Guidance for Clean Electricity Projects

Elimination of the 5% Safe Harbor

The most impactful change is the complete elimination of the 5% Safe Harbor for most projects. Previously, developers could establish a BOC date by paying or incurring 5% or more of the total project cost. This was a straightforward, cost-based rule that provided certainty and was widely used, especially for projects that were still in the early stages of development. The Notice removes this option for all wind facilities and for solar facilities with a nameplate capacity greater than 1.5 megawatts (AC). This change necessitates a shift in strategy for many large-scale projects, requiring a greater focus on initiating physical work to establish a BOC date.

The only remaining exception is for “low-output solar facilities” with a maximum net output of 1.5 MW (AC) or less. These projects, which often include rooftop or distributed solar systems, can still utilize the 5% Safe Harbor.

Clarification of the Physical Work Test

With the 5% Safe Harbor largely gone, the Physical Work Test becomes the primary, and often sole, method to establish BOC for most projects. The Notice clarifies and reinforces the long-standing principles of this test. The test is a facts-and-circumstances analysis, focusing on the nature of the work, not the cost incurred.

On-Site Activities:

These are the most common and easily documented forms of physical work. For a wind farm, this may include the excavation for turbine foundations, setting anchor bolts, or pouring concrete pads. For a solar facility, it includes installing racking or other structures to affix PV panels, collectors, or solar cells to a site.

Off-Site Activities:

The Notice confirms that off-site activities can also qualify as “physical work of a significant nature.” This includes the manufacturing of components, mounting equipment, support structures such as racks and rails, inverters, and transformers and other power conditioning equipment. The work must be performed either by the taxpayer or by another person under a binding written contract and cannot be on components that are already part of the manufacturer’s existing inventory.

The Continuity Requirement

The Notice retains the requirement for a “continuous program of construction” after a BOC date has been established. This ensures that projects are actively moving toward completion. The guidance clarifies certain disruptions in a taxpayer’s continuous construction to advance towards completion of an applicable wind or solar facility that are beyond a taxpayer’s control will not be considered as indicating that a taxpayer has failed to satisfy the Continuity Requirement.  These include delays due to severe weather conditions, permitting delays, and others.

The 4-year Continuity Safe Harbor remains in effect. This is a crucial provision that provides a predictable timeline: a project is deemed to meet the continuity requirement if it is placed in service by the end of the fourth calendar year following the year in which construction began. For example, a project that begins construction in 2025 will have until December 31, 2029, to be placed in service.

Actionable Steps for Developers

The new guidance requires a strategic pivot for developers. To manage these changes effectively, we recommend the following:

• Immediate Project Review: Evaluate all projects in the pipeline to determine which ones will be subject to the new rules (i.e., those that will not have established a BOC before September 2, 2025).
• Prioritize Physical Work: For projects that fall under the new rules, the focus must immediately shift to commencing physical work, both on-site and off-site, as early as possible.
• Meticulous Documentation: Maintain detailed, contemporaneous records of all physical work. This includes binding contracts, invoices for off-site manufacturing, and photographic evidence of on-site activities.
• Strategic Planning: The elimination of the 5% Safe Harbor for most projects necessitates a front-loaded development schedule. Projects must be planned to meet the Physical Work Test and be placed in service within the four-year safe harbor to avoid a more burdensome facts-and-circumstances review.

Other Important Considerations:

1. This notice only applies to solar and wind facilities. As such, other technologies seeking the ITC or PTC should follow prior guidance.
2. One concern the renewable industry had was the potential to have retroactive application of these more stringent BOC rules. This notice only applies prospectively – to projects on which construction did not begin before September 2, 2025.
3. For wind and solar projects wanting to utilize the 5% safe harbor, construction must begin prior to September 2, 2025. However, this does not give developers much runway.
4. Future guidance can be expected, specifically related to prohibited foreign entity rules.

Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.