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IRS Issues Guidance on Termination of Energy Credits Under OBBB
On Friday, the IRS released Notice 2025-42, outlining the guidelines for the termination of energy credits under Sections 45Y and 48E of the Internal Revenue Code. This follows the passage of the One Big Beautiful Bill(OBBB) and the President’s issuance of Executive Order 14315, “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources,” which required termination guidance within 45 days.
Background on Energy Credit Termination Under OBBB
The OBBB eliminates clean energy credits under Sections 45Y and 48E for wind and solar facilities placed in service after December 31, 2027. The termination applies to facilities beginning construction after July 4, 2026.
Historically, the IRS has allowed taxpayers to establish the beginning of construction using either the physical work test or the five percent safe harbor test. However, under Executive Order 14315, the Treasury Secretary was directed to ensure these rules are not “circumvented,” preventing companies from artificially accelerating projects or manipulating eligibility.
Key IRS Rules on Establishing the Beginning of Construction
Under Notice 2025-42, the IRS specifies that:
Physical Work Test Required: Construction must involve “physical work of a significant nature” and meet a continuity requirement. This work may be on-site or off-site but must be substantive.
Excluded Activities: Planning, financing, permitting, and site clearing do not qualify. Similarly, producing components from standard inventory (e.g., solar panels commonly kept in stock) does not establish construction.
Exception for Small Solar Projects: “Low output solar” facilities (<1.5 MW AC output) may still use the five percent safe harbor. Larger projects, however, must rely on the physical work test.
Impact on Solar, Wind, and Renewable Energy Developers
While these rules specifically address changes to Sections 45Y and 48E, they provide insight into how the IRS may approach other OBBB-related modifications. Developers and investors in renewable energy should anticipate stricter IRS enforcement on construction eligibility and limited reliance on safe harbors.
What to Expect Next: Upcoming IRS Guidance on Energy Tax Provisions
Additional guidance is expected in the coming months on provisions such as 179D, 45L, and other expiring or modified credits. Firms should closely monitor IRS updates to understand compliance requirements and planning opportunities.
If you have questions about these changes, please reach out to your McGuire Sponsel representative.
David McGuire is a leading expert on cost segregation, fixed assets and depreciation law and a co-founder of McGuire Sponsel.
McGuire is an expert on for how tax law affects depreciation. His knowledge in determining asset costs and classifications has held up against IRS scrutiny and has built the firm into a trusted industry partner.
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