Notice 2025-42 Explained: What You Need to Know
On August 15, 2025, U.S. Treasury and IRS issued guidance for solar and wind projects mostly eliminating the 5% Safe Harbor for start of construction, but retaining the Physical Work Test and 4-year continuity
Notice 2025-42 was issued in response to Executive Order 14315 of July 7 with the stated purpose to “strictly enforce the termination of the clean electricity production and investment tax credits” and adopt guidance “restricting the use of broad safe harbors”. The One Big Beautiful Bill Act (OBBBA) includes a requirement that solar and wind facilities remain eligible for the PTC and ITC only if they are placed in service by the end of 2027; however, there is an exception for projects that start construction before July 4, 2026 (the one-year anniversary of the OBBBA).
Notice 2025-42 only applies to solar and wind projects. The Notice eliminates the 5% Safe Harbor that previously allowed wind and solar project owners to begin construction by paying or incurring 5% of the total project credit-eligible basis but retains one exception: “low output solar facilities” with a net output of 1.5 MW (AC) or less can still use the 5% Safe Harbor. This exemption is welcome news for community solar and DG developers, but means a short remaining window for any larger projects. For all solar projects with a maximum net output greater than 1.5 MW (AC) and for all wind projects, only the Physical Work Test remains after the Notice effective date.
As with prior guidance, (i) there are on-site and off-site options to satisfy the Physical Work Test and (ii) the 4-year continuity safe harbor continues to apply. If a project is not placed in service by the end of the 4-year window, whether a continuous program of construction was followed will be determined on the relevant facts and circumstances (including a list of excusable disruption rules).
Despite industry concerns that the updated guidance would be retroactive, Notice 2025-42 is not. The new rules apply to applicable wind and solar facilities that do not begin construction under the existing rules (as reflected in Section 5 of IRS Notice 2022-61) prior to September 2, 2025. This provides roughly two weeks for wind and larger solar project developers to execute on a 5% Safe Harbor strategy to avoid the 2027 placed in service cliff.
In the lead up to this Notice, we saw developers of all sizes using both the 5% Safe Harbor and Physical Work Test – in a sense, both were rewarded because of the effective date of this Notice. We expect module procurement deal flow to accelerate over the next two weeks, with rack, inverters, transformers and power conditioning equipment to be prioritized by most procurement specialists.
A major concern for financing parties in losing the 5% Safe Harbor is the loss of an objective determination. The prior formulation provided a straightforward calculation to ensure continued eligibility for 45Y and 48E credits, whereas the Physical Work Test requires proving that such work is “significant”. Several widely-accepted approaches within the tax equity market were listed in this Notice (e.g., certain transformers for offsite work) as satisfying that bar. Some less common methods may face higher scrutiny, however, given the language in both the Executive Order and the Notice directing that a “substantial portion” of wind and solar facilities must be built to satisfy this test.