New Possibilities – and Uncertainties – for Solar and Wind Projects on Eve of Critical Deadline

Key Points

• On June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 and remanded such notice to the Treasury Department for further consideration.
• In the absence of Notice 2025-42, taxpayers can begin construction using well established 5% safe harbor, and should be able to establish continuity using the more flexible “continuous efforts” test.
• How the Treasury Department will respond is uncertain, though any response could cast doubt on the ability to rely on the additional tests.
• Taxpayers rushing to begin construction before July 4, 2026 should continue to focus on physical work strategies, though would be wise to document any costs that might be used to establish that the 5% safe harbor has been met.

Background

Following the enactment of the One Big Beautiful Bill Act, developers seeking clean energy tax credits for wind and solar projects must begin construction thereof by July 4, 2026, or else place their project into service by December 31, 2027.  A developer that meets the July 4, 2026 deadline generally has until December 31, 2030 to place the project in service, or, if the developer can meet certain tests showing construction was continuous, the developer will not be subject to such deadline in order to qualify for tax credits.

Developers had historically been able to show that a project began construction by either starting “physical work of a significant nature” (the “Physical Work Test”), or else incurring 5% of the project’s costs (the “5% Safe Harbor”), and then meeting a continuity test (the “Continuity Test”) by either placing the projects in service within four years, making continuous efforts to advance towards completion, or maintaining a continuous program of construction.

In August 2025, the Treasury Department, in response to an Executive Order, issued Notice 2025-42 (the “Notice”), which limited developers to establishing the beginning of construction by meeting the Physical Work Test, removing the ability to rely on the 5% Safe Harbor, and required developers to satisfy the Continuity Test by meeting the four-year deadline, or else maintain a continuous program of construction, removing the ability to satisfy the Continuity Test by making continuous efforts to advance towards completion.  The Notice represented a significant narrowing of strategies available to begin construction.  First, the 5% Safe Harbor provides an objective standard to meet and therefore was favored by certain developers.  Second, eliminating the ability to satisfy the Continuity Test by making continuous efforts to advance towards completion imposes a significant burden on developers that miss the four-year placed in service deadline, as maintaining a continuous program of construction requires significantly greater effort throughout the construction period.

Oregon Environmental Council et al. v. IRS et al., No. 25-4400

On June 6, 2026, The U.S. District Court for the District of Columbia (the “District Court”) released a memorandum opinion regarding an Administrative Procedures Act challenge to the Notice.  The plaintiffs presented a threefold argument:

1. The IRS and the Treasury Department failed to articulate a reasoned basis for the major policy change reflected in the Notice.
2. The Notice arbitrarily singles out wind and certain solar projects for disfavored treatment without justification.
3. The IRS and the Treasury Department failed to consider serious reliance interests or evaluate alternative policy options when adopting the Notice.

The District Court ultimately held that both the IRS and Treasury Department failed to articulate a reasoned explanation in the Notice that would justify removal of the 5% Safe Harbor, and therefore that the Notice was arbitrary and capricious.  The Notice was fully vacated as a result.

What This Means

The District Court’s decision may be viewed as a victory for many developers, but the Treasury Department is almost certain to challenge the outcome of this case.  Such a challenge could reinstate the Notice on a temporary basis.  Developers have largely spent the last year focusing on execution of physical work strategies and should continue to document those strategies.  Developers who have started construction under the Physical Work Test and who have concerns about meeting the four-year continuity safe harbor should document their ongoing development activities in order to meet the more relaxed continuous efforts test in the event the Notice remains vacated following resolution of any challenge by the Treasury Department.

* * *