For the purposes of meeting deadlines to claim investment tax credits, the Internal Revenue Service has published guidance for determining when a solar energy project has begun construction from the standpoint of the IRS.
Note: On July 7, the White House issued an executive order (EO) instructing the Treasury Department to revisit criteria for beginning construction. What follows below concerns the existing IRS guidance, which may be subject to additional rulemakings that result from Treasury’s compliance with the EO.
Beginning construction of solar projects
Certain laws, including the Inflation Reduction Act of 2022 and the budget reconciliation act of 2025 (colloquially known as the One Big Beautiful Bill Act), introduced changes to tax policy that could affect projects already underway. To protect the interests of investors and businesses involved in those projects, these laws stipulated that solar and wind projects that had already started construction before a certain date were to remain exempt from certain provisions or remain qualified for others.
The tradition of providing these exemptions, or “safe harbors,” helps give investors certainty that when they invest in a project that expects to receive a tax benefit, they will still be able to count on that tax incentive even if the law is changed after the project gets underway.
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What is a safe harbor?
“Safe harboring” means following a set of published rules and practices in order to avoid punitive action, legal liability, or the need to comply with a regime of regulations that may be cumbersome to complete, or one that was not anticipated at the time a project or business began. In other words, individuals and businesses that follow instructions for making it into the safe harbor are exempt from certain rules, regulations, and changes to statutory provisions.
Safe harboring is similar to the concept of “grandfathering” older buildings or facilities into a previous building code rather than forcing every single building or facility in an entire jurisdiction into compliance with new regulations every time they’re enacted. As the name suggests, grandfathering clauses typically follow a time-based standard.
Safe harbors are not necessarily time-based, and can be used in an ongoing manner or in conjunction with a deadline. In finance and healthcare, as well as in real estate, safe harbors are meant to protect good-faith actors against legal liability or sudden shifts in policy that could adversely affect their business interests.
Safe harbors for solar projects claiming the Investment Tax Credit
Congress has repeatedly extended and modified the investment tax credit (ITC) since its reintroduction in 2005.
In 2015, the Consolidated Appropriations Act extended the ITC but also implemented a phase-down schedule for the credit. (Under the legislation, the credit was set to phase down in 2021, but it was extended and modified again under subsequent acts of Congress, including the IRA). For the first time, the Consolidated Appropriations Act contained a begun-construction safe harbor, which stipulated that projects that began construction in a certain tax year could still qualify for the percentage ITC in effect that year.
The begun-construction safe harbor was meant to provide greater certainty for developers who depend on federal tax incentives to finance their projects. Previously, projects were required to be placed-in-service by a certain deadline to qualify, which created dependence on variables outside a project developer’s control (such as delays caused by a utility or regional transmission organization). But changing the ITC qualification from a definitive placed-in-service date to the start of project construction required the IRS to define what counts as the beginning of construction. In Notice 2018-59, the IRS published guidance that established criteria for when it considers a project to have started construction.
The IRS commence construction guidelines offer two pathways for establishing the beginning of construction: the physical work test and the 5 percent safe harbor test.
Physical work test
Under the physical work test, the IRS requires that “physical work of a significant nature,” either at the project site or off-site, be undertaken for the project to be considered under construction. Significant physical work may include on-site work that is integral to the operation of, but not physically a part of the solar asset, such as excavation or the installation of project foundations and supports. Off-site physical work could include the manufacture of custom equipment (not normally held in inventory) necessary for project construction or installation. Any work performed for a taxpayer (rather than directly by the taxpayer) must be completed under a binding written contract in order to qualify. Work of a preliminary nature, such as planning, designing and permitting, does not qualify as physical work.
5 percent safe harbor test
The 5 percent safe harbor test requires the project owner to incur at least 5% of the total project costs for construction to be considered begun in that year. While this is a more straightforward mathematical test, it’s important for project owners to understand the risks of underestimating project costs. A cost overrun or an increase in the price of certain materials could mean that 5% of the project’s budget will no longer total at least 5% of the project’s total costs. For this reason, many developers looking to meet this test must spend upwards of 10% or more to ensure a project qualifies. In addition, it is important for developers to understand when they’ve incurred costs under their method of accounting.
Continuous progress requirement
Under both begun construction tests, the project must make “continuous progress” toward completion (the Continuity Requirement). The Continuity Requirement is in place to prevent project owners from trying to circumvent deadlines by starting placeholder projects and effectively grandfathering them in rather than using the safe harbor as it was intended—to protect the business interests of companies and investors who planned for an existing tax incentive, such as the ITC, that is now on schedule to sunset.
There are two ways to satisfy the “continuous efforts” requirement:
Four-year continuity of work safe harbor
This safe harbor, nested inside the begun construction tests mentioned above, states simply that if a project is placed into service by the end of the calendar year which is four years after the year construction began, then the IRS assumes the owner made continuous progress. It’s an automatic way of meeting the Continuity Requirement.
Facts and circumstances
Projects that take longer than four years to complete are still able to be considered making continuous efforts, or to have had a continuous program of construction, under IRS guidance, but owners must demonstrate proof that progress is ongoing. For purposes of the 5% safe harbor, this could be through additional physical work, procurement of materials, commissioning engineering studies, obtaining additional financing, or undergoing a permitting process. For purposes of the physical work test, this must be satisfied via continuous physical work.
The IRS applies a “facts and circumstances” analysis to determine whether these proofs are sufficient for satisfying the Continuity Requirement. Because it’s not an automatic method of satisfying this standard, project owners have to take greater care with documenting their progress to completion as well as any of the excused delays set forth in guidance.
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