5% safe harbor rule restored: What solar developers need to know
A U.S. District Court ruling has vacated Treasury Department guidance from last August that had eliminated a critical tax credit qualification pathway for solar developers. The decision restores — at least temporarily — the 5% safe harbor rule, which allows solar projects to prove construction eligibility by demonstrating that 5% or more of a project’s total cost has been spent.
The ruling and what it restores
Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia vacated the August Treasury guidance and remanded the matter to the IRS “for further administrative action.” With the guidance reversed, solar developers may have a renewed pathway to prove they commenced construction by the One Big Beautiful Bill Act’s July 4, 2026, deadline — preserving eligibility for the 45Y clean energy production tax credit and 48E clean energy investment tax credit.
The court found the administration had not satisfied the Administrative Procedure Act’s requirement for “reasoned decisionmaking.” In her memorandum opinion, Kollar-Kotelly stated: “Although the Defendants have argued that wind and large-scale solar projects are situated differently than other projects because Congress set an earlier credit termination date for those specific technologies in the OBBBA, the record does not show that the agency made a reasoned decision that this difference in termination date alone should lead to a different methodology for determining the beginning of construction.”
Small solar projects already exempt
Solar developers should note that the August guidance that triggered this legal battle never applied to solar facilities with a net output of less than 1.5 MW. Those smaller projects retained the ability to qualify for tax credits using the 5% cost threshold test throughout the dispute.
The Natural Resources Defense Council, one of the plaintiffs that brought suit against the IRS guidance in December, said the ruling “adds to a string of defeats for the Trump administration and its wide-ranging attempts to block new wind and solar energy projects.”
The 5% safe harbor has been restored by the court, but regulatory uncertainty remains high. Developers with projects near the July 4 deadline should consult legal counsel before relying on this pathway, given the risk of appeal or new IRS guidance that could reinstate the prohibition.
