Court Decision Reopens Five Percent Safe Harbor Pathway for Solar and Wind Projects

In June 2026, a federal district court vacated IRS Notice 2025-42, which had limited how wind and solar projects establish the start of construction for purposes of the clean electricity credits under Sections 45Y and 48E.

The decision in Oregon Environmental Council v. IRS goes beyond a renewable energy tax credit update. It represents an important administrative law development with practical implications for taxpayers evaluating project documentation, credit eligibility and beginning-of-construction positions.

Key Questions to Consider

• Why did the court vacate IRS Notice 2025-42?
  The court determined that the IRS did not adequately explain its decision to depart from long-standing beginning-of-construction guidance for clean electricity credits.
• What does the court’s decision mean for solar and wind projects?
  The decision restores the potential use of the Five Percent Safe Harbor for wind and solar projects unless the ruling is stayed, reversed or replaced by new guidance.
• Can taxpayers rely on the court’s decision alone to support credit eligibility?
  No. Taxpayers should continue maintaining documentation supporting their beginning-of-construction position, including contracts, invoices, procurement records, cost allocations and construction schedules.

Background on IRS Notice 2025-42

The court framed the central issue clearly: Under current law, certain clean energy projects may qualify for the credits if construction begins by July 4, 2026, or if the project is completed and placed in service by December 31, 2027. The dispute focused on what a taxpayer must do by the July 4 deadline to be treated as having begun construction.

Since 2013, IRS guidance has generally recognized two methods for establishing the beginning of construction:

• Physical Work Test: Beginning physical work of a significant nature
• Five Percent Safe Harbor: Paying or incurring at least five percent of the total facility cost

Both methods also require continued progress toward completion.

Notice 2025-42 narrowed that historical framework by eliminating the Five Percent Safe Harbor for wind projects and most larger solar projects. The result was a more restrictive approach that typically moved affected projects toward the Physical Work Test.

Why the Court Vacated IRS Notice 2025-42

The court held that Notice 2025-42 was arbitrary and capricious under the Administrative Procedure Act. The opinion emphasized that the IRS had not adequately explained why it was departing from guidance that had been repeatedly reaffirmed for more than a decade.

The court also pointed to comments in the administrative record raising reliance concerns, requests for prospective application, technology-neutral treatment and narrower alternatives to address perceived abuse.

In short, the problem was not merely that the IRS changed course. The issue was that the agency did not sufficiently explain the change.

Why This Matters for Solar and Wind Projects

For solar developers, the decision restores the Five Percent Safe Harbor as a potential method for establishing the beginning of construction unless the ruling is stayed, reversed or replaced by new guidance. This is significant because the Five Percent Safe Harbor can support credit eligibility based on qualifying project costs, while the Physical Work Test depends on evidence that significant physical work has begun. The ruling does not eliminate the need for careful project-level support.

What Taxpayers Should Do Now

Taxpayers should avoid relying on the court decision as a substitute for documentation. Project owners, investors and credit buyers should confirm that contracts, invoices, procurement records, cost allocations, construction schedules and continuity efforts align with the claimed beginning-of-construction position. Where possible, projects should preserve support under both the Five Percent Safe Harbor and the Physical Work Test.

The Oregon Environmental Council decision is favorable for many clean energy projects, but its larger lesson is about process and documentation. Agencies must explain significant changes to long-standing guidance, and taxpayers must be prepared to support the facts underlying valuable tax credit positions. The strongest position is not simply the one that fits a restored safe harbor. Rather, it is a position that can be defended through diligence, reporting and examination.

Weaver Can Help

Weaver’s fixed asset advisory services team can help solar developers, project owners, investors and tax credit stakeholders assess beginning-of-construction documentation and review project cost support. Our professionals can also coordinate renewable energy credit planning with broader fixed asset and depreciation analyses. Contact us today.

Authored by Rafael Ferrales and Rick McClellan

©2026