Environmental and renewable energy groups sue IRS and Treasury over solar, wind tax rules

A coalition of environmental, tribal, local government and clean-energy advocacy groups filed a federal lawsuit on Thursday challenging newly issued tax guidance by the Internal Revenue Service (IRS) and the U.S. Department of the Treasury that they say unfairly targets solar and wind energy developers. The complaint alleges the guidance unlawfully alters longstanding construction-start criteria for claiming federal tax credits and will impede renewable energy deployment.

The lawsuit, filed in the U.S. District Court for the District of Columbia, was led by the Oregon Environmental Council and includes plaintiffs such as the Natural Resources Defense Council (NRDC), Public Citizen, Hopi Utilities Corporation, the City and County of San Francisco, and the Maryland Office of People’s Counsel.

At the heart of the complaint is IRS guidance issued on Aug. 15, 2025, which revised how developers of utility-scale and larger solar and wind projects can demonstrate they have begun construction and thus qualify for federal renewable energy tax credits. The guidance eliminated the so-called “five percent safe harbor”, a test that allowed developers to secure credits by spending 5% of project costs before statutory deadlines, for wind and solar projects above a certain size. Plaintiffs argue that this change was made without adequate justification and that it singles out clean energy technologies in a way that is “arbitrary and capricious” and violates the Administrative Procedure Act.

According to the legal filing, removing the safe harbor provision undermines over a decade of established IRS practice and injects uncertainty into tax policy for an industry that depends on predictable credit eligibility to finance long-term projects. The plaintiffs contend the guidance will increase development costs, slow construction starts, and ultimately harm consumers through higher electricity prices.

Broader Industry and Legal Context

For years, solar and wind developers have used the safe harbor rules to qualify for tax incentives, notably the Investment Tax Credit (ITC) and Production Tax Credit (PTC), that have been central to financing large renewable energy projects in the United States. The Internal Revenue Code and IRS regulations historically allowed taxpayers to meet construction-start requirements either through paying 5% of project costs or beginning physical work of significant nature. This dual path provided flexibility when project timelines were affected by permitting or supply-chain delays.

Under the revised guidance, solar and wind facilities, particularly those larger than 1.5 megawatts, must meet more stringent criteria that plaintiffs argue were never offered for comparable energy technologies such as nuclear, hydropower or geothermal. The complaint asserts that the administration’s guidance effectively penalizes renewable developers by narrowing the conditions under which credits can be claimed, even though the statutory deadlines for beginning construction remain unchanged by Congress.

Plaintiffs emphasize economic and climate stakes

Coalition members emphasized broader economic and consumer implications of the IRS policy. Jana Gastellum, executive director of the Oregon Environmental Council, said in a statement that the administration’s changes jeopardize jobs and clean-energy investment “just when communities need affordable energy and economic opportunity.” The lawsuit also cited concerns express by city and state officials about higher power bills and lost clean-energy economic activity if solar and wind projects are delayed or become uneconomic.

NRDC tax attorney Grace Henley called the guidance “illegal” and said it threatens progress in expanding clean energy nationwide, arguing that “Congress intended to encourage investment in renewable generation, not hinder it through arbitrary regulatory shifts.”

Tribal utility Hopi Utilities Corporation and local governments similarly argued that new rules forced adjustments to project plans and undermined certainty, a key factor in financing capital-intensive infrastructure projects.

What comes next

The lawsuit seeks a court order declaring the IRS guidance unlawful and instructing the agency and Treasury to restore the prior interpretation of construction-start rules so that solar and wind developers can claim tax credits under consistent standards. Industry observers expect the case to draw interest from a range of stakeholders, including utilities, renewable developers, and energy policy advocates, as it could influence the pace of deployment and financing of new clean-energy capacity. (archive.md)

Oral arguments have not yet been scheduled, and the IRS and Treasury have not publicly responded to the lawsuit. The case adds to a growing number of legal challenges over federal energy and tax policy that have emerged amid shifting regulatory priorities at the Treasury and across the federal government.

Source: Environmental and renewable energy groups sue IRS, Treasury (Solar Power World Online) (solarpowerworldonline.com)