A U.S. federal district court has completely reversed and reinstated IRS Notice 2025-42 the 5% safe harbor method for large solar and wind projects to determine when construction begins for federal tax credits. The June 6, 2026 ruling comes just 27 days before the critical July 4 statutory deadline and temporarily opens a critical qualification path for utility developers facing a serious commissioning cliff. The general waiver immediately reinstates the previous guidance under Notice 2013-29 and Notice 2018-59, allowing developers to do so Secure tax credit eligibility by charging 5% of a facility’s total qualifying costs, rather than relying solely on physical on-site work.
Under the One Big Beautiful Bill Act signed into law in 2025, clean energy projects that begin construction on or before July 4, 2026 will have a four-year window to become operational by the end of 2030. Projects that miss this deadline will have an accelerated deadline of December 31, 2027 to qualify for the Section 45Y Clean Energy Production Tax Credit and the Investment in Investment Tax Credit to qualify clean electricity under Section 48E. To demonstrate that construction has begun, developers have historically relied on either beginning significant physical work or meeting the 5 percent cost threshold, both of which required continued effort to complete the project.
IRS Notice 2025-42, issued in August 2025 to implement Executive Order 14315, abruptly eliminated the 5% safe harbor for all wind turbines and solar projects greater than 1.5 MW AC. The agency claimed the restriction was necessary to prevent artificial eligibility manipulation and evasion of statutory loan termination dates. A coalition of environmental and industry groups then filed a complaint against the notice in the U.S. District Court for the District of Columbia, arguing that the sudden policy change violated the Administrative Procedure Act.
Presiding Judge Colleen Kollar-Kotelly ruled that the IRS failed to meet the standard for reasoned decision-making. The court concluded that the agency failed to adequately explain how the safe harbor allowed developers to avoid statutory deadlines, ignored the trust interests established by more than a decade of established precedents, and failed to justify carving out large solar and wind installations while leaving the small solar installation safe harbor intact. Because the court found that only a general indemnity could fully redress damages resulting from the notice’s impact on third-party developers, the ruling applies nationwide.
That’s what the Natural Resources Defense Council, a plaintiff in the lawsuit, said in a statement that the decision adds to a series of defeats for the government and its wide-ranging attempts to block new wind and solar energy projects. The Treasury Department has not yet responded to requests for comment on the ruling.
Despite the legal victory, energy law firms are advising developers to proceed with extreme caution due to the likelihood of an emergency stay, a government challenge or a rapid reissue of IRS guidance with changed legal justification. Legal Counsel at Gibson Dunn warned The lack of immediate approval from the IRS creates procedural uncertainty Relying solely on the 5% safe harbor is extremely risky before the July 4th deadline. Firms like Foley & Lardner are urging developers to maintain a two-pronged strategy while documenting both the 5% cost threshold and the physical work test to protect tens of billions of dollars in utility-scale pipeline investments.