start of physical construction activities such as site preparation, excavation, or foundation work. In today’s clean energy tax credit market, projects looking to retain eligibility for tax credits must apply a very nuanced application of the meaning of “begun construction” and, in this context, understanding the technical tax definition of beginning construction and following some very specific rules will be critical to qualifying projects for tax credits. 

Action Item: Familiarize yourself with the specific IRS Notices (including IRS Notice 2018-59), the July 7 Executive Order, and the milestones associated with "begun construction". Track updates released by the Treasury and IRS as a result of the July 7 Executive Order.

History: IRS Notice 2018-59: Establishing Construction Start For the ITC

On June 22, 2018, the IRS issued Notice 2018-59 (the Notice), which outlined how to establish the beginning of construction for the energy investment tax credit (ITC) under Section 48. It applies two methods, or tests.

The following is a high-level summary of these two tests:

1) 5% Spending Safe Harbor (Cost) Test

Under this test, a project qualifies if at least 5% of the total final cost of ITC-eligible energy property is paid or incurred by a certain date. This excludes land, most buildings, and other non-integral components and non-depreciable property. 

The three and a half-month rule (a sub-method of accrual tax accounting) may apply to certain payments for goods. The three and a half-month rule essentially determines when a cost is considered incurred. If a taxpayer relies on prepayments for the purchase of energy property to meet the 5% Safe Harbor, it must ensure that the delivery of goods or services is reasonably expected within three and a half months of the payment date. Also, one may not just choose to rely on the three-and-a-half-month rule, there are certain tax requirements that must be met. 

The 5% Safe Harbor Test is a straightforward and objective method to establish the beginning of construction for ITC eligibility, but it implicitly may be dependent on the availability of goods. Further, projects intending on qualifying for the domestic content adder or looking to overcome the foreign entity of concern (FEOC) rules may face challenges for meeting the 5% safe harbor.

Action Item: Ensure that at least 5% of the total cost of ITC-eligible property is paid or incurred, excluding non-eligible costs. There are also expectations that the documentation will satisfy this requirement. Beware that cost overruns (including, among other reasons, those caused by tariffs) can cause a project to fail to meet the 5% threshold. A buffer over the 5% is advisable to avoid unpleasant surprises, since the 5% safe harbor expenditures can’t be revised after the fact. Monitor Treasury and IRS guidance on the July 7 Executive Order (see below) for changes to these rules.

2) Physical Work of a Significant Nature Test

This “physical work” test focuses on the nature – not the cost – of the work. It includes on-site (e.g., racking installation) and off-site work (e.g., component manufacturing), but excludes planning or inventory production. 

The Notice doesn’t prescribe a minimum dollar amount or a minimum amount of work required to meet this test, but similar to the 5% safe harbor, the Notice imposes requirements on the contracts under which this work would be performed and other tax accounting conditions that must also be met. 

Action Item: Begin substantial physical work and document it clearly, avoiding reliance on preliminary activities such as planning, design, obtaining permits, and other activities described in the Notice. Monitor Treasury and IRS guidance on the July 7 Executive Order (see below) for changes to these rules.

Continuity Requirement

Both the 5% safe harbor and physical work tests require continuous progress, which is essential to maintain ITC eligibility. This includes ongoing expenditures, contracts, or permitting. Certain projects placed in service beginning four years after the date on which the begun construction criteria are satisfied are deemed to have met this requirement.  

Note that the first test met (whether the 5% safe harbor or the physical work test) triggers the start of this four-year window.

If the project doesn’t meet the four-year continuity timeline, there is a facts and circumstances analysis as to whether the continuity test is met. As a general rule, financiers don’t favor this scenario because there is a subjective analysis as to whether the continuity test was met. 

Action Item: Maintain and document continuous efforts, and make every effort to have an energy project completed to meet the deemed four-year continuity safe harbor.

Transfer of Energy Property

ITC eligibility via the safe harbor can be retained in certain circumstances, even if the energy property is transferred to a different project, or to a different owner, as long as the transferor and transferee meet certain requirements. There are specific rules for transferring to unrelated parties.

Equipment transfers to unrelated parties without further project development may cause the transferee project to be disqualified if the transfer is solely of tangible personal property. The transfer of other types of project assets, such as permits or an interconnection agreement along with the safe-harbored equipment may allow the transfer of that safe harbored equipment to an unrelated party to allow the new owner to retain the project’s begun construction status.

Action Item: Carefully evaluate ownership scenarios to avoid disqualifying transfers to either related or unrelated parties.

Executive Order

Despite all that we talked about above, an Executive Order issued on July 7, 2025, could upend all of these well-practiced rules. Titled "Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources", the anticipated guidance triggered by this order could significantly impact the rules surrounding the 5% Safe Harbor, Physical Work Test, and the transfer of safe-harbored equipment or projects for energy tax credits.

The order instructs the Secretary of the Treasury to take all action within 45 days following enactment of the One Big Beautiful Bill Act, “…that it deems necessary and appropriate to strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities. This includes issuing new and revised guidance as the Secretary of the Treasury deems appropriate and consistent with applicable law to ensure that policies concerning the “beginning of construction” are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.”

We can speculate but we don’t know when this guidance will be issued nor how the guidance will change. Guesses for possible changes include an increase from 5% to a higher percentage for the safe harbor, establishing a minimum dollar amount of work for the physical work test, or shortening the four-year window of satisfaction of the continuity requirement or any combination of the above.

Conclusion

Meeting these begun construction requirements – especially for wind and solar energy projects under the scrutiny of the government – requires more than just breaking ground. It demands strategic planning, regulatory compliance, financial resources, and technological readiness. Successful project initiation requires a holistic approach. 
Keep abreast of any changes as a result of any additional Treasury guidance by checking in with your CohnReznick trusted advisor.