The §48E Solar ITC Terminates at the End of 2027: What Advisors Need to Know Now
A Brief History of the Solar Investment Tax Credit
The federal investment tax credit for solar energy has been around longer than most practitioners realize. The Energy Tax Act of 1978 (P.L. 95-618), signed by President Carter in the wake of the oil crisis, created the first federal tax credit for business investment in solar and other non-oil-and-gas energy property. That original credit was a temporary 10% credit. It was expanded by the Windfall Profit Tax Act of 1980, allowed to partially expire in the mid-1980s, and then kept alive in a reduced form for solar and geothermal through a series of extensions. Congress made a permanent 10% solar ITC part of the code in 1992 under the Energy Policy Act.
The real acceleration came in 2005. The Energy Policy Act of 2005 increased the solar ITC from 10% to 30%, and subsequent legislation extended the 30% rate multiple times through 2019 and beyond. Then in August 2022, the Inflation Reduction Act (IRA) overhauled the energy credit framework. The IRA replaced the legacy §48 credit with a new technology-neutral clean electricity investment tax credit under §48E, effective for projects beginning construction after December 31, 2024. The IRA also introduced transferability under §6418, which for the first time allowed project owners to sell tax credits to unrelated third-party buyers for cash. That single provision opened the solar ITC to a much wider universe of taxpayers.
What the Credit Does and Why It Matters
For advisors unfamiliar with energy credits, the basic mechanics are worth stating plainly. The §48E investment tax credit is a dollar-for-dollar offset against federal income tax liability. It is not a deduction. A taxpayer who places a qualifying solar project in service and claims a $100,000 ITC reduces their federal tax bill by $100,000. That is an extraordinarily powerful tool, and it is the reason the solar tax equity market exists.
One additional feature that makes §48E credits especially attractive: under §39(a)(4), as amended by the IRA, §48E credits are “applicable credits” eligible for a three-year carryback and a 22-year carryforward. The standard general business credit under §38 carries back only one year. A three-year carryback window is rare in the Code. It means a taxpayer who generates or purchases §48E credits in 2026 can carry unused credits back to 2023 to recover taxes already paid. For tax equity investors and credit buyers, this carryback significantly expands the usable capacity of the credit.
The OBBBA Accelerates the Sunset of §48E for Solar and Wind
The One Big Beautiful Bill Act (OBBBA), enacted as Public Law 119-21 on July 4, 2025, accelerated the termination of §48E clean electricity investment tax credits for wind and solar projects. The key provision is new §48E(e)(4), added by §70513(a)(2) of the Act.
There are two things happening in the statute, and keeping them separate is essential.
First, the general termination. Under §48E(e)(4)(A), §48E does not apply to any qualified property placed in service after December 31, 2027, if the property is part of a facility that uses wind or solar energy to produce electricity. For any project that has not taken affirmative steps to protect itself, the credit simply stops being available after 2027.
Second, the safe harbor. Under the effective date provision in §70513(g)(5), the termination in §48E(e)(4) only applies to facilities whose construction begins after July 4, 2026. Projects that begin construction on or before July 4, 2026 are exempt from the new truncated sunset. They are not subject to the December 31, 2027 placed-in-service deadline at all. Instead, they revert to the ordinary §48E rules, including the continuity safe harbor that gives them significantly more time.
One additional note: energy storage technology placed in service at a wind or solar facility is carved out by §48E(e)(4)(C) and retains §48E eligibility even if the underlying generation facility does not.
The Two Tracks: This Is Where Practitioners Get Confused
The interaction between §48E(e)(4)(A) and the §70513(g)(5) effective date creates two distinct tracks. Getting this distinction right matters for every solar project, every tax equity taxpayer.
Track 1: Projects that do NOT begin construction by July 4, 2026. These projects are subject to §48E(e)(4)(A). They must be placed in service by December 31, 2027 to qualify for §48E credits. Period. If they miss that date, no credit. For a residential or small commercial rooftop project, that timeline may be workable. For a larger project, it is extremely tight.
Track 2: Projects that DO begin construction on or before July 4, 2026. These projects escape the termination entirely. Section 48E(e)(4) does not apply to them. They revert to the ordinary §48E rules, which means they are governed by the continuity safe harbor rather than the December 31, 2027 hard deadline. Under IRS Notice 2025-42, the project must be placed in service by the end of the fourth calendar year after the year in which construction began:
- Construction begins in 2025: placed in service by December 31, 2029.
- Construction begins in 2026 (on or before July 4): placed in service by December 31, 2030.
If a project misses the four-year safe harbor, there are other ways to satisfy the continuity requirement, but they fall outside the safe harbor and involve a less certain, facts-and-circumstances analysis.
The difference in runway between these two tracks is significant. A project that begins construction in June 2026 has until the end of 2030 to be placed in service. A project that waits until August 2026 must be placed in service by the end of 2027 or lose the credit entirely.
Beginning-of-Construction Rules Under Notice 2025-42
IRS Notice 2025-42, issued August 15, 2025 and published in Internal Revenue Bulletin 2025-36 with an effective date of September 2, 2025, provides the controlling guidance on how to establish beginning of construction for §48E wind and solar facilities. This Notice modifies the prior framework established in Notices 2013-29, 2018-59, and 2022-61 in one very important way: it eliminates the 5% of cost safe harbor for large projects.
Here is the new landscape:
Solar projects with nameplate capacity of 1.5 MW (AC) or less (“low-output solar facilities”). These projects can still use either the 5% safe harbor or the Physical Work Test to establish beginning of construction. The 5% safe harbor, which has been available in various forms since the original beginning-of-construction guidance in Notice 2013-29, allows a taxpayer to establish beginning of construction by paying or incurring at least 5% of the total cost of the project. For many smaller solar installations, this remains the simplest and most straightforward path to establishing beginning of construction. The 1.5 MW threshold is measured in alternating current. For DC-generating facilities, the AC equivalent is the lesser of (a) the sum of DC nameplate capacities or (b) the AC nameplate of the first inverter that converts to AC.
Solar projects above 1.5 MW (AC) and all wind projects. The 5% safe harbor is gone. The only way to establish beginning of construction is the Physical Work Test, which requires that “physical work of a significant nature” has begun. This can be on-site work or off-site manufacturing under a binding written contract. The test looks at the nature of the work, not the amount or cost. There is no fixed minimum monetary or percentage threshold.
Anti-splitting rule. Notice 2025-42 includes an aggregation rule for the 1.5 MW threshold. Under the “integrated operations” test in §6.03(3), facilities are aggregated if they are (a) owned by the same or related taxpayers, (b) placed in service in the same taxable year, and (c) transmit electricity through the same interconnection point or, if behind-the-meter, support the same end user. Related taxpayers are defined by reference to the common-control rules in Treas. Reg. §1.52-1(b). This prevents developers from artificially splitting a larger project into sub-1.5 MW pieces to preserve access to the 5% safe harbor.
The Next Step for Pre-July 2026 Projects: Continuity
Once a taxpayer has met the beginning-of-construction test by July 4, 2026, the work is not done. The taxpayer must make continuous efforts to complete the project, or the safe harbor is lost. In other words, taxpayers cannot bank a bunch of costs or contract for some off-site manufacturing and then sit on the project indefinitely. Continuity can be met in a few ways.
The four-year continuity safe harbor. Under Notice 2025-42 §4.04, a taxpayer is deemed to satisfy the continuity requirement if the project is placed in service by the end of the fourth calendar year after the year construction began. This is the cleanest path. For a project that begins construction in 2025, that means placed in service by December 31, 2029. For a 2026 start, by December 31, 2030.
Facts-and-circumstances test. If the project goes beyond four years, the taxpayer can still demonstrate continuous construction under a facts-and-circumstances analysis. The IRS will look at whether there was a continuous program of construction from the date physical work began through the placed-in-service date. There are also rules around excusable disruptions (permitting delays, supply shortages, interconnection delays, and similar issues) that may support continuity under the facts-and-circumstances test, but a full treatment of those rules is beyond the scope of this article.
Key Dates for Advisors
For a CPA or tax advisor reading this in mid-2026, here are the dates that matter:
July 4, 2026: Beginning-of-construction deadline under the OBBBA effective date. After this date, projects that have not begun construction must be placed in service by December 31, 2027. This is the single most important date in the current §48E planning landscape.
December 31, 2027: Hard placed-in-service deadline for projects that did not begin construction by July 4, 2026.
December 31, 2029: End of the four-year continuity safe harbor for projects that began construction in 2025.
December 31, 2030: End of the four-year continuity safe harbor for projects that began construction in 2026 (on or before July 4).
Practical Advice
If you have clients considering solar tax equity investment, the window to begin construction under the safe harbor is closing. Projects that begin construction before July 4, 2026 have meaningfully more runway to reach placed-in-service status than projects that do not. That additional runway matters in two ways. In some cases, the project itself simply needs more construction time to reach completion. In other cases, the motivation is more strategic: savvy taxpayers want to ensure they can access ITCs from solar projects placed in service in 2028, 2029, and 2030, years when most taxpayers will be locked out of the credit entirely.
For projects above 1.5 MW (AC), remember that the Physical Work Test is now the only option. This means your client needs actual physical work of a significant nature, not just a check for 5% of project cost. That requires coordination with developers and EPC contractors well in advance of the deadline. Documentation is critical: binding written contracts, invoices, photographs of on-site work, contractor logs, and manufacturer confirmations that components are not held in normal inventory.
For projects at or below 1.5 MW (AC), the 5% safe harbor remains available, but be aware of the aggregation rules. If your client is developing multiple small solar facilities at a single site or through related entities, they may trip the integrated-operations test and lose access to the 5% safe harbor.
Finally, practitioners should be aware that Notice 2025-42 is the subject of an APA challenge in Oregon Environmental Council et al. v. IRS, No. 1:25-cv-04400 (D.D.C.), filed in December 2025. No ruling in the challengers’ favor has been reported as of this writing, but the litigation is worth monitoring.
Why We Wrote This
After speaking with over one hundred CPAs and other tax professionals about §48E projects their clients were building, purchasing, or considering, we found substantial uncertainty about the deadlines, the two-track framework, and what it takes to establish beginning of construction under the new rules. This article is meant to provide some clarity at a high level to tax advisors and others with clients considering §48E ITC-producing projects. It is not a substitute for project-specific legal and tax analysis, but we hope it serves as a useful reference point.
This article is for informational purposes only and does not constitute legal or tax advice. The information presented reflects our understanding of the law as of the date of publication. Tax law is complex and fact-specific. Readers should consult with qualified tax counsel before making decisions based on this information.