A federal court has overturned an Internal Revenue Service (IRS) notice that limited access to clean energy tax credits for wind and solar projects, ruling that the agency did not properly explain its decision. In a ruling, Judge Colleen Kollar-Kotelly of the US District Court for the District of Columbia found that IRS Notice 2025-42 was arbitrary and capricious under the Administrative Procedure Act.
The notice was issued after a July 2025 executive order by President Donald Trump directing the Treasury Department to strictly enforce the phase-out of certain clean electricity tax credits. It removed the long-established Five Percent Safe Harbor provision for wind projects and most solar projects.
The Five Percent Safe Harbor allowed developers to secure eligibility for tax credits by spending at least five percent of a project's total cost before a statutory deadline, without having to start physical construction.
Under the notice, wind projects and solar projects larger than 1.5 MW could qualify only through the Physical Work Test, which requires developers to begin significant construction activity before 4 July 2026.
The IRS had recognised both methods for determining the start of construction since 2013. The tax credits involved, Sections 45Y and 48E, were created under the Inflation Reduction Act and later amended by the One Big Beautiful Bill Act, which shortened the eligibility period for wind and solar projects.
The court ruled that the IRS failed to provide sufficient reasons for removing the Five Percent Safe Harbor. It also found that the agency did not properly address concerns raised by industry stakeholders during the consultation process or explain why wind and large-scale solar projects were treated differently from other clean energy technologies.
According to the ruling, the IRS also failed to consider the impact on developers and investors who had relied on more than a decade of consistent guidance allowing the use of the Five Percent Safe Harbor.
The plaintiffs in the case included the Oregon Environmental Council, the Natural Resources Defense Council, Public Citizen, the City and County of San Francisco and Woven Energy. The court found that these parties had standing because of the potential economic impact of the notice on electricity prices and clean energy development.
As a result, the court vacated Notice 2025-42 and sent the matter back to the IRS for further review. It also rejected a government request to limit the ruling's effect to the plaintiffs, finding that the notice affected the wider energy market.
