The US Treasury made it harder Friday for wind and solar projects to be considered under construction in time to qualify for federal tax credits.

However, the changes were not as bad as rumored.

The main change is the Treasury discarded a bright-line 5% test for starting construction of solar projects over 1.5 megawatts and all wind projects in favor of a less clear facts-and-circumstances approach of looking at the amount of physical work done by a factory on custom-made equipment for the project or at the project site.

This leaves uncertainty about how much work is required. The financiers will have to decide where they feel comfortable drawing lines. Many developers relied on physical work in the past to start construction, and the market was able to function.

The main change is that "physical work of a significant nature" merely had to have "begun" in the past while it will have to have been "performed" in the future.

The new construction-start rules apply to wind and solar projects on which construction starts on or after September 2, giving developers a short window to try to tidy up any construction-start efforts they have currently underway.

Developers starting construction of new solar or wind projects during the period September 2, 2025 through July 4, 2026 will have four years to finish after the year construction starts. Thus, a project on which construction starts in early 2026 will have until the end of 2030 to finish construction.

Anyone wanting more than four years will have to show continuous actual construction -- rather than mere continuous efforts -- to buy more time.

Events that prevent continuous construction -- like inability to get approvals from the US Department of the Interior -- will excuse a break in construction.

Wind and solar projects on which construction starts after July 4, 2026 must be completed by the end of 2027.

Distributed solar developers will still be able to use the 5% test on projects with nameplate capacities of up to 1.5 megawatts. The capacity will be measured at each inverter string. Thus, a large project could qualify in theory, but the IRS will treat multiple inverter strings as a single project if they have "integrated operations."  (Strings placed in service in separate tax years are not aggregated.) 

The new rules are in Notice 2025-42.

Share prices for rooftop solar and other renewables companies surged Friday after the guidance was released.

Deadlines

The "One Big Beautiful Bill Act" set several new deadlines for clean energy projects to qualify for federal tax credits.

Power and storage projects that were under construction by the end of 2024 qualify for "legacy" tax credits under sections 45 and 48 of the US tax code. Such projects generally must be completed within four years after the year construction starts, but offshore wind projects and projects on federal land have 10 years.

Legacy tax credits can also be claimed on geothermal heat pump installations that are under construction by the end of 2034.

Power and storage projects that start construction in 2025 or later qualify potentially for "technology-neutral" tax credits. Instead of listing the types of projects on which tax credits can be claimed as was done with the legacy tax credits, the technology-neutral credits can be claimed on any power plant with zero or negative lifecycle greenhouse gas emissions and any storage project.

House conservatives pushed for an early end to tax credits for wind and solar projects. The OBBBA set a deadline of the end of 2027 for such projects to be placed in service to claim technology-neutral tax credits.

However, at least six moderate Republican Senators engineered more time for wind and solar projects that are under construction by July 4, 2026. Such projects will have four years after the year construction starts to be completed. Thus, starting construction in early 2026 will allow until the end of 2030 to be completed.

Other projects -- like storage, gas-fired power plants with carbon capture, geothermal, hydroelectric and biomass -- have until the end of 2033 to start construction and qualify for tax credits at the full rate. Any such project that starts construction in 2034 or 2035 will qualify for tax credits at reduced rates.

The OBBBA has complicated FEOC -- for foreign entity of concern -- provisions that will deny technology-neutral tax credits on projects that use too much Chinese equipment or have contracts or technology licenses that give Chinese counterparties effective control over their projects. FEOC requires a three-part analysis. Any project that is under construction by December 31, 2025 can avoid step 1 of the analysis, which is the limits on use of Chinese equipment. There has been no change in what it takes to be considered under construction for this purpose. (For more detail, click here.)

There have been two ways to start construction of all projects to date. The tests are in a series of notices that the IRS issued starting in 2013 that mirror similar tests used in the Treasury cash grant program starting in 2009 and borrow from concepts that have been used for depreciation bonus purposes since 2001.

A project is under construction currently once at least 5% of the cost of the project has been "incurred" or once "physical work of a significant nature" starts at a factory on custom-made equipment for the project or at the project site.

President Trump directed the Treasury in an executive order on July 7 to issue "new and revised guidance" within 45 days to make it harder for any project to be considered under construction until a "substantial portion" has been built. The guidance released on August 15 was in response to the executive order. (For more detail on the executive order and how the OBBBA affects projects, click here.)

Other Details

The new guidance applies to wind and solar projects on which technology-neutral tax credits will be claimed. The Treasury believes it has authority to interpret the same words -- begin construction -- differently in an effective date clause engineered by the Republican Senators to give wind and solar projects until July 4, 2026 to start construction and avoid an end-of-2027 cliff to be placed in service than where the same words are used in deadlines for other types of projects.

The Treasury declined to set markers for how much physical work will be required in the future for a project to be under construction. It said "there is no fixed minimum amount of work or monetary or percentage threshold required," quoting the same statement from the current physical work test for starting construction. The tax equity market, tax credit buyers and tax insurers will have to decide where to draw lines.

The Treasury gave examples of what counts potentially as physical work at a factory. One of the examples was "transformers (used in electrical generation that step up the voltage to less than 69 kilovolts)."  The language in parentheses was an error and has been stricken in the official version of the construction-start notice posted on the Treasury website.

House conservatives complained about "stockpiling," meaning buying equipment without knowing where the equipment will be used. The new Treasury notice did not address stockpiling directly, but curtailed it to a degree by eliminating the 5% test for starting construction for utility-scale projects. Many tax counsel believe physical work of a significant nature must be for an identified project, as it is hard on a common-sense level to understand how work can start on a project without knowing the project.

Some developers sitting on unallocated equipment took steps in the past few weeks to move the equipment into specific projects.

The market has allowed developers who move construction-start equipment from project A to project B to treat project B as under construction in time. The Treasury copied the same language about when such transfers are permitted under the existing construction-start tests into the new notice. Thus, transfers are still possible. However, it is a good idea to have a business reason for the move. An example of a business reason is the project for which a transformer was originally purchased is now uncertain to advance after losing its offtake contract.

Congress wrote the existing construction-start tests into the tax code for testing whether projects are under construction by year-end 2025 to avoid the FEOC limits on use of Chinese equipment. The Treasury said in a footnote to the new notice that it does not address the construction-start rules for the FEOC deadline. The Treasury is expected to ask shortly for comments on issues it should address in future regulations or other guidance to implement the FEOC restrictions.