The “One Big Beautiful Bill” (OB3) and subsequent executive order rapidly phase out solar tax benefits and add new restrictions for nonprofits who want to go solar.
Because of the imminent loss of solar tax credits, there’s a new sense of urgency for nonprofits who want to go solar and secure the Investment Tax Credit (ITC).
Your nonprofit can still save with solar — if you start your solar project now.
🗒️ Note: The information here is current as of September 12, 2025. For the latest updates, please check our Events and Policy pages often, or reach out to us anytime.
Historical guidance on beginning of construction
To benefit from the ITC, your project must meet one of these targets:
- Your project must be placed in service by December 31, 2027.
– OR –
- You must begin construction on your project on or before July 4, 2026 — and the project must be placed in service within 4 years.
To safe harbor an exemption from the new Foreign Entity of Concern (FEOC) Material Assistance rules, you must begin construction on or before December 31, 2025. You can read more about FEOC in our article “What Your Nonprofit Needs to Know About FEOC to Protect the ITC and Direct Pay.”
For this article, we’re going to concentrate on “Beginning of Construction;” as you can see from the bolded phrases, this is critical to meeting the required dates and protecting your solar project’s ITC eligibility. So what constitutes “Beginning of Construction”?
As an industry, we’ve already had 16 years’ worth of historical precedent and guidance defining the two pathways for showing that construction has begun on a solar project:
- The physical work test is met by performing physical work that is of a significant nature.
- The 5% safe harbor is met by paying or incurring 5% of your project’s final ITC-eligible cost.
Keep in mind these important features of the physical work and 5% safe harbor tests:
- You must execute a binding written contract for your project.
- Construction on your project must be continuous.
- Facts and circumstances are key to determine if you pass either of the tests. Because there’s a lot of gray area and subjectivity in the rules, documentation is critical. Document everything you can, keep copies of invoices, and take photographs.
The physical work test
For the physical work test, the focus is on the nature of the work, not the amount or cost of the work.
The work must be considered “significant.” That includes activities like manufacturing project components, such as transformers, wind turbines; installing racking or other support structures; pouring concrete; or mounting solar modules.
Any work considered a “preliminary activity” does not count as physical work. That includes planning, administrative, or legal work; getting permits; site preparation, such as clearing, leveling, or removing items; or purchasing equipment, unless it’s custom made for the project (i.e., not normally held in inventory);
You can see more details on the physical work test in our September 4 webinar, but this test is mostly useful for large utility-scale projects. Nonprofit organizations building commercial scale projects are much more likely to use the 5% safe harbor.
The 5% safe harbor
This test is all about paying costs, if you’re on a cash basis, or incurring costs, if you’re on an accrual basis. Check with your organization’s CFO or treasurer if you don’t know whether your organization is on a cash basis or an accrual basis for tax purposes.
To meet the 5% safe harbor, your organization must pay or incur 5% of your project’s total final cost.
Paying (cash basis) is fairly clear: it’s about when the dollars move. On the other hand, accruing is about accruing a liability and meeting the “all events test” in IRS Code §461. If you’re on an accrual basis and incurring a project cost, you must go beyond making a deposit: the liability must be fixed or known, and it must meet the economic performance test. Generally speaking, completing a service or delivering materials can meet this test. There are some exceptions — for example, if you reasonably expect that the service or material will be delivered within three and a half months from when you pay for it.
Whether you’re on a cash or an accrual basis, a couple things remain the same as they’ve been:
- The 5% safe harbor applies only to ITC-eligible costs; you can’t apply it to costs not eligible for the ITC.
- You must pay or incur 5% of the total final cost of the project. Because project costs can sometimes rise unexpectedly, it’s a good idea to shoot for 7%–10%, or even 12%, to ensure you meet this requirement.
Example
Project cost = $100,000
You spend $5,000 = 5%
Later, the project cost increases to $101,000.
The $5,000 you spent is now 4.95%, so your project fails to meet the 5% safe harbor.
Notice 2025-42
On August 15, 2025, Treasury issued Notice 2025-42 in response to the executive order that followed OB3. The rules in the notice became effective for projects beginning construction on or after September 2, 2025.
The notice does not change the rules for the FEOC safe harbor of December 31, 2025 or the rules for technologies other than solar or wind. It’s just about solar and wind projects claiming “Beginning of Construction” on or before July 4, 2026.
For solar projects 1.5 MW AC or smaller, the changes to the rules from Notice 2025-42 are minor. Most of the notice is reaffirming rules already in place.
For projects that are larger than 1.5 MW, Notice 2025-42 removed the 5% safe harbor. However, most nonprofit solar projects are 1.5 MW or smaller, so they are not subject to this change. That means that nonprofit solar projects have a choice of using either the physical work test or the 5% safe harbor.
Ensuring your project doesn’t exceed 1.5 MW
What if your nonprofit solar project has more than one installation, and together they add up to more than 1.5 MWac?
Notice 2025-42 gives clear guidance for aggregating solar projects. Your separate projects are considered “integrated,” meaning that their total size is considered the size of your project, if they meet all of these three criteria:
If you have five different solar arrays that are all owned by the same taxpayer, are all placed in service in the same year, and all go into the same point of interconnection, they are considered one integrated operation. If they add up to over 1.5 MWac, your project will not be eligible for the 5% safe harbor.
Ensuring your project meets the continuity requirement
Prior to Notice 2025-41, there were already requirements in place for “continuous construction” (for the physical work test) and for “continuous efforts” for the 5% safe harbor. Notice 2025-41 removed “continuous.construction” and “continuous efforts” and replaced them with a new term, “continuous construction.”
For the “continuous construction” requirement, the notice is somewhat ambiguous, stating that a “continuous program of construction involves continuing physical work of a significant nature.” Certain acceptable delays are called out, such as severe weather, supply shortages, and other things that are out of your control, but there’s a lot of gray area. That means that again, the facts and circumstances of each project will play a significant role in determining whether this requirement is met.
Fortunately, the notice provides an out — a safe harbor within a safe harbor. If you finish your project by the end of the fourth year (i.e., 12/31) from the year in which you began construction, it will be deemed to have had a continuous program of construction without needing to prove any facts and circumstances.
Nonprofit game plan
The main takeaway is that the safe harbors for the ITC are based on the Beginning of Construction — and that some of the required Beginning of Construction dates are coming up very soon.
Here’s a game plan that will help your nonprofit safe harbor the ITC:
- If possible, assuming your solar project is at or under 1.5 MW, be sure to begin construction on your solar project by December 31, 2025 to meet the FEOC safe harbor deadline — or at least begin construction on or before July 4, 2026 to meet another safe harbor deadline for the ITC.
- Use the 5% safe harbor (since your project is at/under 1.5 MW, you’re still eligible to utilize the 5% safe harbor).
- Ensure you have a binding written contract by December 31, 2025 (if it has a cancellation option, be sure there is a minimum 5% penalty for cancelling in order to protect the integrity of the definition of a binding written contract).
- If using the cash method, ensure payment occurs on or before December 31, 2025.
- If using the accrual method, make a milestone payment for goods/services that will meet the economic performance test by December 31, 2025. For example, you can do this by having milestones like submitting the permit/interconnection application or purchasing equipment (note that you just need to transfer the title for equipment, not necessarily take physical possession). A backup plan is to rely on the 3.5-month rule by making payment and having a reasonable expectation of delivery of equipment within three and a half months — it’s a good idea to document the expected delivery date in your contract.
These are the critical dates to keep in mind:
- ITC: If you begin construction on or before July 4, 2026, you can safe harbor the ITC for four+ years. If you begin construction after July 4, 2026, your project must be placed in service by December 31, 2027.
- Foreign Entity of Concern (FEOC): If you begin construction on or before December 31, 2025, you can safe harbor from FEOC project-level (Material Assistance) rules (learn more here).
Learn more
For more details on OB3 and its implications, see our recent webinars, including recordings, slides, and Q&A transcripts:
- September 4 webinar on “beginning of construction”
- August 21 webinar on FEOC
- July 31 webinar on recent changes to solar policy
You can also find more information on solar policy on our Policy page — and don’t hesitate to reach out to us directly with any questions.
Disclaimer: The information presented here is for educational purposes only and should not be construed as tax or legal advice. Please consult your tax advisor or legal professional for personalized guidance.
