IRS Updates Rules for Renewable Energy Tax Credits

The renewable energy industry has been waiting for clarity and now it has arrived. On August 15, 2025, the IRS released Notice 2025-42, which provides long-awaited guidance on what qualifies as the “beginning of construction” for renewable energy projects under the One Big Beautiful Bill Act of 2023.

This notice is pivotal for developers, tax professionals, and investors seeking to secure tax credits under IRC §§45Y (Clean Electricity Production Credit) and 48E (Clean Electricity Investment Credit).

What Happened

• Notice 2025-42 redefines the standards for when renewable projects are considered to have begun construction.

• Projects started before September 2, 2025, can rely on prior safe harbors.

• Projects beginning after September 2, 2025, must meet stricter documentation and physical work criteria.

• Key focus areas include:

  • Physical Work Test – Construction must involve significant physical work (not just planning or permitting).

  • Five-Year Continuity Rule – Developers must show continuous progress toward completion.

  • Recordkeeping Requirements – Expanded documentation is required for IRS substantiation.

    
    

Why It Matters

For developers and tax advisors, the impact is immediate:

• Credit Eligibility at Stake

  Projects that fail to meet the new “beginning-of-construction” test risk losing access to the lucrative §45Y and §48E credits, potentially worth millions per facility.

  
  

• Financing & Investment Decisions

  Investors will now scrutinize project timelines more closely. The compliance risk could directly affect financing terms, valuations, and deal structuring.

  
  

• Compliance Burden

  Developers must update tax reporting systems, construction contracts, and documentation procedures to reflect the IRS’s new requirements.

  
  

• Broader Energy Policy Context

  The stricter rules aim to prevent “paper projects” from locking in credits without meaningful progress helping the government direct incentives toward projects that truly advance renewable capacity.

  
  

Compliance Steps for Advisors

Tax professionals working with renewable clients should immediately:

• Review Project Timelines: Identify which projects fall before or after the September 2, 2025 cutoff.

• Audit Documentation: Ensure contracts, invoices, and construction logs satisfy the new recordkeeping requirements.

• Communicate with Investors: Advise stakeholders about risks and opportunities under the updated framework.

• Model Tax Outcomes: Run side-by-side projections for projects that may slip past the deadline.

  
  

What’s Next?

Notice 2025-42 is expected to become the defining reference for renewable energy tax compliance over the next decade. More guidance may follow, especially on transferability and prevailing wage/apprenticeship rules under the same credits.

Tax professionals advising energy developers, private equity, or infrastructure funds should treat this notice as required reading.

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