Federal Court Restores Five Percent Safe Harbor for Solar Projects: Near Term Implications for Transferable Tax Credit Supply
On Saturday June 6, 2026, a federal court decision reopened an important path for solar developers seeking to preserve eligibility for Section 45Y and Section 48E clean electricity credits. The court vacated IRS Notice 2025-42, which restricted the use of the long-standing Five Percent Safe Harbor for wind and most solar projects and left many developers dependent on the Physical Work Test which is more facts and circumstances based.
This matters because, under the OBBBA accelerated phaseout rules, wind and solar projects generally must be placed in service before January 1, 2028, unless construction begins before the statutory beginning of construction deadline. For purposes of that deadline, the Five Percent Safe Harbor allows a developer to establish that construction has begun by paying or incurring at least five percent of total project costs, subject to continuity requirements. By contrast, the Physical Work Test requires evidence that physical work of a significant nature has started, which can be harder to document and less predictable for early-stage projects.
The court found IRS Notice 2025-42 arbitrary and capricious given that, in the court’s opinion, the IRS did not adequately justify its decision to remove the Five Percent Safe Harbor for wind and large-scale solar while leaving it available for other clean energy technologies. As a result, the Five Percent Safe Harbor is once again available, at least for now, as a method for establishing beginning of construction for solar projects before the July 2026 deadline. Given that it remains to be seen whether the IRS will issue revised guidance, or appeal this decision before the July deadline, buyers should treat this court decision with caution.
Because the beginning-of-construction deadline falls in early July 2026, the practical window to rely on the restored Five Percent Safe Harbor is extremely short. For solar developers, the ruling is therefore a last-minute but meaningful opportunity. Its impact will likely be narrow because the deadline is imminent and many market participants have already made strategic decisions based on the now vacated IRS guidance. Developers that abandoned or restructured projects months ago may not have enough time to reverse course. However, projects that already incurred qualifying costs, or that were close to satisfying the Five Percent Safe Harbor but lacked sufficient physical work, may now have a viable path to preserve credit eligibility.
For buyers of transferable tax credits, the practical consequence may be an increase in near-term solar credit supply. Projects that were previously viewed as uncertain, delayed, or potentially disqualified may reenter the market if developers can prove a safe-harbor position. That additional supply could improve pricing in the near term, particularly where developers seek to monetize credits quickly and buyers are prepared to move through diligence efficiently.
That said, the ruling should not be treated as eliminating all risk. Treasury and the IRS may issue revised guidance, and the government may still seek appellate review. In our view, the closer the market gets to the July deadline, the less likely it becomes that the government will broadly seek to retroactively invalidate properly documented projects that relied on the restored safe harbor under the court’s decision.
The key takeaway is that this ruling could be highly consequential for projects that were already positioned to satisfy the Five Percent Safe Harbor, although it may not reopen the market for every solar project. Buyers should expect a potential short-term increase in available solar TTC inventory, with possible pricing benefits, while continuing to require strong documentation around beginning of construction, qualifying costs, continuity, placed in service timing, and any remaining eligibility risks.
