Treasury Guidance - July 7th Executive Order

Written By Rhone Resch

The Treasury Guidance on Commence Construction from the July 7th Executive was just released.  Here’s it is https://aboutblaw.com/bjeL and what’s in it:

 

1. Safe Harbor (5% Test) Is Mostly Eliminated

Under traditional IRS guidance (e.g., Notice 2013‑29 and successors), there were two main ways to establish “beginning of construction”:

  • Physical Work Test: Engaging in physical work of a significant nature.

  • 5% Safe Harbor: Spending at least 5% of total project cost on qualifying property.

Now, the new guidance under Notice 2025-42 eliminates the use of the 5% Safe Harbor for most projects (wind and solar facilities) seeking to meet the July 4, 2026 construction commencement deadline. Only the Physical Work Test remains available in most cases.

2. Physical Work Test—Tighter Standards

To establish that construction has begun (before July 5, 2026):

  • You must perform physical work of a significant nature.

  • This includes off‑site manufacture (e.g. transformers, racks, inverters) only if:

    • It’s under a binding written contract, and

    • Components are not held in inventory.

  • On‑site work may include:

    • Foundation excavation, anchor bolts, concrete pouring (wind)

    • Rack installation, mounting PV panels (solar).

  • Preliminary activities remain ineligible—things like planning, permitting, studies, site clearing, and so on do not qualify—similar to prior guidance.

3. Continuity Still Required

Once construction has begun under the physical work test, you must maintain a continuous program of construction. A Continuity Safe Harbor applies if the project is placed in service within four calendar years from the year construction began (e.g., if construction begins in 2025, service by end of 2029 meets the safe harbor).

4. Limited Exception for Small Solar Projects

One narrow exception still allows the 5% Safe Harbor for “low output solar facilities”—projects under 1.5 MW. These projects may still use either the Physical Work Test or the Safe Harbor.

5. Effective Date & Scope

  • This guidance is effective for projects whose construction had not begun on or before September 2, 2025.

  • If construction began before that date under prior guidance, those rules may still apply.

 

What This Means in Practice

  • Projects relying on the 5% test: Those planning to satisfy beginning-of-construction with contracts or deposits totaling ≥5% must pivot. For large solar or wind installations, the Safe Harbor route is mostly closed now.

  • Physical Work only: You must begin qualifying physical work of significant nature—like excavation or component manufacture—under binding contracts, and avoid having components held in inventory.

  • Timing is critical: Projects that began construction (and are properly documented) before September 2, 2025 may still rely on earlier, more flexible guidance. Those that haven’t must strictly adhere to the new rules to avoid missing credit deadlines (especially the July 4, 2026 cut‑off).

In Short…

The updated “commence construction” guidance drastically restricts the use of the 5% Safe Harbor for wind and solar facilities. Now, the only reliable path for most projects starting construction after early September 2025 is through physical work of a significant nature, which must be clearly documented and meet stricter criteria. The continuity requirement remains, but the means to establish a start date are now narrower.

 

Rhone Resch
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