District Court Strikes Down Beginning of Construction Guidance Ahead of Pivotal Wind and Solar Deadline

Key Takeaways

• On June 6, 2026, the U.S. District Court for the District of Columbia struck down IRS Notice 2025-42, the applicable guidance for establishing “beginning of construction” for wind and solar investment or production tax credits, holding that the IRS acted arbitrarily and capriciously under the Administrative Procedure Act.
• The court vacated the notice in its entirety and remanded the matter to the IRS for reconsideration; the decision is applicable to all taxpayers, not just the plaintiffs. 
• Taxpayers can now aggressively argue that "beginning of construction" may be proven using the IRS's long-standing prior guidance, specifically Notices 2018-59 and 2022-61, which allows all market participants—including large-scale wind and solar developers—to once again utilize the objective 5% Safe Harbor pathway. 
• Developers with complex or ambiguous project timelines should act immediately, and taxpayers should establish a robust safety net by looking to pay or incur qualifying costs and satisfy safe-harbor guidelines to secure a defensive, parallel qualification pathway. 
• The deadline for establishing “beginning of construction” for projects is imminent, and the ruling is subject to ongoing litigation, potential appellate reviews, or an emergency stay. Project sponsors, investors, and suppliers must rapidly coordinate to evaluate capital expenditures while remaining nimble against further judicial updates.

Overview: District court decision

On June 6, 2026, the U.S. District Court for the District of Columbia issued a memorandum opinion in Oregon Environmental Council v. IRS, No. CV-25-4400 (D.D.C. June 6, 2026) that struck down Notice 2025-42, which served as the governing framework for establishing when a renewable energy project "begins construction" ahead of a critical upcoming regulatory milestone: the July 4, 2026, one-year anniversary of the One Big Beautiful Bill Act (OBBBA). The court vacated Notice 2025-42, ruling that the IRS acted arbitrarily and capriciously by failing to adequately justify its sudden departure from past practices or account for the industry's massive reliance interests. Nor did the IRS justify its failure to explain its decision to apply different rules to wind and large-scale solar projects even though the credits were technology-neutral. By setting aside Notice 2025-42, the court has introduced immediate flexibility back into tax equity planning—but has also increased tactical complexity as the statutory deadline looms. 

Notice 2025-42: What constitutes 'beginning of construction'

Developers, investors, suppliers, outside advisers, and others in the wind and solar industry have been asking this question ahead of the OBBBA deadline. Notice 2025-42 limited the applicability of the “5% Safe Harbor,” under which a taxpayer could begin construction by paying or incurring at least 5% of the costs of the project. This left taxpayers to make the beginning-of-construction determination under the “Physical Work Test” by establishing that “physical work of a significant nature” had begun before the July 4, 2026, deadline. Because the Physical Work Test is inherently dependent on a complex matrix of facts and circumstances, it can be highly difficult to decisively satisfy in a volatile regulatory environment. In addition, the Notice 2025-42 raised questions as to the extent to which prior guidance, and related understandings of how to establish beginning of construction, still applied.

The beginning of construction date is crucial, because it determines how much time the developer has to construct the project. Under Notice 2025-42, taxpayers who begin construction of wind and solar facilities after July 6, 2026, must place those facilities in service before 2028 in order to be eligible for the federal Section 48E investment tax credit or Section 45Y production tax credit. In contrast, taxpayers that begin construction prior to that date have a much longer lead time and need only place the facilities in service before 2030, or potentially later if continuity of construction is established under the facts and circumstances. Given the time needed to construct many large-scale projects, as well as the complicated economic and regulatory environment, that extra time can be crucial.

Current state of play: More flexible but more complicated

Based on the ruling, taxpayers now have a strong argument that “beginning of construction” may be established under the IRS's prior guidance, which provides that all taxpayers may use the 5% Safe Harbor. The court acknowledged that reintroducing the 5% Safe Harbor at this late date before the deadline introduces a degree of uncertainty for both clean energy project developers and investors. Nevertheless, it reasoned that some uncertainty was inevitable under the circumstances and that, on balance, the more equitable path was to vacate Notice 2025-42 now, giving taxpayers at least some time to take action to begin construction in accordance with the reinstated rule. 

While there is not much time before the OBBBA deadline, taxpayers with complicated facts under the Physical Work Test also should consider paying or incurring costs (and satisfying other requirements) under the 5% Safe Harbor in order to provide an alternative way to meet the deadline. Taxpayers may also review and evaluate their existing expenditures incurred to date to determine whether they may already have achieved this 5% milestone or be approaching it. 

In any circumstance, taxpayers also must exercise caution, as the ruling not only could be appealed, but the IRS could issue new similar guidance that would satisfy the court’s concern with its “adequately justify[ing]” its departure from the prior guidance.

Endnotes

[1] The court concluded that “the cursory explanation [in the notice] is insufficient to show the ‘path’ that led the IRS to eliminate the Five Percent Safe Harbor for wind and large-scale solar projects, while leaving the Safe Harbor in place for other clean energy projects.”

[2] Under the notice, taxpayers with low-output solar facilities, with output less than 1.5 megawatts, may still use the 5% Safe Harbor.