The Treasury Department has issued new guidance that makes it more difficult for large solar projects to qualify for tax credits under the safe harbor provisions.

Key Updates:

• Projects over 1.5 MW must now use the physical work test instead of the 5% safe harbor.
• The physical work test has been narrowed. It only applies to:
  • Installing racks or other structures that will hold photovoltaic (PV) panels, collectors, or solar cells.
• Preliminary activities no longer count. Tasks like grading land, clearing a site, or conducting studies do not qualify as physical work.
• Projects using the physical work test must also demonstrate a “continuous program of construction” with significant, ongoing physical work.
• Smaller projects (1.5 MW or less) can continue using the 5% safe harbor rule.
• All projects, regardless of size, still have four years to be placed in service under the continuity safe harbor.