Begun construction: Navigating today’s challenges

Understanding the history of ‘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.

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

On June 22, 2018, the IRS issued Notice 2018-59 (PDF), 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.

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 make sure 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 to qualify for the domestic content adder may face challenges in meeting the 5% safe harbor.
   • • Action item: Make sure that at least 5% of the total cost of ITC-eligible property is paid or incurred, excluding non-eligible costs. Third parties will expect that there will be sufficient documentation that will demonstrate satisfaction of 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% threshold is advisable to avoid unpleasant surprises, since the amount of 5% safe harbor expenditures can’t be revised after the fact. Monitor Treasury and IRS guidance 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 2018 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 2018 Notice. Also, physical work of a significant nature does not include work (performed either by the taxpayer or by another person under a binding written contract) to produce a component/part of an applicable wind or solar facility that is either in existing inventory or normally held in inventory by one selling the component/part to the taxpayer. Monitor Treasury and IRS guidance for changes to these rules.

Continuity Requirement

Both the 5% safe harbor and physical work tests under Notice 2018-59 require continuous progress, which is essential to maintain ITC eligibility. Continuous progress includes ongoing expenditures, contracts, or permitting, depending on the circumstances. Certain projects placed in service by the end of the calendar year that is no more than four years after the calendar year during 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 and related party status to avoid disqualifying transfers to either related or unrelated parties.

August 2025: Notice 2025-42: Restrictions on safe harbor qualification

Note: A June 2026 court ruling invalidated Notice 2025-42, as further detailed below, restoring access to the 5% test for projects restricted by this Notice; however, as the situation may continue to evolve, we have left this section in place for continued reference. We will continue to update this page with further developments.

On Aug. 15, 2025, the IRS released a new Notice on the subject of safe-harboring wind and solar projects that intend to qualify for the 45Y or 48E tax credit.  

Notice 2025-42 (PDF) was issued as a follow-up to the July Executive Order 14315, “Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources,” in which the U.S. Department of the Treasury was instructed to “strictly enforce” the phaseout of the clean electricity production and investment tax credits for wind and solar projects and to issue new and revised guidance to ensure that wind and solar projects did not circumvent the beginning of construction requirement.

This Notice’s changes to the ITC and PTC safe harbor rules were, in some minds, far less punitive than had been anticipated after the issuance of the Executive Order.

To summarize Notice 2025-42:

1. Projects that qualify for Sections 45 (PTC) and 48 (ITC) credits, based on the date of the project’s start of construction, were not impacted.
2. The changes in Notice 2025-42 were not retroactive.
   1. These new rules took effect for applicable wind and solar facilities (under Sections 45Y or 48E) the construction of which begins (as determined under section 5 of Notice 2022-61) on or after Sept. 2, 2025. So even for 48E and 45Y projects, if construction began prior to Sept. 2, 2025, they were not impacted by the new Notice.
3. The new rules applied to wind or solar exclusively. Other 45Y or 48E technologies were not impacted by this Notice. There is an exception for “low-output solar facilities” (described below), but this exception only applies to solar, not wind.
4. Wind projects could not qualify under the 5% safe harbor after Sept. 1, 2025. The ability to use the 5% spending safe harbor was  limited by this Notice on a go-forward basis only to what are now defined as “low-output solar facilities” – i.e., a solar facility that has maximum net output of not greater than 1.5 megawatt (as measured in alternating current). Careful analysis should be made as to whether multiple facilities are treated as a single project under the new Notice, and thus trip this rule.
   1. Low-output facilities can also be eligible for the Physical Work of a Significant Nature test in addition to the 5% spending safe harbor.
5. The Physical Work of Significant Nature test remained unaltered from prior iterations of guidance and still applied to both wind and solar.
   1. Both on-site and off-site work remain eligible to be included in the Physical Work test, subject to the same binding contract and continuity rules, subject to their eligibility for the tax credit.
   2. No new or higher amount of work test or spending test applies to the Physical Work Test. These are also unchanged.
6. The continuity requirement remains as an additional requirement to fully satisfy the begun construction requirements. However, while Notice 2025-42 Section 4 did retain the continuity safe-harbor rule in general, it modified it so that continuous “efforts” may no longer used, and instead requires that the taxpayer demonstrate “a continuous program of construction.” An applicable wind or solar facility that is placed in service before the end of the fourth calendar year after the calendar year during which construction of the applicable wind or solar facility began will be treated as having satisfied this continuity safe harbor.
7. The rules for transfers of projects remain unchanged from prior guidance.
8. The Notice did not address the Foreign Entity of Concern (FEOC) issues mentioned in the Executive Order; guidance to address the beginning of construction rules for purposes of those FEOC matters is currently being drafted and additional guidance will be issued.