Court Restores 5% Safe Harbor for Wind and Solar as July 4 Deadline Nears

Key Takeaways

What Happened: On June 6, 2026, the U.S. District Court for the District of Columbia vacated Internal Revenue Service (IRS) Notice 2025-42, which eliminated the 5% Safe Harbor for most wind and solar projects seeking clean energy tax credits under Sections 45Y and 48E. The court held that the IRS acted arbitrarily and capriciously and remanded the notice to the IRS for further action consistent with that ruling.

Who’s Impacted: Wind developers, utility-scale solar developers, tax equity investors, lenders, offtakers, utilities, and companies evaluating clean energy procurement or ownership structures.

Potential Next Steps: Solar and wind project developers should promptly reassess whether they can establish beginning-of-construction under the restored 5% Safe Harbor, while preserving alternative arguments under the Physical Work Test where possible. They should also update tax credit diligence, financing assumptions, procurement documentation, and risk allocations to account for potential appeal, stay, or revised IRS guidance.

When Should They Act: By July 4, 2026. Wind and solar project developers should evaluate beginning-of-construction strategies before the July 4, 2026, statutory deadline, unless they will be placed in service by December 31, 2027. These are the two relevant timeframes for preserving 45Y and 48E eligibility.

Background

The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, significantly changed the clean energy tax credit landscape for wind and solar. The OBBBA accelerated the phaseout of Sections 45Y and 48E for wind and solar projects by requiring affected projects to either begin construction by July 4, 2026, or be placed in service by December 31, 2027.

Historically, developers could establish that a project had begun construction through either the Physical Work Test, which requires “physical work of a significant nature,” or the 5% Safe Harbor, which generally requires a developer to pay or incur at least five percent of the project’s total cost. The IRS had recognized both pathways for more than a decade.

Notice 2025-42 changed that framework for wind projects and most solar projects. It eliminated the 5% Safe Harbor for wind and solar projects and left the Physical Work Test as the only available beginning-of-construction pathway, except for certain small solar facilities (under 1.5 MW). That shift created immediate planning challenges for projects with advanced financing, procurement, interconnection, or permitting work but limited physical construction activity.

The Court’s Decision

In Oregon Environmental Council v. IRS, No. 25-4400, 2026 U.S. Dist. LEXIS 125356 (D.D.C. Jun. 6, 2026), Judge Colleen Kollar-Kotelly vacated Notice 2025-42 and remanded it back to the IRS. The court found that the IRS failed to provide a reasoned explanation for eliminating the 5% Safe Harbor after years of prior guidance allowing developer to rely on it. The court also found that the IRS failed to adequately address reliance interests, did not meaningfully consider alternatives, and did not justify treating wind and solar differently from other zero-emission technologies eligible for the same tax credits.

For now, the decision restores the 5% Safe Harbor as an available method for wind and solar projects seeking to establish beginning of construction before the July 4, 2026, deadline. However, the ruling does not eliminate uncertainty. The government may appeal, seek a stay, or issue new guidance that attempts to address the court’s Administrative Procedure Act concerns.

Business Implications

The decision gives many wind and solar projects a potentially important second pathway to preserve Section 45Y and 48E eligibility. For some projects, the restored 5% Safe Harbor may better align with commercial realities than the Physical Work Test, particularly where developers have made significant equipment deposits, entered into procurement agreements, or incurred other qualifying project costs but have not yet started qualifying physical work.

To manage these uncertainties, businesses should consider developing or revising contractual provisions to account for the tax credit opportunities and risks, including provisions addressing changes in law or guidance, appeal or stay risk, beginning-of-construction obligations, changes to documentation requirements, pricing adjustments, and responsibility for any loss or reduction of expected credits. 

Where possible, projects should avoid relying exclusively upon the decision. The July 4, 2026, deadline is rapidly approaching, and a successful government appeal or stay could weigh against reliance on the reinstated Safe Harbor Provision. Where possible, projects should advance both a 5% Safe Harbor position and a Physical Work Test to manage risk in the event that later court or agency action undermines the court’s decision.

Projects should also coordinate beginning-of-construction planning with other clean energy credit restrictions. The Treasury and the IRS have separately issued guidance on foreign entity restrictions, prohibited foreign entities, and material assistance rules that may affect eligibility for Sections 45Y, 48E, and 45X.

What Companies Should Consider Now

Wind and solar developers, investors, and offtakers should consider near-term steps to preserve optionality and reduce execution risk:

• Review whether current or planned payments may satisfy the 5% Safe Harbor before July 4, 2026.
• Confirm that cost-incurrence documentation and accounting records support the intended beginning-of-construction position.
• Evaluate whether the project can also support a Physical Work Test position as a fallback.
• Revisit financing documents, tax equity materials, purchase agreements, and offtake arrangements for assumptions tied to Section 45Y or 48E eligibility.
• Identify contracts that may need revised tax credit provisions to address the risks and opportunities associated with restored availability of the 5% Safe Harbor.
• Monitor whether the IRS seeks a stay, appeals the decision, or issues replacement guidance before the statutory deadline.

Conclusion

The court’s decision may offer meaningful relief for wind and solar projects facing the fast-approaching July 4, 2026, beginning-of-construction deadline—but it does not remove all tax credit risk. Project developers and other entities should move quickly to evaluate whether the restored 5% Safe Harbor improves their position, document that position carefully, and defensively prepare for further IRS or appellate action on this topic.

Beveridge & Diamond helps clients navigate legal, regulatory, tax-adjacent, permitting, transactional, and project development issues affecting renewable energy and infrastructure projects. Our Climate Change, Project Development and Permitting, ESG, and Transactions practices advise companies on clean energy project strategy, environmental review, permitting, supply chain diligence, and risk allocation. For more information on this development, please contact the authors.