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- By Chez Oxendine
- Energy | Environment
Tribal renewable energy projects face a new deadline: spend millions of dollars on construction by early September or lose federal tax credits that can cover up to 70% of project costs.
New guidance issued by the Internal Revenue Service on Friday has eliminated a key option that allowed tribes to qualify for the credits by spending just 5% of a project’s cost by Sept. 2. Now, larger projects must begin physical construction to remain eligible.
“The most important word to get out to Indian Country regarding the guidance is for any projects larger than 1.5 MW, if it’s going to qualify for the (tax credits) under the 5% test, they have to achieve that within the next couple of weeks,” Todd Halvorsen, head of energy finance and structuring at the Alliance for Tribal Clean Energy, told Tribal Business News.
The credits at stake were created by the Inflation Reduction Act of 2022. The IRA modernized and bolstered existing energy tax credits into technology‑neutral, emissions‑based incentives and expanded their availability to tax‑exempt entities, including tribal governments. However, the One Big Beautiful Bill Act of 2025 (H.R. 1) curtailed eligibility for wind and solar facilities.
The bill set a deadline of Dec. 31, 2027, for projects to be placed in service and July 5, 2026, to begin construction. Those who meet the July deadline could have four full years to put the project in service. Initially, projects could meet the construction requirement by expending 5% of the project cost using a so-called “safe harbor option” for those who couldn't begin physical construction quickly.
The new IRS guidance limits that safe harbor option to smaller projects under 1.5 megawatts. Larger projects are left with the “physical work test,” which evaluates whether the project has undergone sufficient physical construction or equipment purchases. The evaluation is a more complex, less clear-cut process than the 5% spending safe harbor, according to Candice Long, specialty tax advisor for law firm Winthrop and Weinstine.
“The short point is that this makes this all much more challenging for tribes, organizations and other taxpayers to pull together positions that meet the criteria,” Long said. “It makes a bar that was already complicated to begin with that much harder to clear.”
The guidance becomes official Sept. 2, giving tribes relying on the safe-harbor option just weeks to spend potentially millions of dollars.
“The physical work test is harder to achieve, so the entire industry, not just Indian Country, will be scrambling to meet it,” Halvorsen said.
The physical work test can be met through on‑site activities such as excavation, foundation installation or racking assembly, or through off‑site manufacturing of essential components under binding contracts. Preliminary work such as design, permitting or financing arrangements does not qualify. Projects that face uncontrollable delays — such as, say, waiting on Bureau of Indian Affairs approvals — may have more time to complete their work.
Halvorsen said that while most tribal projects in the pipeline are under the 1.5‑megawatt threshold, some larger developments already in advanced planning could face increased risk.
The notice maintains a four‑year “continuity safe harbor” for placing a facility in service after starting construction, with allowances for certain delays beyond a developer’s control. Supply chain issues, like the current transformer backlog that can exceed 50 weeks, may qualify for exceptions if well‑documented, but that could be difficult to prove, Halvorsen said. He noted that many tribal projects have relied on the 5% safe harbor in the past because it was less costly and more flexible than starting physical work early in the development process.
“It’s going to cause a lot of stress for projects, not just in Indian Country, but especially in Indian Country, where it’s already harder to attract developers and source capital,” Halvorsen said. “Large for‑profit developers with bigger balance sheets and more staff can handle this kind of stress more easily than tribes.”
As Tribal Business News previously reported, tribal nations have increasingly pursued renewable energy projects as part of broader sovereignty and economic development strategies. Federal tax credits have been called a “game-changer” by industry experts for their ability to bring in private investment, which has been critical to financing both utility‑scale and community‑scale systems.
But offering the credits to tribes proved complex, requiring multiple consultations and listening sessions to fine-tune the concept. That slowed tribes’ plans to use the credits for their projects. Now, that complexity is even worse, Long said.
“Implementing these tax credits requires a lot of skillsets, and a lot of learning that has to be done,” Long said. “Now, it’s even harder because the goalposts are changing and there are fewer options for an eligible pathway for beginning of construction.”
At the Alliance, Halvorsen said staff are working to identify every project over the 1.5‑megawatt threshold that could be affected, with the goal of getting as many as possible to meet the 5% expenditure standard before the Sept. 2 effective date of the new rule. Projects that miss the short-term safe harbor window will have until July 5, 2026, to meet the physical work test. For many, that will mean accelerating schedules, securing contractors and equipment earlier and preparing for more rigorous documentation.
Halvorsen said it's likely the guidance will be challenged in court.
“The complexity of the guidance works against the original law that was agreed upon,” Halvorsen said. “This approach is highly unusual and arbitrary — if you took this to nine out of 10 major law firms, they would likely disagree with the administration’s position.”
