IRS Notice 2013-29: Beginning of Construction Tests and Safe Harbor

IRS Notice 2013-29 sets out the beginning of construction rules that a renewable energy developer uses to prove a facility qualified for the Section 45 production tax credit or the Section 48 investment tax credit before a statutory deadline. It offers two independent methods: the Physical Work Test and the Five Percent Safe Harbor. Whichever method a taxpayer relies on, the facility must also show continuous progress toward completion after that start date.¹

The notice covers wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic facilities. Solar is not on that list. The two-test framework has since been carried forward, with adjustments, into guidance for the Section 45Y and 48E clean electricity credits created by the Inflation Reduction Act, and it is the framework the IRS still applies today.

The Physical Work Test

A taxpayer meets the Physical Work Test by performing physical work of a significant nature on the facility. The test looks at the character of the work, not its cost. Both on-site and off-site work count, and work done by someone other than the taxpayer counts only if it is performed under a binding written contract entered into before the work begins.¹

For a wind facility, qualifying on-site work includes excavating the foundation, setting anchor bolts, and pouring concrete pads. Qualifying off-site work usually means manufacturing custom components such as turbine blades or specialized transformers built specifically for the project. Items a manufacturer normally keeps in inventory do not count.

What Does Not Count

The notice is strict about the line between construction and preparation. The following are treated as preliminary activities and do not begin construction, no matter how much they cost:

Planning, design, engineering studies, and surveying
Clearing land, grading to change land contour, and removing existing structures or old turbines
Obtaining permits and licenses from federal, state, or local agencies
Test drilling for geothermal deposits or soil conditions
Securing financing and conducting research

Millions of dollars spent on environmental review and permitting can move a project closer to being shovel-ready without starting the clock under this test.

The Binding Contract Rule

A written contract is binding for these purposes only if it is enforceable under local law and does not cap damages at a fixed low amount. A liquidated damages provision is fine so long as the damages equal at least 5% of the total contract price.¹ A contract either side can walk away from cheaply is not binding.

The Five Percent Safe Harbor

The alternative is to pay or incur at least 5% of the facility’s total cost before the deadline. Every cost properly included in the facility’s depreciable basis counts toward both sides of the ratio. Land, and any property not integral to the facility, is excluded.¹

Timing follows the taxpayer’s accounting method. A cash-basis taxpayer counts a cost when payment is made. An accrual-basis taxpayer counts it when all events have occurred to establish the liability and economic performance has taken place, which generally means the property or service has actually been provided.

Cost Overruns

The safe harbor is unforgiving on cost overruns. If a single facility ends up costing more than expected, and the pre-deadline spending turns out to be less than 5% of the actual final cost, the taxpayer loses the safe harbor for that facility entirely. There is no partial credit.¹

The rule is more forgiving when the project consists of multiple generating units. If overruns push the total above twenty times the pre-deadline spending, the taxpayer can still claim the safe harbor for as many of the individual units as have an aggregate cost no greater than twenty times the initial spend. Large developers often structure sites as multi-unit projects for this reason.

The Continuity Requirement

Starting is only half of the job. After satisfying either test, the taxpayer has to show continuous progress toward finishing the facility. This is where projects most often run into trouble, especially those that lock in a start date years before they can be energized.

The standard varies with the method used to begin. A taxpayer who relied on the Physical Work Test must keep up a continuous program of construction. A taxpayer who used the Five Percent Safe Harbor must show continuous efforts to advance toward completion, a broader standard that can be met by paying additional costs, entering new component contracts, obtaining permits, or continuing physical work.² Both standards are judged on the totality of the facts and circumstances.

The Continuity Safe Harbor

Most developers would rather not litigate facts and circumstances, so they rely on the Continuity Safe Harbor. A facility placed in service by the end of the fourth calendar year after the calendar year construction began is automatically treated as satisfying continuity. Construction started in 2024, for example, gets through the safe harbor if the facility is placed in service by the end of 2028.³ Missing the window is not fatal, but the taxpayer then has to prove continuity the harder way.

Excusable Disruptions

Certain delays outside the developer’s control are disregarded when the IRS evaluates continuity. Notice 2016-31 gives a non-exclusive list:

Severe weather and natural disasters
Delays in obtaining permits from agencies such as FERC, the EPA, or the Bureau of Land Management
Delays requested by a government entity for public safety or security reasons
Interconnection-related delays, including waiting for transmission upgrades or resolving grid congestion
Manufacturing delays for custom components
Labor stoppages
Inability to obtain specialized equipment of limited availability
Presence of endangered species on the site
Financing delays
Supply shortages

Interconnection delays are common. Multi-year waits for interconnection studies or transmission upgrades will not, by themselves, break continuity.³

Grouping Units As a Single Project

Large sites can involve dozens or hundreds of generating units. Notice 2013-29 allows multiple units to be treated as one project for beginning-of-construction purposes, so a single start date covers the whole group and each turbine or array does not have to independently show timely construction.¹ Whether units qualify depends on the facts, and the IRS weighs eight factors:

Common ownership by a single legal entity
Location on contiguous land
Coverage under a common power purchase agreement
A shared intertie to the grid
A shared substation
Common environmental or regulatory permits
Construction under a single master construction contract
Financing under the same loan agreement

No factor is dispositive, and the IRS has not set a minimum number. A wind farm of 50 turbines on adjacent parcels, built under one construction contract and financed by a single lender, will readily qualify.

Transfers After Construction Starts

A change of ownership after construction begins does not disqualify a facility. Notice 2013-60 confirms that the taxpayer who owns the facility when it is placed in service can elect the ITC, and the taxpayer who owns it during the ten-year production period can claim the PTC, even if neither owned the facility on the beginning-of-construction date.⁴ This is what makes tax equity structures workable.

How the Framework Has Been Updated

Notice 2013-29 was the first in a series. Later notices adjusted the mechanics without abandoning the two-test approach:

Notice 2013-60 added the original Continuity Safe Harbor and addressed transfers.
Notice 2016-31 replaced the earlier safe harbor with the four-year placed-in-service window and expanded the excusable disruption list.
Notice 2021-41 gave extended safe harbor windows for pre-pandemic starts.
Notice 2022-61 carried the Physical Work Test, Five Percent Safe Harbor, and continuity framework into the new Section 45Y and 48E credits.³

Notice 2025-42 and the July 2026 Deadline

The One Big Beautiful Bill Act terminates the Section 45Y and 48E credits for wind and solar facilities whose construction begins after July 4, 2026. Notice 2025-42 sets the rules for that deadline and makes one major change: the Five Percent Safe Harbor is not available. A wind or solar developer trying to lock in credits before July 5, 2026 must satisfy the Physical Work Test.⁵ Deposit-based strategies that would have worked under a decade of prior guidance do not work for this deadline.

What To Document

The IRS has said it will closely scrutinize claims that construction began before a deadline.¹ Keep records that establish both the start and the follow-through. For the Physical Work Test, that means signed contracts, photographs, invoices, and delivery records for custom components. For the Five Percent Safe Harbor, it means cost accounting that ties every counted dollar to the facility’s depreciable basis. For continuity, keep a running record of ongoing work, payments, and permit activity through the placed-in-service date.

1
Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit
2
Internal Revenue Service. Notice 2021-41 – Beginning of Construction for Sections 45 and 48
3
Internal Revenue Service. Notice 2016-31 – Beginning of Construction for Sections 45 and 48
4
Internal Revenue Service. Notice 2013-60
5
Internal Revenue Service. Notice 2025-42