Installing solar reduces energy costs for commercial and industrial users in most states and does not face the price volatility of natural gas and oil. However, despite the benefit cheap power has for domestic manufacturing, the Trump administration has shortened the runway for the commercial investment tax credit, eliminating the 48E credit for projects that have not safe harbored and start after July 4, 2026, and do not finish before December 31, 2027.
President Donald Trump’s One Big Beautiful Bill Act (OBBBA) also increased the cost of 48E projects by limiting the use of components from or controlled by foreign entities of concern (FEOC). Projects trying to qualify for the 48E credit need to comply with both criteria.
FEOC compliance
Credit: S-5!
The OBBBA limits the use of solar components from certain countries of origin by imposing FEOC restrictions, namely on Chinese solar projects. Projects starting after January 1, 2026, need to be FEOC-compliant to qualify for the 48E credits.
FEOC prohibits a qualifying project from using more than a statutory threshold of components from affected manufacturers. In February 2026, the Trump administration released guidance on FEOC compliance (Notice 2026-15).
In general, suppliers, vendors, manufacturers and project developers have the knowledge to certify FEOC compliance but the taxpayer who uses the credit bears the risk of not complying. Prior to Notice 2026-15, there was uncertainty around how this administration would interpret the FEOC requirements. Notice 2026-15’s safe harbor requirements were largely uncontroversial and, to date, have not been preemptively challenged.
At minimum, taxpayers need to contractually ensure the project is FEOC compliant, adheres to Notice 2026-15, and conduct a proportional amount of due diligence.
Unless the taxpayer files fraudulently, it will be difficult for the IRS to challenge their use of the credit in an audit if the taxpayer can provide records showing reasonable due diligence. Generally, the IRS has three years to audit a taxpayer unless there is fraud.
Additionally, certain recapture rules apply to 48E credits. The recapture period extends beyond the normal three-year statute of limitations for taxpayers, but it is limited in scope. For example, the credit can be retracted if a “specified taxpayer” makes an “applicable payment” to an FEOC entity during the 10-year period after the project is commissioned. The “specified taxpayer” is the taxpayer claiming the credit, not the supplier; therefore, this is not a material risk for most taxpayers.
The 48E sunset
The OBBBA limited the 48E credit to solar and wind projects that started work before July 4, 2026, or are commissioned by December 31, 2027. Last year, the IRS issued Notice 2025-42, which limits the safe harbor for solar and wind to the “Physical Work Test” to establish that continuous construction began before July 5, 2026. The limitation has been challenged by some states and non-governmental organizations, so taxpayers have a good-faith basis for using the old rules even though the taxpayer risks penalties if they are audited and the U.S. Tax Court agrees with Notice 2025-42.
To qualify under Notice 2025-10, work must be physical work of a significant nature, depending on the relevant facts and circumstances. The focus is on the “nature of the work performed, not the amount or cost.” Notice 2025-42 only provides one example for solar facilities: “The installation of racks or other structures to affix photovoltaic (PV) panels, collectors or solar cells to a site.” According to Notice 2025-42, once construction begins, the taxpayer will satisfy the “Continuity Requirement” if the taxpayer maintains a continuous program of construction.
A continuous program of construction involves continuing physical work. Notice 2025-42 provides a safe harbor for projects placed in service within four years after the year during which construction began. It is unclear if the safe harbor applies to all projects, including those with a significant planned gap in the “continuous work”. However, based on the plain language of the notice, taxpayers have a good faith basis to claim that any projects that meet the safe harbor test qualify, even if there are planned gaps in construction.
Minimize the risk
To minimize risk, projects should take steps to ensure their project meets both safe harbor tests articulated by the Trump administration. If the project cannot, taxpayers can keep the option to claim the 48E credits open by meeting the previous administration’s interpretations and/or the statutory criteria. Numerous circuits have held that IRS notices that do not comply with the Administrative Procedure Act (APA) are not enforceable (for example, “Green Rock LLC v. Internal Revenue Serv.”). Notices 2025-42 and 2026-15 do not comply with the APA, and it is unclear if the tax court will follow the administration’s lead. Thus, projects that meet the statutory requirements but not the Trump administration’s may be able to use the 48E credits but will do so with an increased risk of a penalty if audited by an understaffed IRS.
The debate over which test applies may be academic since the next administration and an already gutted IRS will have to enforce these limits. All taxpayers who claim the ITC for projects that need the safe harbor will claim it on their TY 2028 returns, which are filed in 2029.
Bill Curtis is a partner with law firm Spencer Fane based in St. Louis, Missouri.
