On June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42. In the short term, this decision disrupts the push to begin construction on solar and wind projects before July 4, 2026, and reinstates historical beginning of construction guidance.
These changes necessitate close monitoring by affected parties and may require proactive strategies to ensure compliance with this changing landscape of guidance. However, ongoing caution is critical as the IRS will likely appeal or issue revised guidance.
Background: The rush to begin construction
In October 2025, Treasury published Notice 2025-42 in response to a July 2025 executive order. Both actions came after the One, Big, Beautiful Bill Act (OBBBA), passed on July 4, 2025, created an earlier than anticipated tax credit termination for solar and wind projects under Section 45Y and 48E. While the credits generally terminate if wind and solar projects aren’t placed in service by Dec. 31, 2027, an exception to that termination date was provided if a project begins construction by July 4, 2026.
With the July 4, 2026, beginning of construction (BOC) deadline quickly approaching, project owners and developers have been racing across the clock to begin construction on solar and wind projects as quickly as possible. Until the recent court decision, IRS Notice 2025-42 had altered the landscape by eliminating the 5% safe harbor for most projects and generally requiring the physical work test to prove construction has begun on a project. This compelled project owners and developers to expedite physical work activities and tightly document their efforts under this narrower standard. Now, the ruling by the U.S. District Court provides temporary relief, but it also brings much uncertainty.
The court’s decision
On June 6, 2026, the U.S. District Court for the District of Columbia in Oregon Environmental Council v. Internal Revenue Service found IRS Notice 2025-42 to be arbitrary and capricious, citing the agency’s failure to adequately justify its departure from established guidance and its neglect in considering long-standing industry reliance on the 5% safe harbor. Consequently, the notice was vacated nationwide, sending the issue back to the IRS for further consideration.
The court’s ruling underscores the importance of consistency and clarity in regulatory frameworks. Under the court’s view, the IRS' abrupt changes to historical guidance without sufficient explanation not only disrupted project timelines but also strained financial planning for many energy projects. As the court remands the notice to the IRS for additional evaluation, stakeholders find themselves navigating a familiar landscape but with the understanding that this could change once again.
Prior beginning of construction (BOC) frameworks are back in play — for now
With Notice 2025-42 vacated, developers and project owners are no longer subject to its limitations. Taxpayers can revert to historical guidance such as Notice 2013-29 and Notice 2018-59, both of which allow a project to begin construction by starting physical work of significant nature or meeting the 5% safe harbor, regardless of project type or size. These methodologies have been recognized as the standard for BOC for over a decade, lending some provisional flexibility to projects that initially pivoted away from the safe harbor under the constraints of Notice 2025-42.
As projects reevaluate their options, there’s potentially room to reengage previously planned strategies without the immediate pressures to solely rely on physical work. However, with this revived choice comes the responsibility of reevaluating risk assessments and ensuring documentation remains robust.
The newfound flexibility doesn’t eliminate all risks, nor does it provide a permanent solution. Projects may now explore the 5% safe harbor without the restrictive lens of Notice 2025-42. This choice could reinstate prior financial models and operational strategies deferred to meet previous regulatory demands. Nonetheless, it’s imperative to proceed with caution and maintain a strategic overview of both current circumstances and potential changes.
Proceed with caution: This is not settled
The ruling brings uncertainty, not clarity, which means continuing to stay vigilant and up to date on construction strategies and project documentation will go a long way.
1. Appeal is likely
The federal government is expected to either appeal the decision or pursue other legal or administrative options to reinstate comparable rules, given the importance of the matter. The battle over these regulatory frameworks is unlikely to resolve quickly, meaning stakeholders should stay nimble and responsive to developments.
2. Updated IRS guidance is possible
The IRS could respond by reissuing Notice 2025-42 with a more comprehensive justification or by introducing new guidance addressing the court’s concerns. Any such updates will necessitate rapid industry response and potential recalibration of existing strategies.
3. Timing pressure remains
The statutory BOC deadline of July 4, 2026, still stands. Developers and project owners must keep pushing projects forward, document BOC activities in real time, and preserve as much flexibility as possible amid uncertain regulatory backdrops. This unwavering deadline presses stakeholders to remain proactive, ensuring that timelines are adhered to despite regulatory shifts.
The bottom line for taxpayers
In light of the District Court’s decision, whether you’re involved in solar and wind projects or are energy project owners and developers, consider these practical steps:
- Stay on course with BOC efforts. Continue moving forward under both frameworks when feasible and don’t assume the 5% safe harbor will remain indefinitely available. Most project owners already have robust BOC strategies under Notice 2025-42. It may be wise to just stay the course until this issue is resolved. Ultimate resolution may not occur, however, until after the July 4 deadline.
- Document everything. As always with BOC, project owners must maintain comprehensive records of physical work activities, incurred costs, and the timing of contract execution and payments. Such detailed documentation will become crucial should IRS scrutiny arise years down the road.
- Evaluate flexibility but avoid overreaction. The decision offers optionality in planning but doesn’t ensure certainty. Avoid drastic changes unless there’s a clear, strategic benefit. If anything, this decision may allow some owners of projects that otherwise had accepted credit noneligibility due to timing constraints to get back into the game. For example, if a project owner knew there was no possibility of beginning physical work of a significant nature, and the project was moving forward with the anticipation of not claiming tax credits, meeting the 5% test might still be feasible at this time. While this situation may be limited, it’s worth considering.
- Monitor developments closely. Keep a vigilant watch on appeals, new IRS guidance, and further court rulings to adjust strategies proactively and adaptively. This situation will likely continue to evolve quickly over the next few weeks.
The road ahead
Navigating the complexities of energy tax credits amid vacated and potentially shifting IRS guidance demands strategic acumen and continuous oversight. This period of uncertainty offers a mixed bag of opportunities and risks, urging stakeholders in solar and wind projects to balance immediate flexibility with foresight and caution.
For all stakeholders, the vacating of Notice 2025-42 opens the door to rethink strategies using previously reliable frameworks — just with a new level of uncertainty that comes with this legal process. Keep a watchful eye on legislative and IRS movement as stakeholders seek to capitalize on opportunities while safeguarding compliance and project timelines.
