Key Takeaways
- Projects must meet specific requirements related to the start of construction to qualify for certain clean energy incentives.
- After meeting the BOC requirement, projects must make continuous progress toward completion, with the IRS providing saf
- e harbor deadlines to accommodate potential delays.
- Adhering to BOC requirements is essential for securing valuable tax credits and enhancing the financial viability of clean energy projects.
The Inflation Reduction Act (IRA) introduced and extended several clean energy provisions to promote investment in the United States, including beginning of construction (BOC) requirements. These requirements are critical to determining eligibility for various energy tax credits, including the Production Tax Credit (PTC) and the Investment Tax Credit (ITC).
With passage of the One Big Beautiful Bill (OBBB) and its new restrictions on energy tax credits, here’s what you need to know.
Defining the Beginning of Construction
To determine which incentives are applicable, an energy project, qualified facility, or energy storage technology must meet specific requirements related to the start of construction.
The IRS historically outlines two primary methods to establish the BOC:
- Physical Work Test: This method involves starting significant and continuous physical work at the project site. This includes excavation of foundations, setting supports, and equipment installation. Off-site work can also qualify if it involves producing essential components that are not normally held in inventory. For example, manufacturing wind turbine blades specifically for a project, under a signed contract, can meet this requirement.
- Five Percent Safe Harbor: Under this method, a taxpayer can establish the beginning of construction by paying or incurring at least 5% of the total project cost. Eligible expenditures include all costs that contribute to the depreciable basis of the property generating the credit and those directly related to the construction or manufacturing of project components under a contract. These expenditures must be accompanied by continuous efforts to advance the project toward completion.
Continuous Construction Requirement
Once a project has met the BOC requirement, the IRS also mandates it must make continuous progress toward completion. This means that work must be consistent and ongoing, with limited interruptions.
The continuity requirement ensures that projects claiming the IRA's tax benefits are genuinely advancing toward becoming operational.
Continuity Safe Harbor
To provide flexibility to taxpayers, the IRS has established a Continuity Safe Harbor, which deems the Continuity Requirement satisfied if the project is placed in service within a certain timeframe — generally within four to six years after construction begins.
A few notable continuity safe harbors include:
- Section 48C (Qualifying Advanced Energy Project Credit): If placed in service within five calendar years of the construction start.
- Sections 45 (Production Tax Credit), 45Y (Clean Electricity Production Credit), 48 (Investment Tax Credit) & 48E (Clean Energy Investment Credit): If a qualified facility is placed in service no more than four calendar years after construction began.
- For offshore projects and projects built on federal lands, the placed-in-service date is limited to no more than 10 calendar years.
- Section 45Q (Carbon Oxide Sequestration Credit): If placed in service no more than six calendar years after construction of the qualified facility or carbon capture equipment began.
OBBB Changes
On July 7, 2025, President Trump issued Executive Order 14315 directing the Treasury to strictly enforce the termination of the PTC and ITC for solar and wind facilities. In response, the Treasury issued IRS Notice 2025-42 (the Notice), effective for solar and wind facilities whose construction did not begin prior to September 2, 2025. The Notice outlined new requirements for determining the beginning of construction for solar and wind facilities for purposes of the Section 45Y and 48E credits. Amongst other changes, the Notice eliminated the Five Percent Safe Harbor for Section 48E and 45Y projects, except for small solar projects.
However, in June of 2026, mere weeks before some of the OBBB changes were to take effect, the District Court for the District of Columbia vacated the Notice. The Court found that the IRS did not adequately justify eliminating the Five Percent Safe Harbor for wind and most solar projects.
Impact on Energy Investments
The BOC requirements are critical for developers and investors in the renewable energy sector to secure valuable tax credits that significantly enhance the financial viability of clean energy projects.
These provisions are designed to accelerate the transition to renewable energy, contributing to the broader goals of reducing greenhouse gas emissions and promoting sustainable development.
Understanding and adhering to BOC requirements is essential for anyone involved in developing renewable energy projects, and a trusted energy services provider can help.
Benefit from available tax credits and deductions to help maximize tax savings.
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