The 2025 Act (formerly known as the One Big Beautiful Bill or OBBB) introduced major changes to federal green energy tax credits that affect tax-exempt organizations. These credits—often used to offset unrelated business income tax (UBIT)—are now subject to earlier termination dates and stricter construction requirements, particularly for wind and solar projects.
Recent guidance from the IRS clarifies how organizations must determine whether a project qualifies under the revised rules. Understanding these changes is critical for nonprofits planning or currently developing renewable energy projects.
Early Termination of Wind and Solar Credits
The 2025 Act terminates the Section 45Y and Section 48E credits for wind and solar facilities placed in service after 2027, with a limited exception.
Projects may still qualify if construction begins before July 5, 2026. The Act also directs the Secretary of the Treasury to issue guidance ensuring the termination provisions are strictly enforced and not circumvented through planning strategies.
This change significantly narrows the window for qualifying projects and places heightened importance on how “beginning of construction” is defined.
IRS Notice 2025-42: Defining the Beginning of Construction
To implement the Act, the IRS issued Notice 2025-42, which establishes a single method for determining when construction begins for wind and solar facilities.
The Physical Work Test (PWT)
Under Notice 2025-42, the Physical Work Test (PWT) is now the sole method for establishing the beginning of construction.
Key characteristics of the PWT include:
- The focus is on physical work of a significant nature, not the amount or cost of work performed.
- There is no minimum monetary or percentage threshold required to satisfy the test.
- Both on-site and off-site work may qualify.
- Work may be performed by the organization itself or by another party under a binding written contract.
Qualifying Physical Work Activities
Off-Site Physical Work
Off-site work may include the manufacture or construction of key components, such as:
- Solar mounting equipment
- Support structures (racks and rails)
- Inverters
- Transformers used to step up voltage to less than 69 kilovolts
- Other power-conditioning equipment
On-Site Physical Work
On-site work generally begins with:
- Excavation for foundations (wind facilities)
- Installation of racks (solar facilities)
IRS Notice 2025-42 provides additional examples specific to both wind and solar projects.
Activities That Do Not Qualify
Certain preliminary activities are explicitly excluded, even if their costs are capitalized into the project’s depreciable basis. These include planning, permitting, site assessments, and similar preparatory work.
Merely incurring costs is not sufficient—the work must be physical and significant in nature.
Elimination of the 5% Safe Harbor
Under prior guidance, some projects could rely on a 5% safe harbor to establish the beginning of construction. However, Notice 2025-42 eliminates this option for most wind and solar facilities.
Important Exception
The 5% safe harbor no longer applies except for certain low-output solar facilities, as specifically defined in Notice 2025-42.
For most projects, reliance on financial thresholds alone is no longer permitted.
Continuity Requirement Still Applies
In addition to satisfying the Physical Work Test, projects must also meet a continuity requirement, meaning construction must proceed without unreasonable delay after it begins.
IRS Notice 2025-42 outlines additional continuity standards and compliance provisions that organizations must follow to preserve eligibility.
Practical Implications for Tax-Exempt Organizations
These changes increase compliance risk for nonprofits pursuing renewable energy projects. Organizations should:
- Reassess project timelines immediately
- Review contracts and construction activity documentation
- Confirm qualifying physical work occurred before July 5, 2026
- Avoid reliance on cost-based safe harbors
- Coordinate closely with tax advisors and project developers
Failure to meet the revised requirements could result in loss of valuable credits and increased UBIT exposure.
The 2025 Act and IRS Notice 2025-42 significantly reshape the landscape for green energy credits available to tax-exempt organizations. With earlier credit termination, stricter construction tests, and the removal of prior safe harbors, careful planning and documentation are now more important than ever.
Nonprofits engaged in wind or solar projects should act proactively to ensure compliance, preserve credit eligibility, and mitigate financial risk as these changes take effect.
