Trump tried to kill solar’s 5% safe harbor, a federal court brought it back

With less than a month left before the key, July 4th Federal Clean Energy tax-credit deadline, a federal judge has handed the solar industry an unexpected win, restoring the 5% safe harbor that Trump’s IRS tried to kill.

Last week, a US District Court for the District of Columbia vacated IRS Notice 2025-42, which had sought to eliminate the previous 5% “safe harbor” rule established in 2018, which defined the beginning of construction (BOC) date that could allow solar panel system projects with longer lead times to qualify for valuable Section 45Y and 48E tax credits.

If you missed it, here’s what the 2018 notice actually says:

SECTION 3. METHODS FOR ESTABLISHING BEGINNING OF CONSTRUCTION

.01 In general. This notice provides two methods for a taxpayer to establish that
construction of energy property has begun for purposes of the ITC under § 48. A
taxpayer may establish the beginning of construction by starting physical work of a
significant nature as set forth in section 4 of this notice (Physical Work Test).
Alternatively, a taxpayer may establish the beginning of construction by meeting a safe
harbor based on having paid or incurred five percent or more of the total cost of the
energy property as set forth in section 5 of this notice (Five Percent Safe Harbor).

Both methods require that a taxpayer make continuous progress towards
completion once construction has begun (Continuity Requirement). Section 6 of this
notice discusses the Continuity Requirement and provides a safe harbor for satisfying
this requirement (Continuity Safe Harbor).

IRS N-18-59

The Trump administration had been moving to eliminate the safe harbor path for most solar and wind projects last year, forcing developers to rely on a far more demanding “Physical Work Test” standard to establish BOC instead, but Oregon Environmental Council v. Internal Revenue Service (Civil Action No. 25-4400 (CKK)) has effectively put that effort to bed.

“This is a significant victory for the industry as it provides an extra layer of certainty for those who want to claim the credit,” writes Bill Curtis, an attorney at Spencer Fane. “The IRS typically cannot unilaterally increase a taxpayer’s tax burden absent congressional action. Notice 2025-42 was clearly an attempt by the IRS to dissuade taxpayers from claiming a rightful deduction. Courts, not IRS notices, are the ultimate arbiters of tax deductions. The District Court’s opinion is well-reasoned and provides ample certainty to anyone who meets the 5% rule, even if the IRS appeals or attempts to limit the deduction in the future.”

In other words: if your installer told you that your project wouldn’t qualify for safe harbor, you might want to give them a call, because IRS N-2025-42 might no longer apply.

Electrek’s Take Disclaimer

Tax law is a messy, complicated, and high-stakes field. Federal tax credits, state laws, utility programs, and the fine print in the contracts from company to company can overlap or even contradict each other, and navigating any part of it isn’t especially intuitive. That complexity is exactly why the smart people you know hire accountants and tax professionals to make incentives work for them, and you should do the same.

If you’re considering a lease or PPA, a conversation with a qualified professional installer can help you understand what’s being offered and how a given deal is being structured. Take that information to your accountant to understand what’s real, what’s marketing, and what actually saves you money.

Finally, if there’s money on the table, make sure you don’t leave it there! Remember that US tax law could be a single line codified into law. Instead, it’s more than 4,000+ pages of densely worded legalese. Get yourself an expert, and get what your democratically elected leaders decided you have coming to you.

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