To meet the Investment Tax Credit safe harbor requirements, a renewable energy project must prove construction began before the applicable deadline using one of two IRS-recognized methods: performing physical work of a significant nature, or paying or incurring at least five percent of the total project cost. The project then has to show continuous progress toward completion and file Form 3468 in the year it is placed in service. For wind and solar developers, 2026 changes the picture: those projects generally must begin physical construction before July 5, 2026, and for most of them the five percent spending method is off the table.
The Two Methods for Beginning Construction
IRS Notice 2013-29, as updated by Notice 2018-59 and extended to Sections 45Y and 48E through Notice 2022-61, sets out two ways to establish that construction has begun. You only need to satisfy one.1Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit
The Physical Work Test
This test looks at whether you have performed physical work of a significant nature. The work can happen on-site or off-site. Excavating for foundations, setting support structures, and assembling custom components at a factory all count.1Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit Preliminary activities like clearing land, obtaining permits, or conducting environmental studies do not count, because they don’t involve work on the facility itself. The IRS focuses on the character of the work rather than how much was spent.
The Five Percent Safe Harbor
The alternative is a financial threshold. You must pay or incur at least five percent of the total cost of the facility before the applicable deadline. “Incur” here means the cost is fixed under the accrual method, so a binding contract with a manufacturer can satisfy the test even before the equipment is delivered.1Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit
Two traps here. First, the five percent is measured against actual total cost, so a budget overrun can drop you below the line retroactively. Second, contracts with liquidated damages clauses that cap the buyer’s exposure to a nominal amount may not qualify. If walking away from the deal costs almost nothing, the IRS may treat the obligation as insufficiently binding.
What Changes for Wind and Solar in 2026
Recent legislation set a credit termination date for wind and solar facilities under Sections 45Y and 48E. To avoid termination, a wind or solar project must begin construction before July 5, 2026.2Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction
For purposes of meeting that deadline, the Five Percent Safe Harbor is generally not available. The Physical Work Test is the only method most wind and solar projects can use to prove construction began before July 5, 2026.2Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction Spending money on equipment alone will not preserve credit eligibility. Actual physical construction work has to be underway.
There is one carve-out. Low-output solar facilities with a maximum net output of 1.5 megawatts or less, measured in alternating current, can still use either method to meet the July 5 deadline.2Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction For everyone else building wind or larger solar, boots on the ground are required.
Non-wind, non-solar technologies eligible under Section 48E, including geothermal, energy storage, and nuclear, are not subject to this termination date. Those projects can still use either method under the general framework from Notice 2022-61.
Which Credit Statute Applies to Your Project
The Inflation Reduction Act created Section 48E, a technology-neutral clean electricity investment credit that replaced the older Section 48 energy credit for facilities placed in service after December 31, 2024.3Internal Revenue Service. Clean Electricity Investment Credit Section 48E applies to any facility that generates electricity with a zero greenhouse gas emissions rate or qualifies as energy storage technology.4Federal Register. Section 45Y Clean Electricity Production Credit and Section 48E Clean Electricity Investment Credit
Section 48 still governs certain property types with construction start dates before specific cutoffs. Geothermal heat pump property qualifies under Section 48 if construction begins before January 1, 2035, and several other categories remain available for projects that started construction before January 1, 2025.5Office of the Law Revision Counsel. 26 U.S. Code 48 – Energy Credit For most new projects in 2026, Section 48E is the relevant statute. The safe harbor framework carries over. IRS Notice 2025-42 confirms that the beginning-of-construction principles from the earlier notices apply to Section 48E, with the wind-and-solar modifications noted above.2Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction
Keeping the Start Date Alive: The Continuity Requirement
Establishing a start date is only half the work. The IRS also requires ongoing progress from the beginning of construction until the facility is placed in service. The continuity safe harbor gives you a bright-line benchmark. If the facility is placed in service within four calendar years after the year construction began, continuity is satisfied automatically.6Internal Revenue Service. Notice 2016-31 – Beginning of Construction for Sections 45 and 48 Notice 2025-42 applies this four-year window to Section 48E projects.2Internal Revenue Service. Notice 2025-42 – Sections 45Y and 48E Beginning of Construction
Offshore wind projects and projects on federal land get a longer runway of 10 calendar years after the year construction began.7Internal Revenue Service. Notice 2021-05 – Beginning of Construction for Sections 45 and 48; Extension of Continuity Safe Harbor for Offshore Projects and Federal Land Projects
Miss the four-year or ten-year window and you can still satisfy continuity through a facts-and-circumstances analysis, but the standard depends on which method you used to begin construction. Projects that used the Physical Work Test must show continuous construction, meaning ongoing physical work. Projects that used the Five Percent Safe Harbor must show continuous efforts, which can include paying additional costs, obtaining permits, performing engineering work, or conducting environmental studies.1Internal Revenue Service. Notice 2013-29 – Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit Continuous efforts is a more forgiving standard than continuous construction.
Documenting interim progress matters. A project that takes several years to complete should show meaningful activity in each calendar year: contracts signed, permits obtained, engineering milestones reached, additional payments made. A year or more with nothing to show is what the IRS looks for when challenging continuity.
Documentation That Will Hold Up
Your records have to tell the right story convincingly. What that means depends on which method you used.
For the Physical Work Test, keep construction logs with dates and descriptions of work performed, site photographs with metadata showing when they were taken, and engineering reports documenting project milestones. Off-site fabrication should be documented with vendor records showing when work on your specific components began.
For the Five Percent Safe Harbor, keep binding written contracts with vendors and contractors, accounting ledgers, wire transfer confirmations, and invoices that show when costs were paid or incurred. Contracts have to be genuinely enforceable. A contract where the buyer’s only downside for walking away is a token penalty will not impress an auditor.
Retain records for at least three years after filing the return on which you claim the credit.8Internal Revenue Service. Topic No. 305, Recordkeeping Because the recapture period runs five years, holding records for at least six years from the placed-in-service date is the safer practice.
Filing the Credit
The ITC is claimed on IRS Form 3468, Investment Credit, attached to the annual federal tax return.9Internal Revenue Service. About Form 3468, Investment Credit The form requires you to identify the type of energy property, the date construction began, and the total cost basis. The credit is claimed for the tax year in which the property is placed in service, not the year construction started.10Internal Revenue Service. Form 3468 – Investment Credit
Make sure the figures on the form match your internal records and contracts. Discrepancies between the form, your books, and your binding contracts are one of the most common audit triggers.
The Five-Year Recapture Window
The ITC comes with a string attached. If the property is disposed of, ceases to qualify, or otherwise stops being investment credit property within five years of being placed in service, the IRS claws back a portion of the credit. The recapture amount decreases by 20 percentage points each year:11Office of the Law Revision Counsel. 26 U.S. Code 50 – Other Special Rules
- Within 1 year of placed in service: 100 percent recapture
- After 1 full year but before 2: 80 percent recapture
- After 2 full years but before 3: 60 percent recapture
- After 3 full years but before 4: 40 percent recapture
- After 4 full years but before 5: 20 percent recapture
- After 5 full years: no recapture
Recapture doesn’t only trigger on a sale. Changing the property’s use so it no longer qualifies, failing to maintain prevailing wage compliance during the recapture period, letting insurance lapse after a casualty event without timely repair, or restructuring ownership outside IRS safe harbors can all put the credit at risk. Treat the five-year window with the same seriousness as the initial construction deadline.