The 5% Safe Harbor May Be Back, But Questions Remain

Short summary

A U.S. court struck down an IRS rule eliminating the Five Percent Safe Harbor, allowing solar developers to lock in clean energy tax credits via expedited spending instead of physical work. The court found the IRS's reasoning arbitrary and failed to address decades of industry reliance. Developers should now hedge by meeting both qualification methods until the pending appeal concludes.

• •IRS Notice 2025-42 vacated; Five Percent Safe Harbor restored for solar projects over 1.5MW
• •Court found IRS reasoning arbitrary, capricious, and failed to address industry reliance
• •Until appellate process concludes, developers should structure projects to satisfy both Safe Harbor and Physical Work Test pathways

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