What's Happening?
The IRS has introduced new guidelines under Notice 2025-42, impacting solar power projects' eligibility for federal tax credits. The guidelines eliminate the 'Five Percent Safe Harbor' for projects exceeding 1.5 MWac, requiring them to meet a 'Physical
Work Test' to qualify for the Section 48E investment tax credit (ITC) or Section 45Y production tax credit (PTC). This test mandates that significant physical work must commence to establish the beginning of construction, which is crucial for locking in tax credit parameters such as prevailing wage rates and apprenticeship requirements. Projects that begin construction after September 2, 2025, face increased administrative burdens and must demonstrate continuous progress to maintain eligibility. The guidelines also introduce Foreign Entity of Concern (FEOC) restrictions, affecting projects with supply chain links to certain foreign countries.
Why It's Important?
These changes are significant for the solar industry as they alter the financial and operational landscape for new projects. By setting stricter requirements for tax credit eligibility, the IRS aims to ensure that projects are genuinely advancing and not merely claiming credits without substantial progress. This could lead to increased costs and planning challenges for developers, potentially slowing down the pace of new solar installations. The FEOC restrictions further complicate matters by limiting projects' exposure to foreign supply chains, which could impact material sourcing and project timelines. Overall, these changes could influence the economic viability of solar projects and affect the broader push towards renewable energy in the U.S.
What's Next?
Solar project developers will need to adjust their strategies to meet the new IRS requirements, focusing on demonstrating significant physical work early in the project timeline. This may involve revising project schedules, securing supply chains, and ensuring compliance with wage and apprenticeship standards. The industry may also see increased collaboration with domestic suppliers to mitigate FEOC-related risks. As the July 4, 2026, deadline approaches, developers will likely prioritize projects that can meet the new standards to secure tax credits. The IRS and Treasury Department may provide further guidance to clarify compliance requirements and address industry concerns.
