02 | Key Legislative Changes and Impact

IRS Notice 2025-42 updates the construction start standards by shifting the focus toward visible physical progress and making the “Physical Work Test”, a requirement based on tangible construction activity, the sole method for determining actual construction status for all wind projects and for solar facilities > 1.5MW AC. Smaller distributed-generation projects (≤ 1.5MW AC) may continue to rely on the Five Percent “Safe Harbor”, which previously allowed developers to establish construction start once at least 5% of total costs had been incurred. Projects that begin construction before July 4, 2026, still benefit from the Four-Year Continuity “Safe Harbor”, a regulatory provision carried over from the previous administration that allows up to four years to complete construction and be operational, provided construction advances without extended interruption and any delays are supported by appropriate documentation.

Projects that begin construction before mid- 2026 are generally grandfathered under the IRA framework. However, this protection does not extend to projects subject to foreign entities of concern (“FEOC”) compliance, discussed further below. Projects that meet these requirements can continue claiming full-value credits if they are placed in service within their permitted continuity period, providing short-term policy certainty for transactions already underway. This transition relief gives developers and investors confidence that near-term pipelines will remain largely insulated from the accelerated adjustments introduced under the OB3 Act.

Despite the tightening of credit eligibility timelines, transferability and direct-pay mechanisms that allow companies and projects to monetize earned tax credits remain unchanged. The ability to transfer (sell) tax credits for cash continues in full, allowing developers and investors to monetize credits efficiently without relying solely on traditional tax-equity partnerships. Direct pay also remains available where permitted, allowing eligible entities to receive the credit’s value as a cash refund even if they owe no federal tax. Together, these tools preserve liquidity and financing flexibility even as incentive timing becomes more compressed.

The OB3 Act expands compliance obligations by tightening rules around ownership, sourcing, and financing linked to FEOCs, individuals, corporations, or governments considered detrimental to US national security and referred to as Prohibited Foreign Entities (“PFE”), entities tied to China, Russia, Iran, or North Korea. The US Department of the Treasury (“US Treasury”) and the US Department of Energy (“DOE”) will administer these rules through forthcoming guidance and regulations. These restrictions aim to strengthen domestic supply chain resilience and reduce strategic vulnerabilities, while still providing transition relief to avoid disrupting projects already under construction or in advanced stages of financing.

Material assistance restrictions for Internal Revenue Code (“IRC”) 45Y, 48E, and 45X require taxpayers to ensure direct costs attributable to PFEs remain below the statutory material assistance cost ratio (“MACR”) thresholds. The MACR threshold, in simplified terms, is the percentage of the total project or production costs not attributable to a PFE. Projects and components must exceed MACR thresholds to remain eligible. US Treasury is directed to publish MACR “safe harbor” tables by the end of 2026 for manufactured products and eligible components and, until those tables are issued, taxpayers may rely on tables provided in IRS Notice 2025-08 (domestic content calculations for solar, onshore wind, and battery storage) and supplier certification. This updated approach strengthens compliance expectations while advancing broader US industrial policy goals. In practice, this means developers must document sourcing pathways and demonstrate that key components meet MACR thresholds.

Beyond its restrictive measures, the OB3 Act promotes diversification by preserving storage eligibility, extending clean hydrogen timelines, and raising § 45Q credits to $85/ton for all CO₂ uses, including Enhanced Oil Recovery (“EOR”). From 2026, Master Limited Partnerships (“MLPs”) become available to Carbon Capture and Storage (“CCS”), hydrogen storage, geothermal, and nuclear, reducing capital costs and widening market participation.