Public Agencies Face 2026 Cutoff for Wind & Solar Tax Credits Under OBBBA

The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, combined with the IRS’s Notice 2025-42, issued August 15, 2025, has reshaped the clean energy tax credit landscape for public agencies. These changes impose stricter rules and tighter timelines for wind and solar projects under Internal Revenue Code (IRC) Sections 45Y (production tax credit, or PTC) and 48E (investment tax credit, or ITC), creating urgent planning demands. For public entities aiming to leverage direct pay options, understanding these shifts is critical to securing valuable incentives before they expire. This informational piece distills the essential updates and offers actionable strategies to ensure compliance and optimize benefits.

Urgent Deadlines for Wind and Solar Tax Credits

OBBBA introduces a hard cutoff for wind and solar projects to qualify for full tax credits. To

access the PTCs or ITCs, agencies must begin construction by July 4, 2026, securing a four-year window to place projects in service by 2030. Projects starting after this date must be operational by December 31, 2027, with no grace period. Missing these deadlines could forfeit credits entirely, making early action essential for public agencies managing budgets and infrastructure goals.

New IRS Rules Tighten Construction Requirements

Effective September 2, 2025, IRS Notice 2025-42 redefines how wind and solar projects

establish the “beginning of construction” (BOC) for credit eligibility. Prompted by Executive

Order 14315, the notice eliminates two flexible options for most projects:

• The 5% Safe Harbor, previously allowing BOC qualification by incurring 5% of project costs, is now limited to low-output solar facilities (≤1.5 MW AC).

• The Continuous Efforts standard, which permitted activities like securing permits to meet continuity, is replaced by a stricter “continuous construction” requirement, demanding ongoing physical work.

  
  

Instead, most projects must meet the Physical Work Test, requiring significant on-site or off-site activities, such as:

• On-site: Excavating wind turbine foundations, pouring concrete, or installing solar panel mounting structures.

• Off-site: Manufacturing custom components like transformers or inverters (excluding standard inventory items).

  
  

A four-year Continuity Safe Harbor remains in place, allowing projects to be placed in service within four years of starting construction without violating continuity. Excusable disruptions (e.g., weather or permitting delays) are permitted, but thorough documentation is critical.

Projects that began construction before September 2, 2025, remain unaffected and can rely on prior IRS guidance (Notices 2013-29, 2018-59, 2022-61), which allowed the 5% Safe Harbor test and the continuous efforts test.

Small Solar Projects Retain Flexibility

Low-output solar facilities (≤1.5 MW AC, measured at commissioning) can still use the 5% Safe Harbor, accommodating smaller-scale projects like rooftop or community solar. However, output is aggregated for integrated operations (e.g., same ownership, shared interconnection, or same end user) to prevent splitting projects to meet the threshold. This exception supports public agencies with distributed energy initiatives.

Foreign Entity of Concern (FEOC) Rules Loom

OBBBA’s FEOC provisions, effective for projects starting after December 31, 2025, impose

restrictions on material sourcing (40–55% non-FEOC starting 2026), ownership, and control by entities tied to countries like China or Russia. Notice 2025-42 notes that separate BOC guidance for FEOC rules is forthcoming, likely similar to prior IRS standards. Non-compliance risks full credit recapture, necessitating rigorous supplier vetting.

Strategic Actions for Public Agencies

To navigate these changes:

• Act Swiftly: Start significant physical work by July 4, 2026, to lock in the four-year safe harbor. Document all activities to meet the Physical Work Test.

• Leverage Small Solar Benefits: Use the 5% Safe Harbor for projects ≤1.5 MW AC to simplify compliance.

• Prepare for FEOC Scrutiny: Verify supplier certifications and ownership structures to avoid recapture risks.

• Consider Alternative Technologies: Battery storage and other non-wind/solar projects face fewer restrictions and longer credit windows under OBBBA.

• Strengthen Documentation: Anticipate increased IRS audits by maintaining detailed records of construction progress and supplier compliance.

  
  

Moving Forward

While Notice 2025-42 tightens the framework, the four-year Continuity Safe Harbor and familiar Physical Work Test provide a clear path for compliance. Public agencies must act quickly to meet deadlines and prepare for forthcoming FEOC guidance. Consulting tax and energy experts can ensure projects remain eligible for critical incentives.