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A Washington, D.C. federal court this week fully restored the long-standing “5% Safe Harbor” as a valid method for solar projects to establish the key “beginning of construction” date—before certain energy tax credits start phasing out under the GOP’s tax law passed last summer. (Reuters, June 8 | Holland & Knight, June 8)
Why It Matters
- The June 6 court decision restores a key tax credit pathway that real estate owners, developers, and investors have relied on for more than a decade to plan rooftop solar and other clean energy investments.
- The court’s opinion cited comments submitted by The Real Estate Roundtable (RER) and coalition partners urging the IRS to preserve the long-standing, clear-cut rule to establish “beginning-of-construction” based on expenditure of 5% of project costs. (Letter, Aug. 8 | Roundtable Weekly, Sept. 5, 2025)
- Under the ruling, projects that spend 5% of project costs by July 4, 2026, have a longer time period to preserve tax credit eligibility under the beginning-of-construction deadline set by the One Big Beautiful Bill (OB3) Act. (McGuire Woods, June 8)
RER Advocacy
- RER, Nareit, NAIOP, and ICSC submitted a joint letter to Treasury in August 2025, urging the IRS to continue allowing taxpayers to rely on both the 5% Safe Harbor and the Physical Work Test to show “beginning of construction.” (Letter, Aug. 8 | RW, Sept. 5, 2025)
- The court cited the RER coalition letter, explaining that businesses have relied on the 5% cost test as a valid method for tax credit eligibility “for more than twelve years.” (Memorandum Opinion, June 6)
- The court also cited the letter in recognizing the coalition’s concerns to avoid “stranding capital already invested” in rooftop solar and similar projects that relied upon the well-established safe harbor. (Memorandum Opinion, June 6)
- RER’s fact sheet, “Clean Energy Tax Incentives and the One Big Beautiful (OB3) Act – What CRE Should Know,” provides a broader overview of how the OB3 Act affects energy investments relevant to commercial real estate, including solar, energy storage, building efficiency, and EV charging incentives. (RER Fact Sheet, Aug. 27)
The Ruling
- The U.S. District Court for the District of Columbia found that the IRS acted arbitrarily and capriciously under the Administrative Procedure Act when it eliminated the 5% Safe Harbor for most wind and solar facilities. (Memorandum Opinion, June 6)
- The court vacated Notice 2025-42, issued last August, which kept the 5% cost rule in place only for small-scale solar and wind facilities generating 1.5 megawatts (MW) or less. (Roundtable Weekly, Sept. 5 | Clean Energy Council, Aug. 18)
- Most commercial building rooftop projects met the small-scale threshold—but this week’s court decision reinstates the cost-based safe harbor for large-scale installations as well. (JD Supra, June 9 | Nixon Peabody, June 10)
- The ruling does not change the OB3 Act’s underlying “beginning of construction” deadlines. Projects that start construction by this coming July 4 must be “placed in service” by the end of 2030. Projects that start construction after this coming July 4 must be “placed in service” by the end of 2027. (RER Fact Sheet, Aug. 27)
The IRS could issue revised guidance or appeal the court’s ruling. In the meantime, the decision restores the 5% Safe Harbor as a planning tool for clean energy projects seeking to meet the July 4 “beginning-of-construction” deadline.
