Interim guidance released for energy credit FEOC restrictions

The IRS last month released Notice 2026-15 (PDF - 516.24KB), providing interim guidance regarding restrictions to energy credits under Sections 45Y, 48E and 45X with respect to sourcing from prohibited foreign entities (PFEs). These restrictions, often referred to as the foreign entity of concern (FEOC) rules, were enacted by last July’s One Big Beautiful Bill Act (OBBBA).

The FEOC rules generally disallow credits to a taxpayer that is defined as a PFE, is influenced by a PFE, or receives material assistance from a PFE. “Material assistance” is determined through a material assistance cost ratio (MACR) (See our prior article for more information on the OBBBA changes to U.S. energy tax credits and incentives.).

The Feb. 12 notice provides a general framework for taxpayers to compute the MACR with respect to qualified facilities (QFs) and energy storage technology (EST) for purposes of Sections 45Y and 48E, or eligible components (ECs) for purposes of Section 45X, which Treasury and the IRS intend to include in forthcoming proposed regulations. This framework incorporates various safe harbors that expand and clarify the interim safe harbors provided in Section 7701(a)(52). 

The notice does not provide additional guidance on determining an entity’s PFE status, other than a rule providing that if a taxpayer makes a payment to a specified foreign entity under a licensing agreement entered into after July 4, 2025, with respect to a QF, that taxpayer is treated as a foreign‑influenced entity.

Taxpayers may generally rely on the guidance in Notice 2026-15 to determine the clean energy MACR for QFs and EST for which construction began or will begin after Dec. 31, 2025, and on or before the date that is 60 days after publication of the proposed regulations for purposes of claiming the Sections 45Y or 48E credits. Taxpayers claiming the Section 45X credit may generally rely on the guidance in Notice 2026-15 to determine the eligible component MACR for ECs sold in tax years beginning after July 4, 2025, and on or before the date that other guidance is published. 

Material assistance of a PFE

The OBBBA established MACRs that must be satisfied for QFs, EST and ECs (including critical minerals), and these MACRs generally increase over time. For example, qualified facilities have a threshold of 40% in 2026, increasing 5% per year to 60% in 2029. EST and specific ECs have their own defined percentages under Section 7701(a)(52). To compute a MACR with respect to any QF, EST or EC, a taxpayer must divide direct costs attributable to non‑PFEs by the total direct costs.

For purposes of this discussion, “direct costs” means direct costs with respect to a QF or EST, and direct material costs in the case of an EC. For purposes of Sections 45Y and 48E, the direct costs of a manufactured product (MP) that is produced by a taxpayer generally include direct materials and direct labor (as defined in Treas. Reg. Sections 1.263A-1(e)(2)(i)(A) and (B)), as well as production or acquisition costs of a manufactured product component (MPC) included in the MP.

If a taxpayer purchases an MP, the direct cost is the purchase price of that product including freight-in and tariffs. Direct labor or other costs associated with incorporating the MP into the QF or EST are not included in direct costs. For purposes of Section 45X, direct material costs are costs that a taxpayer pays or incurs (within the meaning of Section 461 and the regulations issued under Section 263A) for materials that become an integral part of the EC and for those materials that are consumed during production of the EC.

To qualify for credits under Sections 45Y, 48E or 45X, the applicable MACR must exceed the required threshold for the calendar year in which construction begins with respect to the QF or EST or in the calendar year sold for purposes of an EC.

How to compute material assistance

The notice provides a framework for computing the MACR for QFs, EST or ECs, which is compared to the applicable threshold based on the year construction begins for QFs and EST, and the year sold for ECs. A taxpayer must calculate a separate MACR for each EC sold during the year for which a Section 45X credit is claimed, although different components may have the same MACR if they use the same constituent materials from the same producers or are covered by the same average‑percentage calculation.

For QFs and EST, a taxpayer must separately calculate the MACR for each individual QF or EST for each year a credit is determined under Sections 45Y or 48E.

In all cases, the MACR is calculated by subtracting direct costs attributable to PFEs from total direct costs and dividing the result by total direct costs, yielding the percentage of costs not attributable to PFEs. The notice outlines a four‑step framework for computing the clean energy MACR and provides safe harbors that may be applied during one or more of the steps of the framework.

Step 1: Identify manufactured products (MPs), manufactured product components (MPCs) and constituent materials (CMs)

The first step is to identify all MPs, MPCs and CMs included in the QF, EST or EC. In some cases, the taxpayer may identify MPs, MPCs and CMs by type rather than individually, such as when using the identification safe harbor (detailed below) or when tracking MPs, MPCs and CMs based on averaging methods.

Step 2: Track MPs, MPCs and CMs

Next, the taxpayer must track the MPs, MPCs and CMs used in each QF, EST or EC to determine their direct costs and whether they were mined, manufactured or produced by a PFE. If the same MP, MPC or CM is used across multiple QFs, EST or ECs, the full direct cost of that MP, MPC or CM is included separately for each QF, EST or EC when calculating MACR. Taxpayers have several options for tracking:

• Individual tracking: Taxpayers using this method must track the direct costs and origin of each MP, MPC and CM.
• Cost percentage safe harbor: Only taxpayers also using the identification safe harbor (discussed below) can use this method, in which they need to track only whether each MP, MPC and CM was produced by a PFE.
• Average costs calculation: Taxpayers claiming the Section 45X credit may use this method, in which they track CMs by type using the average cost during a specified period determined by the taxpayer.
  
• De minimis assignment-based tracking method: If an item of the same type is placed in service during the same tax year and represents less than 10% of a QF’s or an EST’s total direct costs, the item may be reasonably and consistently allocated across all QFs and EST instead of being tracked individually.
• EST with capacity under 1 megawatt: The notice includes a simplified tracking method that may be used if the systems are the same type and placed in service in the same tax year, and if the taxpayer is not using de minimis assignment‑based tracking. Instead of tracking each MP and MPC for each EST, the taxpayer may use averages across similar properties.

Step 3: Determine total direct costs

The taxpayer then determines the total direct costs for each QF, EST or EC by identifying the direct costs attributable to the QF, EST or EC used or consumed in the construction/production of the QF, EST or EC. The notice clarifies that structural steel and iron costs are not included when determining a MACR.

Step 4: Determine PFE direct costs

After determining total direct costs, the taxpayer calculates the portion of those costs that are attributable to MPs, MPCs and CMs mined, manufactured or produced by PFEs. Whether an applicable material is considered PFE-produced is determined at the time the taxpayer pays or incurs the cost. Taxpayers may rely on the certification safe harbor (discussed below) and may use the average cost calculation where permitted.

Qualified interconnection property

When a taxpayer claims a Section 48E credit for both a QF and qualified interconnection property, a separate clean energy MACR must be calculated for each. The ability or inability to calculate the ratio for the interconnection property, or whether that ratio meets the applicable threshold, does not affect the taxpayer’s ability to claim the credit for the QF itself. However, if the interconnection property does not involve material assistance from a PFE and the QF does, the taxpayer cannot claim a credit for the interconnection property.

The MACR for qualified interconnection property is calculated using the same methodology described above.