On Saturday, June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 in full. That notice had removed the long-standing Five Percent Safe Harbor for wind projects and for solar projects larger than 1.5 megawatts. The ruling lands less than a month before the July 4, 2026 deadline that decides whether many of those projects keep their federal credits. Most practitioners expect the government to appeal, so the relief may be short-lived.
What changed
The 2025 tax law, known as the One Big Beautiful Bill Act, cut off the technology-neutral Section 48E investment tax credit and Section 45Y production tax credit early for wind and solar. Those projects must be placed in service by the end of 2027 to claim either credit. There is one exception: a project that begins construction before July 4, 2026, exactly one year after enactment, is not held to the 2027 placed-in-service deadline.
For more than a decade, IRS notices starting with Notice 2013-29 gave developers two ways to show construction had begun. The Physical Work Test requires significant physical work. The Five Percent Safe Harbor is met by paying or incurring at least 5% of the project's total eligible costs. On July 7, 2025, Executive Order 14315 gave Treasury 45 days to strictly enforce the wind and solar termination. The IRS responded in August 2025 with Notice 2025-42, which left only the Physical Work Test for the affected projects.
According to a client alert from Foley Hoag, the court found the notice arbitrary and capricious under the Administrative Procedure Act for three reasons:
- The IRS never explained how using the Five Percent Safe Harbor amounted to circumvention or manipulation.
- It singled out wind and solar under credits that are otherwise technology-neutral, without justifying that choice.
- It ignored more than a decade of taxpayer reliance on the safe harbor, along with narrower alternatives that commenters had proposed.
The plaintiffs sued in December 2025. They included the Natural Resources Defense Council, Public Citizen, the Oregon Environmental Council, the City and County of San Francisco and a clean energy consultant. The court dismissed two of them, Hopi Utilities Corporation and the Maryland Office of People's Counsel, on procedural grounds and reached the merits for the other five.
Who is affected
The ruling matters most for developers of utility-scale solar and wind projects that have not yet started physical work. It also reaches the business owners, family offices and tax-equity investors who finance those projects or rely on the credits they produce. The decision does not directly affect battery storage, hydropower, geothermal or nuclear projects. It also does not change other beginning-of-construction deadlines.
The after-tax math
The safe harbor is attractive because it is a clear number, but it requires real money up front. Example: for a solar project with $40 million of eligible costs, 5% means paying or incurring $2 million before July 4. Under the Physical Work Test, the same project would instead need significant physical work on site or on custom components, which can be harder to arrange in four weeks.
The risk is that the $2 million is spent, the ruling is stayed or reversed, and Notice 2025-42 comes back. In that case the project could be held to the end-of-2027 placed-in-service deadline, and the credit value would depend on finishing on time. For an investor, the question is less about the 5% outlay itself than about the credits that depend on it.
Moves to discuss with your advisor
- Investors with commitments to wind or solar projects may want to ask sponsors which beginning-of-construction method each project relies on, and whether its plan depends on the ruling holding.
- Deal documents often shift credit-loss risk between sponsors and investors. Reviewing how those clauses treat a reinstated notice may be worth doing with counsel.
- Foley Hoag expects most developers to stay with existing Physical Work Test strategies instead of switching methods this late.
What to watch
The government can appeal to the D.C. Circuit and ask for a stay pending appeal. The appeals court could also issue a short administrative stay while it considers that request, which would effectively reinstate the notice. The district court itself said market participants will likely need to wait for the appeal before they have certainty. The same court judged there was almost no chance the appeal would end before July 4. Treasury could also issue new guidance on remand that takes a different route to the same result.
Sources
After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.
