Tag: IRS

Satisfying the prevailing wage and apprenticeship (PWA) requirements under Section 48E Clean Electricity Investment Credit can bump credit from a base rate of 6% to a 30% applicable percentage, potentially multiplying credit up to five-times for many projects.

Where claiming this credit can get complicated, though, is in figuring out which projects actually qualify and how that's tracked. Under the final Treasury regulations, PWA compliance for Section 48E is more frequently being tracked by facility rather than project wide.

This blog walks through what the regulations say, where the qualified-facility-level tracking requirement comes from, and where the boundaries of that rule create scrutiny risk.

The Core Rule: A 30% Rate Tied to Facility-Level Compliance

If a qualified facility or energy storage technology (EST) satisfies the categories of § 1.48E-3(b), it may qualify for the increased 30% applicable percentage.

What are the Section 1.48E-3(b) categories? Notably, each category is written in reference to a specific qualified facility or a specific EST rather than a broader project or portfolio. The regulation identifies:

• A qualified facility with a maximum net output of less than one megawatt (the One Megawatt Exception);
• A qualified facility whose construction began prior to January 29, 2023;
• A qualified facility that satisfies the prevailing wage, apprenticeship, and associated recordkeeping requirements. (See § 1.48E(d)(3), § 1.45-7, § 1.45-8, and § 1.45-12)
• An EST with a capacity of less than one megawatt (the EST One Megawatt Exception);
• An EST whose construction began before January 29, 2023; or
• An EST that satisfies the parallel prevailing wage, apprenticeship, and recordkeeping requirements described in paragraph (3).

From a compliance perspective, the message is straightforward: each qualified facility generally carries its own compliance burden and its own support for claiming the increased credit rate. A taxpayer operating multiple facilities cannot automatically assume that compliance documentation maintained at the project level will be sufficient if scrutiny arises later.

Why This Differs from the Old Section 48 Framework

One area that may create confusion is the assumption that Section 48E follows the same aggregation principles used under the legacy Section 48 investment tax credit. In practice, Treasury and the IRS adopted a much narrower approach.

Historically, Section 48 has allowed multiple energy properties to be treated as part of a broader energy project under certain circumstances. During the regulatory process, several commenters asked Treasury and the IRS to extend a similar concept to Section 48E. Their argument was practical: labor compliance is often administered across an entire project, not by individual facility, making facility-level certification burdensome.

The Treasury and the IRS rejected this. The final rule's preamble states plainly that “[t]he statute requires that each qualified facility satisfy the [PWA] requirements and for this reason the commenter's suggestions cannot be adopted." If a taxpayer doesn't satisfy the PWA requirements for a given qualified facility, the remedy is the correction-payment and penalty mechanism for that facility, not blending its compliance status into a larger group.

At the same time, Treasury and the IRS did not completely eliminate aggregation concepts under Section 48E. Instead, they retained a narrowly tailored aggregation rule tied to a specific purpose: preventing taxpayers from dividing larger facilities into smaller pieces solely to qualify for the One Megawatt Exception. The regulations make clear that this aggregation concept is limited and generally does not extend to other areas of Section 48E, including eligibility analyses for certain bonus credit provisions.

This broader regulatory approach reinforces an important theme throughout Section 48E: facility-level analysis is generally the default unless the regulations specifically provide otherwise.

The One Exception: "Integrated Operations" for the One Megawatt Exception

While facility-level tracking is the general rule, there is one important exception.

The regulations permit certain facilities to be aggregated when determining eligibility for the One Megawatt Exception. This concept is referred to as "integrated operations," and it may be one of the areas most likely to draw IRS scrutiny because it depends heavily on the underlying facts of a project.

Under § 1.48E-3(c)(4), facilities generally may be treated as having integrated operations if they:

• Are owned by the same or related taxpayers;
• Are placed in service during the same taxable year; and
• Transmit electricity through the same point of interconnection or otherwise support the same end user in specified circumstances.

Comparable rules also apply to energy storage technologies.

If facilities satisfy these factors, their capacities may be combined when determining whether they qualify for the One Megawatt Exception. This means a facility that appears to qualify on its own may lose access to the exception once related facilities are aggregated.

The ownership requirement is particularly important. The regulations treat certain commonly controlled businesses as related taxpayers, meaning that simply placing facilities into separate legal entities may not avoid aggregation. The ultimate determination depends on the full facts and circumstances surrounding ownership and control.

For compliance teams, this creates a notable scrutiny risk. A developer may structure a project as several smaller facilities, each below one megawatt, only to discover that the integrated-operations analysis requires those facilities to be evaluated together.

In those situations, documentation regarding ownership structure, placed-in-service dates, and interconnection arrangements may become just as important as prevailing wage records themselves.

Facility-Level Tracking Continues After Construction

The facility-level concept does not end once a credit is claimed.

Several ongoing compliance obligations under Section 48E continue to operate on a facility-by-facility basis.

Alteration and Repair Work

Under § 1.48E-3(e), taxpayers are generally considered to satisfy prevailing wage requirements during a taxable year if no alteration or repair work occurs during the five-year recapture period described in § 1.48-13(c)(4).

Because this analysis applies at the qualified-facility level, taxpayers with multiple facilities may need to separately monitor alteration and repair activity for each facility rather than treating an entire portfolio as sharing one compliance timeline.

Correction Payment Relief

The transition relief provisions contained in § 1.48E-3(d) were also administered at a granular level. Relief from certain correction-payment penalties depended on factors tied to individual workers and facilities rather than portfolio-wide determinations.

Together, these provisions suggest that ongoing PWA compliance monitoring should remain organized around the individual facility whenever possible.

Applicability Date

The rule applies to qualified facilities and qualified ESTs placed in service in taxable years ending after January 15, 2025, and the construction of which begins after March 17, 2025. Taxpayers may elect to apply the section early to facilities placed in service in taxable years ending on or after January 15, 2025, with construction beginning before that date, provided they follow the section in its entirety and in a consistent manner. That "entirety and consistency" condition is notable in that the regulatory text suggests a taxpayer should not selectively apply favorable pieces of § 1.48E-3 to one facility while relying on prior guidance for another within the same portfolio.

What We're Seeing: What Makes a "Qualified Facility"?

A wide range of groups have approached their interpretation of this differently, and much of that comes down to how a firm draws the boundaries of a single qualified facility.

Some firms have opted to enforce the strictest possible reading, taking an aggressive approach as a preventative measure. One example we've seen is with a clean energy project with multiple inverters. Because eligibility for the One Megawatt Exception (and PWA obligations more broadly) is measured at a qualified-facility level, some firms treat each inverter as its own qualified facility and apply prevailing wage requirements to each inverter individually rather than the project as a whole. Under this approach, a project with several inverters, each above the one-megawatt threshold on its own, would need prevailing wage compliance tracked and documented inverter by inverter, even though every inverter sits on the same site and is part of the same overall development.

Other firms have taken the opposite view, applying prevailing wage requirements to the project as a whole rather than segmenting compliance by individual inverter. These firms generally point to the practical realities of labor administration: payroll, contracting, and workforce management are typically already organized at the project level, and facility-by-facility documentation can be layered onto that structure rather than replacing it.

Ultimately, each end of the spectrum carries its own trade-offs. Regardless of the approach, our experts are trained to assist with navigating prevailing wage requirements at all levels. If you're seeking assistance with compliance, we may have the solutions for you.

Practical Considerations for Compliance Teams

For many organizations, the real challenge can come in implementing processes that align with how the IRS may evaluate compliance. While every project is unique, the following considerations may help identify areas that warrant closer review:

Organize Records by Qualified Facility

Certified payroll records, apprenticeship documentation, wage determinations, and correction-payment support may better substantiate the credit requirements if they can be produced on a facility-by-facility basis rather than as a single project-wide package.

Evaluate Integrated-Operations Exposure Early

Projects involving multiple facilities under common ownership should evaluate integrated-operations considerations before relying on the One Megawatt Exception, particularly where facilities share interconnection points or are placed in service during the same taxable year.

Track Recapture Periods Separately

Facilities within the same portfolio may have different placed-in-service dates and different compliance timelines. Tracking recapture periods separately can help reduce confusion about ongoing PWA obligations.

Review Applicability Dates Carefully

Projects that began construction before March 17, 2025 may be subject to transition considerations that affect which regulatory framework applies. Those decisions are often easier to address early than after a credit position has been established.

Don't Assume Section 48 Rules Carry Over

Teams familiar with legacy Section 48 aggregation principles should confirm whether those concepts actually apply under Section 48E. In many situations, the answer may be different than expected.

Project-Wide Contracts May Not Be Enough

Even when labor is contracted and managed across an entire project, Treasury and the IRS have made clear that each qualified facility must independently satisfy the PWA requirements. Documentation that clearly links workers and compliance records back to specific facilities may provide stronger support during an examination.

Conclusion

The final Section 48E regulations send a consistent message: PWA compliance is generally evaluated one qualified facility at a time.

That distinction becomes especially important for developers managing multi-facility portfolios, facilities approaching the One Megawatt Exception threshold, or projects with staggered construction and placed-in-service dates.

As clean energy projects continue to grow in size and complexity, documenting how each facility was evaluated under § 1.48E-3, including any integrated-operations analysis, are key practices alongside maintaining the underlying wage and apprenticeship records. If you have questions about how these rules can appear on your project, our team is available to provide prevailing wage compliance guidance and support. Reach out today.

On June 1, 2026, the IRS published a notice in the Federal Register (91 FR 32511–32512, Document No. 2026-10906). The agency sets the inflation adjustment factor and reference price used to calculate the Section 45 Production Tax Credit (PTC) for renewable electricity. This credit is notorious for an up to 5x multiplier tied directly to whether a renewable energy developer paid prevailing wages and met apprenticeship requirements during construction.

For prevailing wage compliance professionals, this annual notice is easy to overlook because it doesn't change the law, but it does set the dollar figures that determine exactly how much is at stake on every wind, biomass, geothermal, hydropower, and marine energy project claiming the credit this year. The notice serves as a useful annual checkpoint for confirming which compliance track a given facility falls into.

The 2026 Numbers

The notice sets two figures used to calculate the PTC for calendar year 2026:

• Inflation adjustment factor: 2.0570
• Reference price (wind): 3.17 cents per kilowatt hour. Reference prices for closed-loop biomass, open-loop biomass, geothermal, solar, municipal solid waste, hydropower, and marine and hydrokinetic energy have not been determined for 2026.

The notice also confirms that the statutory phaseout under section 45(b)(1) does not apply to any qualified energy resource for calendar year 2026, because the wind reference price does not exceed 8 cents multiplied by the inflation adjustment factor. In practical terms, the credit is not being reduced this year for any resource type.

Base Credit Rates for 2026

The notice translates those figures into per-kilowatt-hour credit amounts under section 45(a). The applicable rate depends on when the facility was placed in service:

Qualified Energy Resource	Placed in Service Before 1/1/2022	Placed in Service After 12/31/2021
Wind, closed-loop biomass, geothermal, solar*	3.1 cents/kWh	0.6 cents/kWh (base)
Open-loop biomass, landfill gas, trash	1.5 cents/kWh	0.3 cents/kWh (base)
Qualified hydropower, marine & hydrokinetic	1.5 cents/kWh	0.6 cents/kWh (base, if placed in service after 12/31/2022)

*Solar was restored to eligibility for facilities placed in service after December 31, 2021, with construction beginning before January 1, 2025.

Those post-2021 "base" figures are the number that matters most to prevailing wage teams: it's the rate before the potential 5x multiplier is applied.

The 5x Multiplier: Where Prevailing Wage Comes In

Under section 45(b)(6)(A), as amended by the Inflation Reduction Act, a qualified facility's credit amount is multiplied by five if the facility satisfies requirements under section 45(b)(6)(B).

What are the § 45(b)(6)(B) requirements? The three independent ways a facility placed in service after December 31, 2021 can meet § 45(b)(6)(B) are as follows:

• Small facility exception: maximum net output of less than 1 megawatt (measured in alternating current).
• Begin-construction exception: construction began before January 29, 2023 — the date 60 days after Treasury and the IRS published initial prevailing wage and apprenticeship guidance.
• Actual compliance: the facility satisfies the prevailing wage requirements of section 45(b)(7)(A) and the apprenticeship requirements of section 45(b)(8).

For any facility that doesn't fall into the first two categories, the 5x multiplier, and the difference between, for example, 0.6 cents and 3.0 cents per kilowatt hour on a wind project, depends entirely on documented prevailing wage and apprenticeship compliance during construction.

Bonus Credits Remain on the Table

The notice is also a reminder that the domestic content bonus under section 45(b)(9) and the energy community bonus under section 45(b)(11) continue to apply to facilities placed in service after December 31, 2022, layering on top of the base and multiplied credit amounts. The IRS has issued separate guidance on both: Notice 2023-38, Notice 2024-41, and Notice 2025-08 address the domestic content bonus, while Notice 2024-30 addresses the energy community bonus.

What This Means for Compliance Teams

For firms supporting developers, EPC contractors, and owners on PTC-eligible projects, it’s best practice to confirm which section 45(b)(6)(B) pathway a project relies on early. Projects claiming the begin-construction exception should have their documentation of construction start date well organized, since it's what stands in for prevailing wage compliance.

For projects that don't qualify under the small-facility or beginning-of-construction exceptions, prevailing wage and apprenticeship compliance during construction sets out the difference between the base rate and five times that rate.

Firms should also track the annual inflation adjustment factor and reference price each year; they change the dollar value of compliance (and noncompliance) even though the underlying legal requirements stay the same.

Conclusion

If questions arise regarding how prevailing wage and apprenticeship requirements apply to your project, our team is available to provide experienced guidance and support. Access expert help and reach out today.

On June 6, 2026, the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 in full, ruling it "arbitrary and capricious" under the Administrative Procedure Act (APA). The decision in Oregon Environmental Council v. IRS, Civil Action No. 1:25-cv-04400 (CKK) (D.D.C. June 6, 2026), restored a beginning-of-construction framework just weeks before the OBBBA's July 4, 2026 beginning-of-construction deadline.

Quick Summary/Timeline

• The Inflation Reduction Act (IRA) of 2022 created the Section 45Y clean electricity production tax credit and Section 48E clean electricity investment tax credit as technology-neutral incentives for zero-emission electricity generation.
• The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, accelerated the phase-out of these credits for wind and solar, requiring projects to begin construction by July 4, 2026 (or be placed in service by December 31, 2027) to preserve credit eligibility.
• Since 2013, "beginning of construction" has generally been established through one of two methods: the Physical Work Test or the Five Percent Safe Harbor.
• In August 2025, the IRS issued Notice 2025-42, eliminating the Five Percent Safe Harbor for wind projects and most solar projects (over 1.5 MW), leaving the Physical Work Test as the sole method for those facilities.
• On June 6, 2026, the court vacated Notice 2025-42 in full, restoring the Five Percent Safe Harbor as an available method ahead of the deadline.
• As of this writing, no appeal or stay has been publicly confirmed, though one remains widely expected among firms tracking the case. The July 4, 2026 beginning-of-construction deadline has now passed.

What does this mean for firms? For the roughly nine-month window between the ruling and the July 4, 2026 deadline, developers had two paths to establish beginning of construction rather than one. Projects that didn't lock in a beginning-of-construction position by that date now proceed on the December 31, 2027 placed-in-service pathway instead. Either way, prevailing wage and apprenticeship (PWA) compliance remains a separate, ongoing requirement regardless of which beginning-of-construction method a project used.

Full Background

What Are Sections 45Y and 48E?

The Inflation Reduction Act of 2022 (Pub. L. 117-169) added Sections 45Y and 48E to the Internal Revenue Code as technology-neutral successors to the older Section 45 production tax credit and Section 48 investment tax credit. Section 45Y provides a production tax credit for electricity generated at a "qualified facility" with a greenhouse gas emissions rate of zero or below; Section 48E provides an investment tax credit based on a taxpayer's qualified investment in such a facility. Both credits apply to facilities placed in service after December 31, 2024.

What Is "Beginning of Construction," and Why Does It Matter?

Neither the IRA nor the OBBBA defines "beginning of construction" in the statutory text. Instead, the IRS has filled that gap through a long series of sub-regulatory notices dating back to Notice 2013-29, which first established the two methods described below. That framework was reaffirmed and extended across more than a decade of subsequent guidance, including Notice 2022-61, which applied the same principles to Sections 45Y and 48E, and, importantly, to the prevailing wage and apprenticeship (PWA) rules discussed later in this post.

"Beginning of construction" matters because it is the trigger date used throughout federal energy tax credit law to determine which set of rules, and which deadlines, apply to a given project.

The Two Tests: Physical Work Test and Five Percent Safe Harbor

Physical Work Test. Construction begins when "physical work of a significant nature" starts. This is a qualitative, facts-and-circumstances test. It focuses on the nature of the work, not its cost or quantity, and covers both on-site work (e.g., excavating a foundation, setting anchor bolts, installing racking) and off-site work performed under a binding written contract (e.g., manufacturing of components, mounting equipment, transformers). Preliminary activities, like planning, permitting, site clearing, and geotechnical testing do not count.

Five Percent Safe Harbor. Construction is deemed to have begun once a taxpayer pays or incurs 5% or more of the total cost of the facility. This is a quantitative, bright-line test that lets developers establish eligibility through early-stage spending, such as procurement or deposits, without needing to show that physical construction activity has actually started on-site.

Both methods have historically been subject to a Continuity Requirement: the taxpayer must maintain continuous progress toward completion, which is generally deemed satisfied under a Continuity Safe Harbor if the facility is placed in service within four calendar years of the year construction began.

Notice 2025-42

The Executive Order Behind It

On July 7, 2025, President Trump issued Executive Order 14315, Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources (90 Fed. Reg. 30,821). The order directed the Treasury Department, within 45 days of the OBBBA's enactment, to issue guidance ensuring that the OBBBA's credit termination provisions for wind and solar were "strictly" enforced, including guidance to prevent taxpayers from using broad safe harbors to establish beginning-of-construction status without having actually built a substantial portion of the facility.

What the Notice Did

In response, the IRS issued Notice 2025-42 on August 15, 2025. The notice:

• Eliminated the Five Percent Safe Harbor for all wind facilities and solar facilities exceeding 1.5 MW (AC), leaving the Physical Work Test as the sole method available to establish beginning of construction for those projects ahead of the July 4, 2026 deadline.
• Preserved the Five Percent Safe Harbor only for "low output" solar facilities — those with a maximum net output of 1.5 MW or less.
• Applied retroactively to any applicable wind or solar facility whose construction had not already begun (under prior guidance) before September 2, 2025.
• Left the four-year Continuity Safe Harbor in place but effectively required continuity to be shown through actual physical work rather than through the broader "continuous efforts" concept available to Five Percent Safe Harbor projects under prior guidance.

Source: IRS Notice 2025-42, 2025-36 I.R.B. 351 (full text, IRS.gov).

Court Ruling Overturns Notice 2025-42

The Case

Seven governmental, tribal, and private organizations, including the Oregon Environmental Council, sued the IRS, arguing that Notice 2025-42 was arbitrary and capricious under the APA. Seventeen states and the District of Columbia also filed an amicus brief in support of the plaintiffs, arguing the notice would raise electricity costs and disrupt state energy planning.

Source: Amicus Curiae Brief of Oregon et al., Case No. 1:25-cv-04400-CKK, Doc. 29 (D.D.C. Feb. 20, 2026) (full text).

The Holding

On June 6, 2026, Judge Colleen Kollar-Kotelly of the U.S. District Court for the District of Columbia granted the plaintiffs' motion for summary judgment and vacated Notice 2025-42 in full, remanding the matter to the IRS. The court held that the IRS had failed to satisfy the "reasoned decision-making" standard required of federal agencies under Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983).

The Practical Effect

With Notice 2025-42 vacated, the pre-existing framework under Notice 2022-61 and its predecessor notices is restored. Wind and large-scale solar developers may once again use either the Physical Work Test or the Five Percent Safe Harbor to establish beginning of construction ahead of the July 4, 2026 deadline.

Two deadlines remain unchanged by the ruling and are worth keeping straight:

• July 4, 2026: The statutory beginning-of-construction deadline under the OBBBA. Projects that begin construction on or before this date lock in the original phase-out schedule for the 45Y/48E credits.
• December 31, 2027: The fallback placed-in-service deadline. Projects that do not meet the July 4, 2026 beginning-of-construction deadline are not automatically ineligible for the credits, but they must instead be placed in service by December 31, 2027 to qualify.

Ongoing Developments

As of this writing (July 13, 2026), the July 4 deadline has passed, and this remains a live legal question rather than settled law:

• No appeal or stay has been publicly confirmed as of this writing, though industry counsel widely expects the government to appeal or seek a stay. The court itself acknowledged in its opinion that there was "almost zero chance" appellate proceedings would conclude before the July 4, 2026 deadline — a prediction that has held true, since the deadline passed with no appellate resolution.
• This ruling is specific to Sections 45Y and 48E beginning-of-construction timing. It does not address other requirements tied to different guidance or deadlines, such as the "Foreign Entity of Concern" (FEOC) / Prohibited Foreign Entity beginning-of-construction rules, which are anchored by statute to a different, fixed set of pre-2025 notices and are unaffected by this decision.
• PWA requirements are untouched. The prevailing wage and apprenticeship rules, and the beginning-of-construction concept used to assess whether a project is exempt from them, derive independently from Notice 2022-61 and are not the subject of this litigation.

Given this, several firms tracking the case advised developers not to abandon Physical Work Test documentation even if they qualified under the Five Percent Safe Harbor in the run-up to the deadline, since a later reversal on appeal could still leave safe-harbor-only projects exposed retroactively.

Best Practices — Especially for Prevailing Wage Compliance

Whichever beginning-of-construction method your project ultimately relies on, prevailing wage and apprenticeship compliance is a separate, independent requirement that determines whether you receive the base credit rate or the enhanced rate — generally five times higher — under Sections 45Y and 48E. That determination is not affected by Oregon Environmental Council v. IRS. With that in mind, firms should consider the following:

• Don't let the safe harbor question distract from PWA documentation. Whether your project qualifies under the Physical Work Test or the Five Percent Safe Harbor, you still need contemporaneous records establishing that laborers and mechanics were paid at least the applicable prevailing wage rates, and that the required percentage of total labor hours was performed by registered apprentices (generally 15% for projects that began construction after December 31, 2023).
• Document both begin-construction pathways where feasible. If your project can support both a Physical Work Test position and a Five Percent Safe Harbor position, maintain records for both. This creates a fallback if the safe harbor is stayed or reversed on appeal.
• Track prevailing wage determinations by classification and geography. Rely on published Department of Labor wage determinations (available via SAM.gov), and request supplemental wage determinations promptly if a classification isn't listed for your project's location.
• Maintain "good faith effort" documentation for apprenticeship requirements. If registered apprenticeship programs deny your request or fail to respond within the required window, keep the request and denial (or non-response) on file — this is what substantiates the good-faith exception.
• Prepare for Form 7220. Compliance (or correction of a prior failure) is reported using IRS Form 7220, Prevailing Wage and Apprenticeship (PWA) Verification and Corrections. Build your recordkeeping process now so you aren't reconstructing payroll and apprenticeship data under time pressure later.
• Consult legal counsel before finalizing your beginning-of-construction strategy. With the July 4, 2026 deadline now passed, firms should confirm with legal counsel which beginning-of-construction method their project ultimately relied on and whether that position is well-documented enough to withstand IRS scrutiny or a later reversal on appeal.

Conclusion

The vacatur of Notice 2025-42 is a meaningful change for wind and solar developers racing toward the July 4, 2026 beginning-of-construction deadline. It restores optionality that many projects were built around, but the government's potential for evolution in the legal landscape means rulings could still shift past the deadline.

What remains applicable is the importance of rigorous, well-documented prevailing wage and apprenticeship compliance. Building the foundation for securing the full value of the 45Y and 48E credits is key, regardless of how the begin-construction question is ultimately resolved.

Have questions about how this affects your project's compliance strategy? Connect with our team to make sure your prevailing wage and apprenticeship documentation is airtight, regardless of which safe harbor you rely on to establish beginning of construction.