The Internal Revenue Service (the “IRS” or “Service”) recently released detailed guidance concerning the classification and treatment of Prohibited Foreign Entities (“PFEs”) as well as the application of the related Foreign Entity of Concern (“FEOC”) restrictions that were created in the One Big Beautiful Bill Act (“OBBBA” or “Bill”).
To recap, the FEOC provisions in the OBBBA—signed into law on July 4, 2025—are designed to limit which entities can receive federal renewable energy tax credits. These rules place strict restrictions on allowed relationships with certain foreign entities and individuals from “Covered Nations,” including China, Iran, North Korea, and Russia. Relationships with foreign entities that may implicate these limitations include, but are not limited to, the sourcing of goods and licensing of intellectual property, direct or indirect ownership, and several types of lateral contractual relationships.
The guidance, promulgated in Notice 2026-15 and issued on February 12, 2026 (the “Notice”), addresses a number of matters related to the implementation of the FEOC rules. For instance, the Notice addresses how to calculate the Material Assistance Cost Ratio (“MACR”) for purposes of claiming the Advanced Manufacturing Tax Credit under Section 45X of the Internal Revenue Code (“IRC”), the Clean Electricity Production Credit under Section 45Y of the IRC, and the Clean Electricity Investment Credit under Section 48E of the IRC. The MACR limitations prevent an entity from claiming these credits if the proportion of the taxpayer’s project costs attributable to components produced by a PFE exceeds the statutory threshold. These thresholds vary by project type and tax year.
Since such a substantial portion of this Notice is dedicated to the Material Assistance provisions of the OBBBA, please see the following simple example illustrating how MACRS are calculated and how such provisions applied:
An Eligible Solar Component produced under the Section 45X Advanced Manufacturing Production Credit has a Material Assistance Cost Ratio of 80% in 2029 (gradually stepped up by 10% each year from an initial threshold of 50% in 2026), meaning that at least 80% of the Solar Component’s total cost of manufactured products must be domestically sourced. If the total cost of manufactured products that comprise the Solar Component equals $1,000, and the entity incorporates $375 in manufactured products from a PFE into the Component, then the cost ratio would be calculated as follows: ($1,000 – $375)/$1,000, or 62.5%. This is less than the 80% required threshold for 2029 and would not qualify under the FEOC rules. On the other hand, if the taxpayer only sourced $125 worth of manufactured products from a PFE for the Component, the ratio would be: ($1,000 – $125)/$1,000, or 87.5%. This total exceeds the 80% threshold for 2029 and would satisfy the Material Assistance Cost Ratio established under the Bill’s FEOC rules.
Notice 2026-15 provides additional guidance on these thresholds and the MACR calculations. It also lays out several taxpayer-friendly safe harbors relating to component identification, certification, and cost percentage allocation. These safe harbors clarify the ambiguity inherent in the OBBBA itself and establish simplified pathways to taxpayer compliance, in response to industry concerns regarding the feasibility of component identification and cost tracking.
There are three safe harbors provided in the Notice: one for identification, one relating to cost percentage, and one concerning certification. The first safe harbor, identification, allows taxpayers to use tables from prior notices, including Notices 2023-38, 2024-41, and 2025-08, to identify both “Manufactured Products” and “Manufactured Product Components”. A Manufactured Product or Product Component that is not listed in the appropriate table will be disregarded for purposes of the MACR calculation. In such cases, the Assigned Cost Percentages would not total 100% because of the disregarded products or components.
The second safe harbor, relating to cost percentages, is more straightforward. Taxpayers are permitted to apply the Assigned Cost Percentages outlined in Notice 2025-08 to calculate their direct costs, any PFE-related direct costs, and PFE status. This serves as an alternative to taxpayer tracing of actual costs incurred by suppliers, a critical concern in the immediate wake of the OBBBA’s passage. However, this cost percentage safer harbor is only available to taxpayers that also use the identification safe harbor discussed previously. It is also important to note that taxpayers who avail themselves of this safe harbor still need to track whether each individual manufactured product or manufactured product component was produced by or sourced from a PFE.
Finally, the Notice establishes a certification safe harbor, which allows taxpayers to use certifications from suppliers to determine the taxpayer’s total direct material costs for each Manufactured Product or Manufactured Product Component that was not produced or sourced by a PFE in order to establish that such Manufactured Products or Manufactured Product Components were not produced or sourced by a PFE. To receive the protection of this safe harbor, these certifications must include the supplier’s employer identification number (or analogous information for foreign entities), be signed by such supplier, and be retained for a minimum of six years. Furthermore, taxpayers cannot rely on any certification that they know, or should know, is inaccurate.
To illustrate, please see the following example applying the Interim Identification and Cost Percentage Safe Harbors, described above, excerpted directly from the Notice:
“(2) Example 2: calculating Eligible Component MACR using the Identification Safe Harbor and the Cost Percentage Safe Harbor.
(a) In taxable year 2026, Taxpayer E produces and sells 100 solar modules (within the meaning of § 45X(c)(3)(B)(v)) (Solar Modules) to an unrelated person. Under § 7701(a)(52)(C)(i)(I)(aa), the Solar Modules include material assistance from a PFE if the Eligible Component MACR with respect to the Solar Modules is less than 50%. Taxpayer E would like to use the Identification Safe Harbor and the Cost Percentage Safe Harbor to calculate an Eligible Component MACR and determine whether its Solar Modules include material assistance from a PFE.
(b) Taxpayer E determines the Solar Modules may be treated as a Listed eligible component by relying on section 4.01(3)(d)(i) of this notice, which identifies solar modules as defined in § 45X(c)(3)(B)(v) as a Listed eligible component. As a result, Taxpayer E may use the Identification Safe Harbor to identify Constituent Materials and use the Assigned Cost Percentages of the MPCs listed for PV module to determine Total Direct Material Costs. Taxpayer E finds that PV module is a Listed eligible component in two separate Notice 2025-08 tables: “Updated Table for Solar PV Ground Mount” and the “Updated Table for Solar PV Rooftop”. Taxpayer E knows that the Solar Modules do not have domestic c-Si PV Cells or domestic wafers and will be used in a Solar PV Ground Mount (Tracking) and so must use the column “Ground Mount (Tracking)” to identify Assigned Cost Percentages for the Solar Modules. A PV module identified in the “Ground Mount (Tracking)” column of the “Updated Table for Solar PV Ground Mount” consists of 10 MPCs: Cells (38.0%), Frame/Backrail (6.0%), Front Glass (6.0%), Encapsulant (3.8%), Backsheet/Backglass (3.8%), Junction Box (1.0%), EdgeSeals (0.3%), Pottants (0.3%), Bus Ribbons (1.5%), and Bypass Diodes (0.4%). The Solar Modules do not include Bypass Diodes (that is, listed but not utilized), but do include heat sensors (that is, unlisted but utilized). In addition to these MPCs and Assigned Cost Percentages, the Ground Mount (Tracking) column provides that Production of a PV module for such an Applicable Project has an Assigned Cost Percentage of 4.7%.
(c) Taxpayer E next tracks whether each Listed MPC identified in the previous step was PFE Sourced. Taxpayer E knows that 800 of the 1000 Cells incorporated in each Solar Module were PFE Sourced and that no additional Constituent Materials incorporated into the Solar Modules and listed as an MPC in the “Updated Table for Solar PV Ground Mount” for a PV module were PFE Sourced.
(d) Taxpayer E then uses the Cost Percentage Safe Harbor to aggregate Assigned Cost Percentages and determine a Total Percentage and Total PFE Percentage. Taxpayer E sums the Assigned Cost Percentages for each of the MPCs listed within the PV Module, plus Production of the PV Module, disregarding Bypass Diodes and heat sensors, to determine a Total Percentage of 65.4% (38.0% + 6.0% + 6.0% + 3.8% + 3.8% + 1.0% + 0.3% + 0.3% + 1.5% + 0.4% + 4.7% – 0.4%).
(e) To determine Total PFE Percentage, Taxpayer E determines the Assigned Cost Percentage attributable to the PFE Sourced Cells by multiplying the Assigned Cost Percentage for Cells (38.0%) by the percentage of such Cells that were PFE Sourced (800 out of 1000 = 80%), which equals 30.4% (Total PFE Percentage).
(f) Taxpayer E calculates the Eligible Component MACR as follows: (65.4% [Total Percentage] – 30.4% [Total PFE Percentage]) / 65.4% [Total PFE Percentage] = 53.5%…
(g) Taxpayer E’s Solar Modules do not include material assistance from a PFE and thus satisfy the requirements of § 45X(c)(1)(C), therefore, § 45X(c)(1)(C) does not prohibit Taxpayer E from claiming the credit under § 45X for the Solar Modules.”[1]
Unfortunately, the Notice fails to elaborate on “beginning of construction” issues (e.g., did a taxpayer begin construction on a project on or before December 31, 2025, thus exempting it from the Material Assistance limitations?), outside of confirming that prior IRS Notice 2025-42, relating to solar and wind facilities, does not apply to the PFE requirements. It overlooks ownership and control, which remain some of the less transparent elements of the OBBBA. Undoubtedly, energy industry stakeholders are disheartened by the paucity of information relating to the mechanics of initial PFE determination and what constitutes a contractual arrangement or provision that grants effective control rights to a Specified Foreign Entity. The Notice also does not elaborate on the 10-year recapture period for certain Investment Tax Credit-eligible facilities.
However, the Service has requested comment on the “substantiation and documentation” that should be required to support anti-circumvention rules under the PFE requirements, including demonstrating that “beginning of construction” has occurred for purposes of the PFE and Material Assistance rules, among other issues. Interested parties will have until March 30, 2026, to make their voices heard on these topics. Otherwise, it looks like industry participants may have to wait at least a few months to receive more detailed and comprehensive guidance on the application of these FEOC rules.
[1] IRS Notice 2026-15, Section 4.04(2).