Safe Harbor Restored: Federal Court Strikes Down IRS Attempt to Narrow Clean Energy Tax Credit Eligibility

By Marc L. Schultz, Nika Antonikova, and Tyler D. Eddington

On June 6, 2026, a federal district court vacated IRS Notice 2025-42 (setting special beginning of construction rules for solar and wind projects) in full and remanded it to the IRS for further administrative action.¹ The effect of this is that the Five Percent Safe Harbor, a method for establishing that an energy project has begun construction for federal income tax purposes, is once again available for wind and large-scale solar projects seeking certain federal tax credits.

Background

Since 2013, the IRS has recognized two methods for taxpayers to establish “beginning of construction” for clean energy tax credits: the Physical Work Test (starting physical work of a significant nature) and the Five Percent Safe Harbor (paying or incurring at least five percent of total facility cost). Both methods were reaffirmed by the IRS in several notices issued over more than a decade.²

The legislation commonly known as the One Big Beautiful Bill Act was enacted in July 2025. Among other changes, it eliminated the tax credits for wind and solar projects under Code Sections 45Y and 48E that are placed in service after December 31, 2027, but provided an eligibility window for wind and solar projects placed in service beyond 2027 (but effectively no later than December 31, 2030) where construction has begun on or before July 4, 2026.  Further, the Trump administration directed the Treasury to “strictly enforce” the termination of these credits for wind and solar facilities in Executive Order No. 14315 (Executive Order).

In August 2025, in response to the Executive Order, the IRS issued Notice 2025-42 eliminating the Five Percent Safe Harbor for all wind projects and solar projects exceeding 1.5 MW (A/C), which made the Physical Work Test the sole method for wind and large solar projects to begin construction and safe harbor against the credit termination deadline.

The Court’s Decision

On June 6, 2026, the U.S. District Court for the District of Columbia vacated Notice 2025-42 in full, finding it “arbitrary and capricious” under the Administrative Procedure Act (APA).

The court held the Notice was “arbitrary and capricious” on three independent grounds: (1) the IRS failed to articulate a reasoned basis for its major policy change, offering only a single conclusory paragraph of explanation; (2) the Notice arbitrarily singled out wind and large-scale solar projects without explaining why the same beginning-of-construction methodology should not apply to other technology-neutral credits; and (3) the IRS entirely failed to consider the serious reliance interests that industry participants had developed over more than a decade of consistent guidance, nor did it evaluate alternative policy options proposed by commenters.

Key Takeaways

Notice 2025-42 is set aside for all taxpayers, not just the plaintiffs. As a result, the pre-existing beginning-of-construction framework (including both the Physical Work Test and the Five Percent Safe Harbor) is restored as applicable guidance pending further IRS action. The decision does not preclude the IRS from issuing new guidance on remand, but any such guidance must satisfy APA requirements for reasoned decision making, including consideration of reliance interests and alternatives.

What This Means for Project Developers

We expect the U.S. Department of Treasury to appeal this decision, and the court itself acknowledged that appellate proceedings will likely extend beyond the July 4, 2026, beginning-of-construction deadline. An appellate court could reverse the decision on jurisdictional or merits grounds, restoring Notice 2025-42 or creating further uncertainty.

Accordingly, notwithstanding this favorable ruling, project developers and sponsors should continue to pursue beginning-of-construction status via the Physical Work Test wherever feasible. Relying solely on the Five Percent Safe Harbor in the current environment carries meaningful risk given the likelihood of appellate review and the possibility of new IRS guidance on remand. Developers who can satisfy both methods will be best positioned regardless of the outcome on appeal. We will continue to monitor developments and provide updates as the appellate process unfolds.