Federal Court Vacates IRS Notice 2025-42, Restoring Five Percent Safe Harbor For “Beginning Of Construction” On Wind And Solar Projects

In a rare Saturday afternoon ruling on June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 in its entirety and remanded to the IRS for further proceedings.

Notice 2025-42, issued in August 2025, eliminated the long-standing “Five Percent Safe Harbor” as a method of establishing “beginning of construction” for federal energy tax credit purposes for all wind projects and solar projects exceeding 1.5 megawatts. Under the Notice, developers of those projects could rely only on the “Physical Work Test” to meet the “beginning of construction” safe harbor.

The ruling comes less than one month before the July 4, 2026 statutory deadline for certain wind and solar projects to begin construction. Projects that do not begin construction by that date must be placed in service by the end of 2027 or risk losing the Section 48E Investment Tax Credit (ITC) or Section 45Y Production Tax Credit (PTC).

The ruling may be too little, too late for developers who spent the past year developing project pipelines around compliance with Notice 2025-42. Even the Court acknowledged that, given the timing, “it is likely that market participants will need to await the outcome of an appeal before they will have certainty about the legal effect of the Notice,” and that there is “‘almost zero chance’ that the parties’ appellate rights will not extend beyond the July 4 beginning-of-construction deadline.”

In practice, most developers will likely proceed with their existing strategies regardless of the ruling. Although the Five Percent Safe Harbor offers a relatively bright-line pathway to establish “beginning of construction,” it requires substantial upfront investment. That expense may be difficult to justify with less than a month before the deadline and a looming possibility that the ruling is stayed or reversed on appeal—reinstating Notice 2025-42 and eliminating the Five Percent Safe Harbor yet again.

Key Takeaways

• The Court’s ruling technically restores the Five Percent Safe Harbor as an option for establishing “beginning of construction” for wind projects and solar projects over 1.5 megawatts seeking federal clean energy tax credits—but with less than a month before the July 4, 2026 deadline, and a likely appeal, relying on the ruling to pursue the Five Percent Safe Harbor before the deadline carries substantial risk.
• The Court determined that Notice 2025-42 is arbitrary and capricious because the IRS (1) failed to explain why the Five Percent Safe Harbor constituted “circumvention” or “manipulation,” (2) singled out wind and solar without justification, and (3) ignored significant taxpayer reliance interests in prior IRS guidance that included the Five Percent Safe Harbor.
• An appeal is expected and could result in the reinstatement of the Notice. Until the appellate process concludes—likely well after July 4—uncertainty will persist for developers weighing the Five Percent Safe Harbor.
• The ruling does not directly affect other technologies (battery storage, hydropower, geothermal, nuclear) or other “beginning of construction” deadlines, such as the end-of-2025 FEOC deadline—but Treasury could take action with broader effects following the ruling.

Background

The ITC and PTC, Inflation Reduction Act, and OBBBA

The ITC and PTC are the principal federal clean energy tax credits that solar, wind, and other clean energy developers rely on to finance and build thousands of projects across the United States. In 2022, Congress enacted the Inflation Reduction Act, which established the Section 48E ITC and Section 45Y PTC and set the timeframe for claiming those credits into the mid-2030s.

After President Trump was elected, Congress enacted the “One Big Beautiful Bill Act” (“OBBBA”) in 2025. Among other things, the OBBBA singled out solar and wind for early tax credit phase-outs. Wind and solar projects seeking the Section 48E ITC or Section 45Y PTC must be placed in service by the end of 2027 to claim the credits. However, the OBBBA created an exception for projects that establish “beginning of construction” before July 4, 2026—exactly one year after the OBBBA was enacted. Those projects are not subject to the 2027 placed-in-service requirement.

The Beginning of Construction Guidance

Neither the Inflation Reduction Act nor the OBBBA defined “beginning of construction” with specificity. Since at least 2013, the IRS has recognized two “beginning of construction” methods/safe harbors for clean energy tax credit purposes:

• Under the “Physical Work Test,” a taxpayer demonstrates eligibility by performing “physical work of a significant nature” before the applicable deadline in accordance with the terms of the guidance. What constitutes such work is determined based on facts and circumstances, not by reference to any fixed amount or type of work.
• The “Five Percent Safe Harbor,” by contrast, provides a more specific threshold: a taxpayer must pay or incur ITC eligible projects costs in an amount of at least five percent of total ITC eligible project costs to establish “beginning of construction” in accordance with the terms of the guidance.

Both methods require compliance with other requirements set forth in the guidance, the specifics of which are outside the scope of this alert.

The IRS has long relied on sub-regulatory guidance—IRS Notices—to define “beginning of construction.” Notice 2013-29 established the Physical Work Test and Five Percent Safe Harbor frameworks. The IRS addressed these tests in several subsequent Notices, most notably Notice 2018-59, which taxpayers relied on when the Inflation Reduction Act passed, and Notice 2022-61, which reaffirmed the principles of Notices 2013-29 and 2018-59 for purposes of the IRA’s prevailing wage and apprenticeship requirements.

The July 7, 2025 Executive Order and Notice 2025-42

After the OBBBA was enacted, on July 7, 2025, President Trump issued Executive Order 14315. Among other things, it imposed a 45-day deadline on the Secretary of the Treasury to take all action “necessary and appropriate to strictly enforce the termination of the clean energy production and investment tax credits . . . for wind and solar facilities,” including by:

issuing new and revised guidance . . . to ensure that policies concerning the “beginning of construction” are not circumvented, including by preventing the artificial acceleration or manipulation of eligibility and by restricting the use of broad safe harbors unless a substantial portion of a subject facility has been built.

In response to this Presidential directive—the first ever to address “beginning of construction” for energy tax credit purposes—the IRS issued Notice 2025-42, eliminating the Five Percent Safe Harbor for wind and solar projects over 1.5 megawatts. The Notice left the Physical Work Test seemingly intact relative to previous guidance. Wind and solar developers have been relying on Notice 2025-42 to inform their strategic planning ever since.

Summary of the Court’s Ruling

The Plaintiffs

The Plaintiffs are a coalition of environmental organizations, energy consultants, a Tribal utility corporation, and governmental entities: Oregon Environmental Council, the Natural Resources Defense Council, Public Citizen, Hopi Utilities Corporation, Woven Energy LLC, the City and County of San Francisco, and the Maryland Office of People’s Counsel.

The Lawsuit

In December 2025, Plaintiffs sued the IRS, the Department of the Treasury, and Secretary Scott Bessent (who was also serving as Acting Commissioner of the IRS at the time the lawsuit was filed), alleging that Notice 2025-42 is arbitrary and capricious under the Administrative Procedure Act (“APA”).

Recognizing that time was of the essence, the Plaintiffs moved for summary judgment on an expedited briefing schedule. The Court granted the request so the case could be resolved before the July 4, 2026 deadline.

The Court’s Procedural Rulings

The Court’s ruling addressed several threshold jurisdictional and procedural questions in addition to the merits:

• Standing. Four of seven plaintiffs established standing based on foreseeable economic injury from higher electricity prices caused by reduced clean energy capacity. The Court relied on “commonsense economic inferences” and evidentiary submissions projecting wholesale price increases of 4 to 38 percent in certain regions. Other Plaintiffs, such as Hopi Utilities Corporation and Woven Energy LLC (a consultant supporting Tribes and Tribal organizations in developing clean energy projects), had standing based on their work on developing an 8-megawatt solar project directly affected by Notice 2025-42.The Maryland Office of People’s Counsel lacked standing under a legal doctrine preventing states from suing the federal government in certain cases, such as this one.
• Anti-Injunction Act. The Court concluded that the suit falls within the AIA’s textual bar because the Plaintiffs’ theories of injury flow from the Notice’s effects on tax liability. However, the South Carolina v. Regan exception applied to all Plaintiffs except Hopi Utilities Corporation, because those Plaintiffs had no alternative legal avenue—such as a refund suit or deficiency proceeding—to challenge the Notice. Hopi Utilities Corporation was dismissed because it could pursue such a proceeding on its own behalf.
• Administrative Procedure Act Review. Because the Plaintiffs (other than Hopi Utilities Corporation) lacked access to refund suits or deficiency proceedings, they had “no other adequate remedy in a court,” and APA review was available.

The result of these procedural rulings was that Court could proceed to decide the merits of the suit for five of the seven plaintiffs. Two plaintiffs, Hopi Utilities Corporation and the Maryland Office of People’s Counsel, were dismissed.

The Court’s Ruling on the Merits

On the merits, the Court held Notice 2025-42 arbitrary and capricious on interrelated grounds rooted in the APA doctrine requiring agencies to provide a “reasoned explanation” for agency-driven policy changes.

• Failure to Provide a Reasoned Explanation. The Notice’s sole justification was a single paragraph stating that the guidance was “necessary and appropriate” to “prevent taxpayers from circumventing the statutory credit termination date” and “prevent the artificial manipulation of eligibility.” The Court found this explanation deficient because it did not explain how or why projects satisfying the Five Percent Safe Harbor were engaging in circumvention or manipulation. The Defendants argued that the Notice targeted “stockpiling” transactions, but the Court rejected this as post-hoc rationalization because neither Notice 2025-42 nor the administrative record showed that the agency chose to eliminate the Five Percent Safe Harbor for wind and solar projects based on stockpiling concerns specific to those projects.
• Arbitrary Disparate Treatment of Wind and Solar. The Section 45Y and 48E credits are technology-neutral, yet the Notice eliminated the Five Percent Safe Harbor only for wind and large-scale solar while leaving it intact for all other clean energy technologies. Neither the Notice nor the administrative record explained why concerns about circumvention and manipulation applied exclusively to wind and solar. The Court found “the record does not show that the agency made a reasoned decision that this difference in termination date alone should lead to a different methodology for determining the beginning of construction.”
• Failure to Consider Reliance Interests and Alternatives. The Five Percent Safe Harbor had been in place for over a decade and was reaffirmed through many subsequent notices. The Court rejected the argument that reliance interests were insignificant because the credits were “of recent vintage,” holding that the relevant question is “the pedigree of the Five Percent Safe Harbor as a means of establishing the ‘beginning of construction’ more broadly.” The IRS itself described this as “an established, defined concept in tax law” as recently as January 2025. The Court also noted that commenters had proposed targeted alternatives—such as new reporting and audit requirements or restrictions on purchases from prohibited foreign entities—and nothing indicated the agency considered them.

The Result

The Court vacated Notice 2025-42 in its entirety and remanded the matter to the IRS for further consideration.

Next Steps

The Court’s ruling means that, for the time being, IRS Notice 2025-42 is no longer in effect. Whether that remains the case through July 4 will depend on whether the IRS seeks to appeal the ruling to the U.S. Court of Appeals for the D.C. Circuit and successfully obtains a stay pending appeal. 

To obtain such a stay, the Government must show that it is likely to succeed on the merits of its appeal, that it will suffer irreparable harm, and that the balance of harms and public interest justify a stay. The D.C. Circuit could then either grant or deny that motion in short order or, as it has done in multiple other recent APA cases, issue an “administrative stay.” The latter freezes the impact of the Court’s ruling while the Court considers the merits of the case and, in the case, would effectively reinstate the Notice pending appeal. And if the D.C. Circuit denies the stay motion or refuses to implement an administrative stay, the Government could file an emergency motion at the U.S. Supreme Court seeking the same interim relief. 

Whatever route the Government ultimately takes, the result is likely to be uncertainty in the near term. Indeed, even if the District Court recognized that its ruling was unlikely to be the last word on the issue, and that any appellate ruling would likely post-date the OBBBA’s July 4 “beginning of construction” deadline for wind and solar projects. 

Implications for Wind and Solar Projects

The Five Percent Safe Harbor Is Restored—For Now

For now, the Court has vacated the guidance eliminating the Five Percent Safe Harbor for “beginning of construction” for wind projects and solar projects exceeding 1.5 megawatts under Sections 45Y and 48E.

In theory, developers of those projects could pay and incur five percent of total project costs before July 4, 2026 to establish “beginning of construction,” rather than relying solely on the Physical Work Test, assuming they meet all other applicable requirements.

As a practical matter, there may not be enough time. The Five Percent Safe Harbor generally requires both paying for and receiving equipment before the deadline, though an exception exists for taxpayers with a reasonable expectation that equipment paid for before the deadline will be delivered within three and a half months of payment.

Relying on the Five Percent Safe Harbor under these circumstances carries risk. As the Court recognized: “it is likely that market participants will need to await the outcome of an appeal before they will have certainty about the legal effect of the Notice.” The Court also noted that “even a decision from a higher court may not settle the relevant issues: if a reviewing court disagrees with this Court’s jurisdictional holdings, it may not reach the APA question at all, leaving that issue to be decided far into the future in a refund suit.” In practice, an appellate court could overturn the ruling on multiple grounds, reinstating Notice 2025-42 and eliminating the Five Percent Safe Harbor for wind and large-scale solar.

Nonetheless, some developers that are considering substantial equipment purchases for projects in the near future may consider advancing those purchases and meeting the Five Percent Safe Harbor requirements before the July 4 deadline in the event that the Court’s ruling is ultimately upheld on appeal. Of course, any approach based on the Court’s ruling should be carefully considered with the input of tax counsel given the possibility that the ruling may be later overturned on appeal and rendered null.

Scope of the Ruling

The Court’s ruling vacated Notice 2025-42, which by its terms applied only in limited circumstances. The Notice applied only to solar and wind projects and only for purposes of the July 4 deadline. It did not apply to other technologies—such as battery storage, hydropower, geothermal, or nuclear—or to other “beginning of construction” deadlines, such as the end-of-2025 deadline to avoid the OBBBA’s “Material Assistance Cost Ratio” requirements under its Prohibited Foreign Entities (commonly called “FEOC”) rules. For more information, see our publications on IRS’s FEOC guidance to date for the ITC and PTC and for the 45X Advanced Manufacturing Production Tax Credit.

Depending on how the ruling fares on appeal, the case may yet affect those other technologies and deadlines. The Court’s core holding is that it is arbitrary and capricious for Treasury and IRS to apply different “beginning of construction” tests to different technologies and deadlines without more compelling statutory support or a more substantial “reasoned explanation” by Treasury/IRS for such disparate treatment. Treasury and IRS could respond by eliminating the Five Percent Safe Harbor across the board—but as the Court noted, the IRS would still need to provide a reasoned explanation accounting for the significant reliance interests developed over the Five Percent Safe Harbor’s long history.

Conclusion

The Court’s ruling is significant in its complete vacatur of Notice 2025-42. However, the July 4 deadline is fast approaching, and a definitive appellate ruling almost certainly will not come until after the deadline has passed. We will monitor this case closely and are available to discuss how this ruling might affect your ITC/PTC strategy.