Recent laws have reshaped the renewables sector for investors and developers alike. As familiar practices shift, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released new guidance to clarify the rules for securing existing clean energy tax credits. Read on for Sugar Creek Capital’s breakdown on IRS Notice 2025-42 and what it means for your investments.
Background:The One Big Beautiful Bill (OBBB)
The One Big Beautiful Bill Act was signed into law on July 4, 2025. This legislation introduced significant changes to renewable energy tax policy for wind and solar projects, including the phase-out of technology-neutral clean electricity investment (Section 48E) and production tax credits (Section 45Y).
Under the OBBB, projects must begin construction before July 4, 2026, to remain eligible for the full credit. Those that miss this deadline may still qualify if placed in service by December 31, 2027.
Despite the accelerated timelines, many investors and developers delayed decisions while waiting for official guidance from the IRS.
About IRS Notice 2025-42
On August 15, 2025, the IRS issued Notice 2025-42, clarifying how wind and solar investors must determine the start of construction to qualify for clean energy tax credits. Some notable points include:
1. Elimination of the 5% Safe Harbor
Previously, projects could qualify as “under construction” once 5% of total costs had been incurred. Now, the 5% Safe Harbor is eliminated for most projects, except for low-output solar facilities (<1.5 megawatt). All projects have until September 2, 2025, to commence construction under the 5% safe harbor threshold. Projects that commence construction between September 3, 2025, and July 4, 2026, must rely on physical work.
Investor Takeaway: Investors must review when a project commences construction to determine which set of regulations apply and ensure the appropriate documentation is in place.
2. Implementation of Physical Work Baseline
The IRS now requires the Physical Work Test to establish the beginning of construction. This facts-and-circumstances test considers:
- Off-Site Activities for Wind & Solar: Manufacturing of components, mounting equipment, support structures, inverters, transformers and other power conditioning equipment.
- On-Site Activities for Wind: Excavation for foundations, setting anchor bolts, pouring concrete pads and assembling wind turbines and towers.
- On-Site Activities for Solar: Installation of racks or structures to affix photovoltaic panels, collectors or solar cells.
The new testing protocol applies to projects starting construction after September 2, 2025. Projects that begin earlier may still rely on prior IRS notices 2013-29, 2018-59 and 2022-61.
Investor Takeaway: For projects that are beginning construction now, eligibility depends on tangible physical work.
3. Continuity Requirement
Beginning construction before the deadline is not enough. Notice 2025-42 states that projects must also adhere to a Continuity Requirement — meaning that construction must occur continuously to remain eligible for clean energy tax credits.
All projects have a four-year timeframe from the commencement of construction to completion. However, the IRS will allow certain exceptions for circumstances beyond the developer’s control, such as severe weather or manufacturing and labor strikes. Excusable disruptions must be well-documented and determined during the calendar year during which the facility is placed in service.
Investor Takeaway: Projects that commence construction now with a continuous work stream will ensure a steady supply of credits for investors over the next four years.
4. Deferred Guidance for Foreign Entity of Concern Compliance
Lawmakers leverage “foreign entity of concern” restrictions to reduce U.S. reliance on designated countries, such as China or Russia. FEOC rules were already in place for select tax credits, such as the Advanced Manufacturing Investment Credit (48D) — but the OBBAA expanded restrictions to cover clean energy tax credits as well.
This significantly raises the stakes for clean energy projects starting construction after December 31, 2025, by limiting who can own, finance or supply materials for them. For developers and investors, this will mean:
- Stricter due diligence around ownership structures and supply chains
- Greater documentation and compliance burdens.
- Heightened risk of disqualification or credit recapture.
However, concrete guidance is still to come. Footnote 3 of Notice 2025-42 defers FEOC beginning of construction rules, noting that guidelines will emerge in a future notice.
Investor Takeaway: Investors should treat the OBBBA’s FEOC restrictions as a new layer of regulatory risk, necessitating stricter due diligence to safeguard eligibility and prevent recapture.
Investor Recommendations
To protect eligibility and reduce risk, Sugar Creek Capital recommends investors:
- Secure solar and wind tax equity investments early by locking in projects that have successfully commenced construction.
- Consider investing in technologies with longer runways, like battery storage. Battery storage is the fastest-growing segment in the renewables space and will have a significant volume of projects coming to market.
- Enhanced diligence requirements for projects may favor tax equity investments over transfers, as investors can earn higher returns for the extra diligence that they perform.
At Sugar Creek Capital, we’re working closely with investors and developers to align projects with the latest IRS and Treasury guidance. Contact our team today to discuss how these updates may affect your portfolio — and how to position your investment dollars.