Following the passage of the One Big Beautiful Bill Act (OBBBA), the IRS issued Notice 2025-42 on August 15, 2025, reshaping how solar projects must establish the “beginning of construction” to qualify for federal investment tax credits under the Clean Electricity Production Tax Credit and Investment Tax Credit.
Effective September 2, 2025, the 5% Safe Harbor method is no longer available for solar projects above 1.5 MW. These larger projects must now meet the stricter Physical Work Test, which requires tangible evidence of significant on-site or off-site construction activities before credits can be claimed.
Additionally, all projects must now be placed in service within four years of beginning construction to maintain federal investment tax credit eligibility. This rule applies to systems both over and under the 1.5 MW size and underscores the importance of accurate scheduling and completion planning.
Accelerated Project Timelines Are Critical
Large-Scale Projects (above 1.5 MW)
- Must rely solely on the Physical Work Test.
- Physical Work Test is narrowed and does not include “preliminary activities.”
- Projects using the Physical Work Test must maintain a “continuous program of construction.”
- “On-site physical work of a significant nature may include the installation of racks or other structures to affix photovoltaic (PV) panels, collectors, or solar cells to a site.”
- Requires early mobilization of construction crews and supply chains.
Small-Scale Projects (below 1.5 MW)
- May still use the 5% Safe Harbor or the Physical Work Test.
- Offers greater flexibility for maximizing ROI on smaller commercial solar installations.
- Off-site work still applies, but documentation must be detailed and verifiable:
- Manufacturing of custom components
- Major structural or electrical assemblies
- Other integral project elements
Smaller-scale solar projects, those at or below 1.5 MW, retain more flexibility, as they are still permitted to use either the 5% Safe Harbor or the Physical Work Test. This dual pathway offers a chance to accelerate smaller installations while securing incentives under less stringent requirements.
Summary
The elimination of the 5% Safe Harbor for larger (1.5+ MW) solar projects significantly narrows compliance options, raising the importance of tangible construction activity and detailed documentation.
Key courses of action include:
- Accelerate project schedules to capture Safe Harbor benefits before September 2, 2025.
- Identify and execute physical work activities that qualify under the new IRS standard to maximize federal solar investment tax credits.
- Audit supply chains and prepare for forthcoming FEOC guidance.
- Maintain detailed documentation to support tax credit eligibility.
The changes introduced in IRS Notice 2025-42 are reshaping how solar projects must be planned, documented, and delivered—especially for larger installations that no longer qualify under the 5% Safe Harbor. With compressed timelines and a strict four-year completion requirement, the stakes for securing federal tax incentives have never been higher. Core Development Group brings the technical expertise, project management rigor, and compliance insight needed to keep your projects on track—whether under or above the 1.5 MW threshold. Let’s discuss how we can help get your solar projects under construction with fast, reliable energy project execution.
