The 5% safe harbor is back

Courts vacate IRS Notice 2025-42

Market intelligence · June 2026

On Saturday, June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 — the August 2025 guidance that had eliminated the long-relied-upon "5% safe harbor" as a way to establish the beginning of construction for wind and large solar projects. The ruling applies nationwide, not just to the parties in the case, and it reshapes how developers can approach the fast-approaching credit deadline.

For anyone planning a project around the federal clean energy credits, this is one of the most consequential developments of the year. Here is what happened, why it matters, and what we'd encourage you to think through now.

Court Decision

In Oregon Environmental Council v. IRS, the court set aside Notice 2025-42 in its entirety, finding that the IRS acted arbitrarily and capriciously under the Administrative Procedure Act. The core problem the court identified was not the policy goal itself, but the reasoning behind it: the agency did not adequately explain why it was eliminating a safe harbor that the industry had relied on for more than a decade, and it did not meaningfully address the reliance interests at stake or the alternatives raised during the process.

The court remanded the matter to the IRS for further action. In plain terms, the agency can try again — but any new guidance will have to be supported by the kind of reasoned decision-making the law requires.

Why the 5% safe harbor matters

A bit of background. Under the One Big Beautiful Bill Act, enacted in July 2025, the clean electricity production and investment credits under Sections 45Y and 48E phase out for wind and solar facilities that begin construction after July 4, 2026 (unless they are placed in service by the end of 2027). That makes the question of when a project "begins construction" enormously valuable.

Historically, developers had two ways to establish that date: the physical work test, and the 5% safe harbor — under which construction is treated as having begun once a taxpayer incurs at least 5% of a project's total cost. The safe harbor has long been the more predictable path, and it is frequently satisfied through qualifying equipment purchases.

Notice 2025-42 had removed that option for wind and for solar projects larger than 1.5 MW (AC), leaving the physical work test as the only route. Saturday's ruling reverses that, restoring both methods while the matter sits on remand.

A path to lock in eligibility that developers were planning around before last August is, for now, back on the table.

What it means right now

With Notice 2025-42 vacated, the pre-existing framework is restored: both the physical work test and the 5% safe harbor are once again available to establish beginning of construction for wind and large solar projects. For projects where timing is the constraint, that meaningfully widens the set of options heading into July.

The short version:

• The 5% safe harbor is restored for wind and solar projects over 1.5 MW (AC).

• The decision applies nationwide, effective immediately.

• The July 4, 2026 beginning-of-construction deadline still stands.

• An appeal is widely expected, and the picture could shift again.

The caveat worth keeping in view

This is a real opening, but it is not settled. The government is widely expected to appeal, and it may ask the appellate court for a stay. If a stay is granted, Notice 2025-42 could be back in effect while the appeal proceeds — and that process would very likely extend past July 4. The IRS also retains the ability to issue new guidance on remand, provided it does the reasoning the court found missing this time.

For that reason, the prudent posture for most developers is to treat the restored safe harbor as one tool among several, rather than the whole plan — and to keep the physical work test in view as a parallel path. The right approach depends entirely on the specifics of your project, which is exactly the kind of conversation worth having with your own tax and legal advisors.

Where equipment fits in

When the 5% safe harbor is available, equipment procurement becomes one of the most direct ways to establish that 5% threshold — and with a tight window, availability and lead times become the real constraint rather than an afterthought. That is where we spend our time.

As a wholesale distributor sourcing across 30-plus manufacturers, we can move quickly on module, inverter, and balance-of-system availability so that, if you and your advisors decide a purchase makes sense before the deadline, the equipment side is not what holds you up. We're glad to talk through current stock, pricing, and timelines for a specific project — no obligation, just options on the table.

A note on scope: Exel Solar US is a wholesale solar equipment distributor, not a tax or legal advisor. This article is general information about a developing legal situation and should not be relied on as tax or legal advice. Eligibility decisions should always be confirmed with your own qualified advisors.

Have a project where timing matters?

Let's talk through equipment availability and lead times so you're positioned to move as the next few weeks unfold.

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• Phone: (800) 817-3153