Treasury And IRS Provide Guidance Regarding Energy Tax Credit Limits On Provision Of Material Assistance By Foreign Entities Of Concern (FEOCs)

On February 12, 2026, the Department of the Treasury and the Internal Revenue Service issued Notice 2026-15, providing 95 pages of guidance regarding the definition of "material assistance from a prohibited foreign entity." Enacted by the so-called One Big Beautiful Bill Act ("OBBBA") on July 4, 2025, as part of a package of "foreign entity of concern" or "FEOC" rules, the rules regarding material assistance from a prohibited foreign entity may disallow a tax credit under section 45X, 45Y, or 48E based upon the source and cost of the materials used to produce the relevant facility or product.For our prior alert on the FEOC rules, see here.

The Notice provides interim safe harbors and other guidance regarding the proper manner to perform the calculations required to determine whether a facility or product has received material assistance from a prohibited foreign entity.Taxpayers are entitled to, but need not, rely upon the Notice, pending the issuance of superseding guidance, as discussed below.

The Notice does not provide guidance with respect to other areas of the FEOC rules, such as details regarding the circumstances in which payments pursuant to licensing agreements and other contracts with, or debt owed to, specified foreign entities will cause a taxpayer to be considered a foreign-influenced entity. The Notice states that Treasury and the IRS intend to issue more comprehensive proposed regulations and other guidance with respect to the definition of prohibited foreign entities so guidance regarding these issues may be forthcoming.

1. Background.
   1. OBBBA "FEOC" Rules. The FEOC rules classify a taxpayer that has too close a connection to China, Russia, North Korea, or Iran, or that is listed on certain "bad actor" lists maintained by the U.S. government, as a "prohibited foreign entity". This classification has a variety of consequences. First, a prohibited foreign entity generally cannot claim, sell, or purchase certain clean energy tax credits (the "Taxpayer-Focused FEOC Rules"). Second, an electrical generation project or storage facility that contains an excessive proportion of components produced by prohibited foreign entities is ineligible for the section 48E ITC or section 45Y PTC (the "Facility-Focused FEOC Rules"). Finally, an "eligible component," such as an inverter, solar module, battery pack, or critical mineral, that contains an excessive proportion of content from prohibited foreign entities is ineligible for the section 45X advanced manufacturing production credit (the "Product-Focused FEOC Rules"). A facility or product that flunks the Facility-Focused FEOC Rules or the Product-Focused FEOC Rules is denied the relevant clean energy credit on the grounds the taxpayer that owns the facility or that produced the product has received "material assistance from a prohibited foreign entity," so we refer to those two rules together as the "Material Assistance Rules."
   2. Definition of "Prohibited Foreign Entity." An entity is treated as a prohibited foreign entity if it is (1) a "specified foreign entity," generally meaning a Chinese, Russian, North Korean, or Iranian individual or entity or a 50%+ subsidiary thereof or an entity listed on certain "bad actor" lists maintained by the U.S. government, or (2) a "foreign-influenced entity" under (a) a test based upon a measure of actual equity or debt ownership or control of the entity by specified foreign entities or (b) a test that deems "effective control" of the entity by a specified foreign entity based on licensing agreements or other contracts. Which of these types of prohibited foreign entities are relevant in determining whether a taxpayer is tainted by the Taxpayer-Focused FEOC Rules varies from credit to credit, but all are relevant to applying the Material Assistance Rules to facilities and products. The various rules defining "prohibited foreign entity" are complex, but the rules for determining "effective control" stand out as the most difficult to interpret. As discussed below, the Notice is focused on the Material Assistance Rules and provides only a single sentence of guidance regarding the definition of "prohibited foreign entity" or its sub-categories.
   3. Material Assistance. The Material Assistance Rules disallow the applicable credit for a facility or product if an excessive percentage of the taxpayer's cost of the facility or product is for components produced by a prohibited foreign entity. The threshold percentages that trigger the disallowance of credits under the Material Assistance Rules vary, both from facility/product to facility/product and over time. The definition of "material assistance" in the tax code includes two safe harbors intended to facilitate these calculations. The first allows taxpayers to rely upon safe harbors under guidance previously provided under the rules for ITC/PTC domestic content adders ("Domestic Content Safe Harbors"), pending the issuance of guidance providing safe harbors under the Material Assistance Rules. The second allows reliance upon certain certifications provided by suppliers.
2. Highlights of the "Material Assistance" Guidance Provided by the Notice. The Notice provides detailed guidance regarding the application of the Material Assistance Rules. The discussion below describes certain highlights from that guidance.
   
   
   1. Level at Which the Determination is Made.The Notice confirms that the material assistance test is applied separately to each qualified facility, energy storage technology, or eligible component. In the context of a wind farm (or solar facility) this means that each wind turbine (or inverter block) is tested separately and passes or fails the test for material assistance on its own. However, as discussed below, there are other rules that ease some of the burden of tracking small components in a larger project.
      
      
   2. Identification Safe Harbor.The Notice provides an Identification Safe Harbor that allows the taxpayer to rely upon a modified version of the Domestic Content Safe Harbors to identify the major components whose source must be determined to apply the test for material assistance to a facility or product.
      
      
      1. Why this Safe Harbor Matters.The Facility-Focused FEOC Rules require the taxpayer to correctly identify (1) the major manufactured products directly incorporated into the facility ("Manufactured Products") and (2) the major manufactured components of each Manufactured Product ("Manufactured Product Components"). The taxpayer must determine whether each Manufactured Product and Manufactured Product Component is produced by a prohibited foreign entity. Failure to correctly identify the components relevant to the analysis would cause the calculation to determine material assistance to be inaccurate. For the types of facilities covered by the Domestic Content Safe Harbors, the Identification Safe Harbor provides certainty regarding the identity of the relevant Manufactured Products and Manufactured Product Components. The Identification Safe Harbor provides similar relief under the Product-Focused FEOC rules for identifying the "Constituent Materials" of products identified in the Domestic Content Safe Harbors.
         
         
      2. Facilities/Products Covered by the Safe Harbor.The Identification Safe Harbor covers wind, solar, battery storage and hydroelectric facilities and the production of certain PV modules, battery packs, and certain inverters.
         
         
   3. Cost Percentage Safe Harbor.The Notice provides a Cost Percentage Safe Harbor that generally allows a taxpayer using the Identification Safe Harbor to further elect to rely upon cost percentages for each relevant component previously published under the Domestic Content Safe Harbors, when available, in lieu of using actual cost data. Where available, and favorable, the use of this safe harbor eliminates the need to calculate and document actual cost data with respect to components of facilities and products. A taxpayer that uses the Identification Safe Harbor need not apply the Cost Percentage Safe Harbor, but a taxpayer must use the Identification Safe Harbor to be eligible to use the Cost Percentage Safe Harbor.
      
      
   4. Certification Safe Harbor.The Notice provides a Certification Safe Harbor that entitles a taxpayer to rely upon certifications provided by suppliers (unless it knows or has reason to know the certification is false) stating that the component was not produced by a prohibited foreign entity or providing the cost of the component that is not produced by a prohibited foreign entity. The Notice provides detailed rules regarding the content of the certification and requires the taxpayer and supplier to retain the certification for at least six years. The Notice includes an example in which a taxpayer applies the Identification Safe Harbor and Certification Safe Harbor to perform the MACR calculation (discussed below) without reliance on the Cost Percentage Safe Harbor.
      
      
   5. Miscellaneous Rules for Performing Material Assistance Cost Ratio Calculations.The Notice includes an array of mechanical rules and safe harbors that add certainty to the calculation of the "material assistance cost ratio" or "MACR" of each relevant facility or product. The MACR is generally the percentage of total costs of a facility or product attributable to components produced by non-prohibited foreign entities. A facility or product with a MACR greater than or equal to the threshold percentage specified for the facility or product by statute or guidance "passes" the Material Assistance Rules and is eligible for the relevant credit. The most significant calculational rules are summarized below.
      
      
      1. SafeHarbor for De Minimis Components of a Qualified Facility or Energy Storage Technology.A taxpayer may assign components of the same type and characteristics to facilities placed in service during the same taxable year without individually tracking them to such facilities, provided that the components incorporated into a given facility represent less than 10% of the facility's costs.
         
         
      2. Safe Harbor for Small Battery Storage Facilities.A taxpayer may use special cost averaging rules for small batteries (less than one megawatt) that are of the same type and placed in services in the same taxable year.
         
         
      3. Period for Calculation of Costs of Eligible Components.A taxpayer may apply special cost averaging rules and prohibited foreign entity production percentages to track Constituent Materials of a given type produced during a "specified period of time. "In general, the specified period of time must be at least one calendar day, and every day of the taxpayer's taxable year must be covered by a specified period.
         
         
      4. Section 45X Contract Manufacturing Arrangements. Where parties to a contract manufacturing arrangement elect to allow the customer to claim the section 45X credit, the MACR calculation includes both costs paid or incurred by the party that performs the actual production activities and the costs to the customer in the contract manufacturing arrangement. (Note, however, that the current threshold percentage for critical minerals in section 7701(a)(52) is zero percent, meaning that even if 100% of the costs of production of an applicable critical mineral are attributable to a prohibited foreign entity, the MACR would not be less than the threshold percentage and would satisfy the Material Assistance Rules.)
         
         
      5. Steel and Iron.The MACR calculation does not take into account structural steel or iron. A taxpayer using the Identification Safe Harbor disregards any items identified in the Domestic Content Safe Harbors as "Steel/Iron."
         
         
      6. Shared Facilities.If ownership of a component is shared by multiple facilities, then the owner of each facility is considered to have an undivided ownership interest in the component and must track its cost and whether the component was produced by a prohibited foreign entity. The Identification Safe Harbor and Cost Percentage Safe Harbor apply regardless of whether components listed in the Domestic Content Safe Harbors are fully or fractionally owned or shared.
         
         
      7. Facilities Relying Upon 80/20 Rule.In the case of a retrofitted facility that is treated as a new facility under the "80/20 rule," the MACR calculation takes into account only the costs of new components of the facility.
         
         
      8. Calculations Under Identification Safe Harbor.In applying the Identification Safe Harbor, unlisted items are disregarded. Listed but unutilized items are also disregarded, and they are removed from both the numerator and denominator of the MACR calculation. This deviates from the domestic content calculations, in which listed but unutilized items are given a "zero value" and removed from only the numerator of the domestic cost percentage. The MACR calculation also includes special rules for taking into account the "Production" rows in the tables published in the domestic content guidance in a way that deviates from the domestic content calculations.
         
         
      9. Qualified Interconnection Property.Under section 48E, the costs of qualified interconnection property are taken into account for purposes of computing the amount of section 48E ITC with respect to a qualified facility. Consistent with the OBBBA, qualified interconnection property must satisfy the Material Assistance Rules, even though it is not part of the "qualified facility" for section 48E ITC purposes. A taxpayer may not use the Identification Safe Harbor or Cost Percentage Safe Harbor with respect to qualified interconnection property. Failure of qualified interconnection property to satisfy the Material Assistance Rules will not disqualify the qualified facility. However, failure of the qualified facility to satisfy the Material Assistance Rules will disqualify the qualified interconnection property.
         
         
      10. Year for Determining PFE Status. Whether a component is produced by a prohibited foreign entity depends on the status of the entity that produced the component for the taxable year of the entity during which the taxpayer pays or incurs costs attributable to the component under the taxpayer's method of accounting.
          
          
3. Effective Control.As discussed above, an entity may be classified as a "foreign-influenced entity," and therefore a "prohibited foreign entity," if the entity has a license agreement or other contract with a specified foreign entity that is deemed to provide the specified foreign entity with "effective control" over the entity whose status is being tested. The Notice includes one sentence clarifying that any license agreement entered into with a specified foreign entity after July 4, 2026, will cause the taxpayer to be a foreign-influenced entity if the other requirements of the test for effective control are satisfied and an exception does not apply.
   
   
4. Taxpayer Reliance.A taxpayer may rely on the guidance provided in the Notice for determining material assistance from a prohibited foreign entity for: (i) any Section 45Y or 48E qualified facility or energy storage technology the construction of which begins after December 31, 2025, and on or before 60 days after publication of proposed regulations in the Federal Register (or in the case of safe harbors, successor safe harbor guidance); and (ii) any Section 45X eligible components sold in taxable years beginning after July 4, 2025, and on or before 60 days after publication of proposed regulations in the Federal Register (or in the case of safe harbors, successor safe harbor guidance).
   
   
5. Request for Comments; Beginning of Construction. The Notice requests written comments on the Material Assistance Rules and related issues byMarch 30, 2026. The Notice specifically requests comments regarding the appropriate substantiation and documentation that should be required to support compliance with the forthcoming anti-circumvention rules, such as to demonstrate that a qualified facility or energy storage technology has begun construction for tax purposes on or before December 31, 2025. It is noticeable that the Notice describes beginning construction on or before December 31, 2025 as an example of "anti-circumvention" rather than standard grandfathering and may signal increased IRS scrutiny of facilities beginning construction in 2025. There is currently no guidance on substantiating beginning of construction specifically for purposes of compliance with the Material Assistance Rules, although current market practice includes a mix of various records and certifications, depending on the beginning of construction strategy. Any forthcoming IRS guidance on substantiating a given beginning of construction strategy for purposes of compliance with, or excuse from compliance with, the Material Assistance Rules could have a significant impact on current market practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.