Federal Court Vacates IRS Notice 2025-42: Five Percent Safe Harbor May be Restored for Wind and Solar Projects

On Saturday, June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 (the “Notice”), which previously eliminated the Five Percent Safe Harbor as a method of establishing “beginning of construction” for wind projects and solar projects greater than 1.5 MW (AC) seeking clean energy tax credits under Sections 45Y and 48E of the Internal Revenue Code.  This decision carries significant implications for developers, investors, and other stakeholders in the renewable energy sector, but given the short timeline before the July 4 beginning of construction deadline, the remand to the IRS for further review, and the potential for an appeal of the ruling and possible procedural and substantive grounds on which it may be overruled, it is not advisable to rely on the Five Percent Safe Harbor for such projects.

 IRS Notice 2025-42

Issued in response to Executive Order No. 14,315, the Notice removed the Five Percent Safe Harbor, which was a longstanding IRS-recognized method allowing taxpayers to “begin construction” of renewable energy (and other) projects for tax credit purposes by paying or incurring at least 5% of total project costs, for all wind projects and for solar projects exceeding 1.5 MW (AC).  Under the Notice, these projects could establish beginning of construction only through the Physical Work Test, which requires starting on-site or off-site physical work of a significant nature before the July 4, 2026, statutory deadline in order to avoid the December 31, 2027 placement in service deadline.  The Notice’s removal of the Five Percent Safe Harbor upended over a decade of consistent agency guidance on which the industry had relied since 2013 for tax credit purposes and before that in connection with the since-expired 1603 grant program.

 The Court’s Holding

The court held the Notice was arbitrary and capricious under the Administrative Procedure Act.  In particular, the court found that the IRS (1) failed to provide a reasoned explanation for eliminating the Five Percent Safe Harbor, (2) did not justify singling out wind and large-scale solar projects while leaving the Five Percent Safe Harbor intact for other technology-neutral clean energy projects, and (3) failed to consider serious reliance interests built up over more than a decade of consistent guidance or to evaluate less drastic alternatives proposed by industry commenters.

What This Means: Full Vacatur

The court vacated the Notice in full for all taxpayers.  On its face, this means the pre-Notice framework is restored for all affected taxpayers.  

Uncertainty Remains

Although the Five Percent Safe Harbor has been restored for now, several sources of uncertainty remain.  The court remanded the matter to the IRS, meaning the agency may issue new guidance, provided it engages in the reasoned decisionmaking the Administrative Procedure Act requires, which could in theory reinstate the prohibition on the Five Percent Safe Harbor.  An appeal is also possible, and there are multiple procedural and substantive grounds on which the court’s holding could be overturned on appeal.  Meanwhile, the July 4, 2026 beginning of construction deadline for wind and solar projects to avoid the December 31, 2027 placement in service deadline remains in effect regardless of the court’s decision.  

Key Takeaways for Clients

• Projects paused in reliance on Notice 2025-42 may now resume qualification efforts under the Five Percent Safe Harbor, but time is extremely limited given the approaching July 4 deadline and there remains significant uncertainty as to the ultimate outcome of the court’s opinion (i.e., whether the Five Percent Safe Harbor will be preserved through future IRS guidance and through a likely appeal of the opinion).
• For projects that cannot meet the Physical Work Test prior to the deadline and are expected to be placed in service after December 31, 2027, developers should evaluate whether utilizing the Five Percent Safe Harbor pathway is advantageous, but given the uncertainty of what lies ahead, should be aware of the risks attendant with meeting the Five Percent Safe Harbor now.
• As always, taxpayers should carefully document all expenditures and construction activities to substantiate their beginning of construction approach.

The Foley team will continue to monitor developments with respect to beginning construction under Sections 45Y and 48E of the Code.  Please reach out to one of the team members identified below with any questions.