To establish beginning of construction on an energy project under the physical work test, you must start physical work of a significant nature on the facility — either on-site excavation and foundation work, or off-site manufacturing of custom components under a binding written contract. The test is qualitative: the IRS looks at the nature of the work, not the dollars spent. It is one of two methods the IRS recognizes for locking in tax credit eligibility under Internal Revenue Code Sections 45, 48, 45Y, and 48E, alongside the Five Percent Safe Harbor. Which method you can use, and when you must act, now depends heavily on your technology and your timeline.
Why the Start Date Matters Right Now
The One Big Beautiful Bill Act, enacted in July 2025, terminated the Section 45Y and 48E clean electricity credits for wind and solar facilities placed in service after December 31, 2027. Facilities that begin construction before July 5, 2026 are not subject to that termination.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction So for wind and solar developers, proving beginning of construction stopped being a planning strategy and became the difference between full credit eligibility and no credit at all.
Notice 2025-42 also imposes a critical restriction: for wind and solar projects trying to beat the July 4, 2026 cutoff, the Physical Work Test is the only method available. The Five Percent Safe Harbor is off the table, except for solar facilities producing less than one megawatt.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction For other energy property, and for legacy Section 45 and Section 48 credits, both methods remain available.
The construction start date also determines whether prevailing wage and apprenticeship requirements apply. Projects that began construction before January 29, 2023 are exempt from those labor rules and still qualify for the full five-times credit multiplier. Facilities generating less than one megawatt are exempt regardless of start date.2Internal Revenue Service. Prevailing Wage and Apprenticeship Requirements
What Qualifies as Physical Work of a Significant Nature
The Physical Work Test originated in IRS Notice 2013-29 and has carried forward through every subsequent beginning-of-construction notice.3Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit The IRS focuses on whether the work directly constructs the energy facility.
On-site activities that qualify include excavation for foundations, setting anchor bolts into the ground, and pouring concrete pads for turbine bases. Off-site work also counts when a manufacturer produces custom components — such as project-specific turbines, blades, or transformers — under a binding written contract, provided those components are not standard inventory items.3Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit
What Does Not Count
The IRS treats a broad range of activities as preliminary, not construction. These include planning and design work, securing financing, environmental and engineering studies, clearing a site, test drilling to assess soil conditions, obtaining permits, and removing old turbines or towers. Installing temporary roads and security fencing also falls on the wrong side of the line. Even when these costs get capitalized into the project’s depreciable basis, they are still treated as preliminary.3Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit
The distinction is whether the work is constructing the energy facility or merely preparing for it. A crew mobilizing equipment and grading a site is not yet constructing. A crew excavating foundations for turbine bases is.
Custom Components vs. Off-the-Shelf Inventory
Off-site manufacturing can establish your start date, but only for components built specifically for your project. Wind turbine blades or custom transformers produced under a binding written contract count when those items are not something the manufacturer normally keeps in stock. Buying off-the-shelf equipment from a vendor’s existing inventory does not qualify, regardless of contract size.3Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit
When a manufacturer produces components for multiple projects at once, the developer must use a reasonable method to associate specific components with specific facilities. Expect the IRS to trace which items were being built for your project and when that work started.
Binding Written Contract Requirements
A contract counts as binding only if it is enforceable under local law and does not cap damages at a nominal amount. A liquidated damages clause is acceptable as long as it requires damages of at least five percent of the total contract price.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction Contracts that limit exposure to a token payment will not support a beginning-of-construction claim.
The Five Percent Safe Harbor Alternative
Where it remains available, the Five Percent Safe Harbor takes a financial approach instead of a physical one. The developer must show that at least five percent of the project’s total cost was paid or incurred before the target date.4Internal Revenue Service. Notice 2018-59 – Beginning of Construction for the Investment Tax Credit Under Section 48 On a $10 million project, that means $500,000 in qualifying expenses. Qualifying costs include everything properly capitalized into the facility’s depreciable basis — equipment, installation fees, and similar items.
The denominator is the total cost of the facility, which the developer must reasonably estimate at the time construction is claimed to have started. This is where the math can turn against you. If final project cost balloons because of supply chain inflation or scope changes, the five percent you already spent may drop below the threshold when measured against the actual total. Developers using this method often spend well past five percent as a cushion.
For accrual-method taxpayers, costs are generally incurred when economic performance occurs. A Treasury regulation lets costs count if the developer can reasonably expect delivery of property or services within three and a half months after payment.5eCFR. 26 CFR 1.461-4 – Economic Performance
Which Method to Use
If you are developing wind or solar and racing the July 4, 2026 deadline, the choice is made for you: only the Physical Work Test counts, unless your solar facility produces less than one megawatt.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction
For other technologies and legacy credit claims, the Physical Work Test rewards developers who can actually break ground or lock in custom manufacturing early. The Five Percent Safe Harbor rewards developers who can move money before they can move dirt — often useful when permitting or interconnection studies delay physical work but equipment orders can be placed. The tradeoff is exposure to cost overruns eroding the percentage. Many developers pursue both methods in parallel where possible, since either one, if properly documented, can establish the start date.
Continuity: Starting Is Not Enough
Once construction begins, you must maintain a continuous program of work toward completion. A developer cannot break ground, lock in a credit rate, and then shelve the project.
The Continuity Safe Harbor
The simplest way to satisfy continuity is to place the facility in service by the end of the fourth calendar year after the year construction began.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction A project that begins construction in 2025 must be operational by December 31, 2029. Earlier IRS notices extended this window to five or six years for projects that began construction between 2016 and 2020 to account for pandemic delays, but the standard four-year window applies to current projects.6Internal Revenue Service. Notice 2021-41 – Beginning of Construction for Sections 45 and 48
One detail that catches developers off guard: the excusable disruption rules do not apply when you rely on the Continuity Safe Harbor. If your project is placed in service within four years, you are fine. If it is not, you must demonstrate continuous efforts under the facts-and-circumstances test regardless of what caused the delay.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction
Facts-and-Circumstances Test
Projects that miss the four-year window are not automatically disqualified, but the burden shifts to the developer to show genuine, continuous efforts to advance the project. Notice 2025-42 lists disruptions that will not count against continuity in that analysis:1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction
- Severe weather or natural disaster damage
- Slow federal, state, local, or tribal permit approvals, including FERC, EPA, BLM, and FAA
- Written government requests related to public safety or security
- Interconnection delays, including waits for new transmission lines, distribution upgrades, or grid congestion resolution
- Delays in production of custom components
- Strikes and other labor stoppages
- Inability to obtain specialized equipment with limited availability
- Presence of endangered or protected species on site
- Difficulty closing project financing
- General supply chain disruptions
The list is not exhaustive but reflects the categories the IRS considers genuinely outside a developer’s control. A prolonged, unexplained halt in work without one of these justifications can destroy the original start date. Interconnection delays are among the most common holdups in practice and were not always explicitly recognized in earlier guidance.
When Multiple Facilities Count as One Project
Several wind turbines or solar arrays that share common infrastructure and operate together are treated as a single facility for beginning-of-construction purposes. Notice 2025-42 identifies factors indicating a single project, including shared substations or interties, contiguous land, a single owner, a common power purchase agreement, shared environmental permits, a master construction contract, or a common loan agreement.1Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction No single factor is decisive, and the determination is made in the calendar year the last facility in the group is placed in service.
The practical effect cuts both ways. Physical work on any part of the aggregated project can establish the start date for the whole group. The continuity clock, however, runs for the entire project rather than individual units.
Repowered Projects and the 80/20 Rule
Replacing components of an existing facility raises the question of whether the result is a new facility eligible for current credits. Under the 80/20 Rule, a facility is treated as originally placed in service on the date the new components go online, so long as the fair market value of retained used components does not exceed 20 percent of the facility’s total value. Total value equals the cost of new components plus the fair market value of used components retained.7Internal Revenue Service. Internal Revenue Bulletin 2025-12 For repowered wind farms that keep existing foundations and electrical infrastructure, this rule lets the beginning-of-construction analysis apply to the new work rather than the original build.
Documentation for Audit Defense
Proving the start date years later depends on records built during the first weeks of construction, not on materials assembled later for an audit response.
- Daily construction logs — chronological records of physical work performed on-site and off-site, with dates, locations, and descriptions specific enough to distinguish qualifying construction from preliminary activity.
- Binding written contracts — certified copies of every equipment or manufacturing contract, including the liquidated damages provisions that make them binding. Off-site manufacturing claims fail without these.
- Payment documentation — invoices, wire transfer confirmations, and check images that validate the Five Percent Safe Harbor calculation, tied to specific line items in the project budget.
- Timestamped photographs — site images with embedded date and location metadata showing groundbreaking through facility assembly.
- Cost tracking records — a running tally of total project costs against the original estimate, especially important for Five Percent Safe Harbor claims where cost overruns can erode the qualifying percentage.
- Engineer reports — third-party progress assessments that corroborate logs and photographs.
For a Physical Work Test claim, the most important records document the exact date and nature of the first qualifying activity. For a Five Percent Safe Harbor claim, the critical documents are the cost estimate at the claimed start date and payment records proving the threshold was met. Both methods require continuity evidence spanning the entire construction period through commissioning.