The IRS has provided interim guidance on how to determine whether electricity-producing qualified facilities, energy storage technologies, or eligible components are receiving material assistance from a prohibited foreign entity (PFE) and, therefore, would be ineligible for certain energy tax credits. (IR 2026-23, 2/12/2026; Notice 2026-15, 2026-11 IRB)
PFE Restrictions and Energy Credits
The One Big Beautiful Bill (OBBB) added new provisions to IRC § 45Y, IRC § 48E, and IRC § 45X to exclude facilities, energy storage technologies (ESTs), and eligible components that include material assistance from a PFE from qualifying for tax credits. The OBBB also amended IRC § 7701 to define “prohibited foreign entity” and “material assistance from a prohibited foreign entity.”
A PFE is generally defined as a specified foreign entity or a foreign-influenced entity. The interim guidance outlines detailed criteria for identifying such entities, including those with certain ownership structures, control over production or operations, or specific contractual arrangements with foreign entities.
Calculating Material Assistance from a PFE
Notice 2026-15 also describes how to determine how much of a qualified facility, EST, or eligible component includes material assistance from a PFE. This involves calculating a Material Assistance Cost Ratio (MACR). If the MACR falls below an applicable threshold percentage, the item is ineligible for the credit.
For qualified facilities and ESTs, the Clean Electricity MACR is calculated by:
- Identifying all manufactured products (MPs) and manufactured product components (MPCs) within the facility or EST.
- Tracking the direct costs attributable to these MPs and MPCs.
- Determining the portion of these direct costs attributable to PFE-produced MPs and MPCs (PFE Direct Costs).
- Subtracting the total PFE Direct Costs from the total direct costs and dividing the result by the total direct costs.
For eligible components, the Eligible Component MACR is calculated similarly, focusing on direct material costs of constituent elements, materials, or subcomponents (Constituent Materials) and the portion of those costs attributable to PFE-sourced Constituent Materials.
Interim Safe Harbors for MACR Calculations
The notice provides three interim safe harbors that taxpayers can use to determine their MACR:
- Identification Safe Harbor: Taxpayers can use the 2023-2025 Safe Harbor Tables (which include tables from Notice 2023-38, Notice 2024-41, and Notice 2025-08) to identify MPs, MPCs, and Constituent Materials for listed qualified facilities, ESTs, or eligible components.
- Cost Percentage Safe Harbor: For listed items, taxpayers can use the assigned cost percentages provided in the 2023-2025 Safe Harbor Tables to determine direct costs and PFE direct costs, simplifying the MACR calculation.
- Certification Safe Harbor: Taxpayers may rely on certifications from direct suppliers regarding whether MPs, MPCs, or Constituent Materials were PFE-produced or PFE-sourced, and the associated costs. These certifications must meet specific requirements, including being signed under penalties of perjury and retained for at least six years.
Note. Taxpayers cannot use the Cost Percentage Safe Harbor for facilities qualifying under the Incremental Production Rule or for qualified interconnection property.
Penalties and Statutes of Limitations
The OBBB introduced new penalty provisions and extended the statute of limitations for deficiencies related to PFE restrictions.
- Accuracy-Related Penalties: For disallowances of applicable energy credits due to overstating the MACR, the accuracy-related penalty under IRC § 6662 applies with a reduced threshold of 1% of the tax required to be shown on the return (instead of 10%).
- Extended Statute of Limitations: A deficiency attributable to an error in determining material assistance from a PFE may be assessed within six years after the return was filed.
- Supplier Penalties: A new penalty under IRC § 6695B applies to persons who provide inaccurate or false certifications regarding PFE status if they knew or reasonably should have known of the inaccuracy, and it results in a credit disallowance and a significant understatement of income tax.
Reliance
Taxpayers may rely on the rules provided in this notice to calculate MACR for:
- any Section 45Y or 48E qualified facility or energy storage technology the construction of which begins after December 31, 2025, until 60 days after the publication of the forthcoming safe harbor tables.
- any Section 45X eligible components sold in tax years beginning after July 4, 2025, the date of the OBBB’s enactment, until the date that the forthcoming safe harbor tables are published.
Request for Comments
The IRS intends to issue proposed regulations and other guidance regarding the definitions of a PFE and material assistance from a PFE. These forthcoming proposed regulations are expected to include:
- Detailed Rules for Material Assistance: Provisions for determining whether a qualified facility, EST, or eligible component includes material assistance from a PFE, leading to ineligibility for credits under Sections 45Y, 48E, or 45X if the MACR falls below the applicable threshold.
- Application of Foreign-Influenced Entity Rules: Clarification that “effective control” is determined independently under each provision of IRC § 7701(a)(51)(D)(ii)(III)(aa)(AA) through (GG). This means a specified foreign entity exercises effective control if any one of these conditions is met, such as a licensing agreement entered into or modified on or after July 4, 2025, that grants effective control.
- Anti-Circumvention Rules: Regulations to prevent entities from evading, circumventing, or abusing PFE restrictions, including through temporary transfers or alterations of rights or property that result in lapses of restricted foreign ownership or control.
The IRS is requesting comments on various aspects of the proposed regs, including clarification on determining “Total Direct Costs,” rules to prevent circumvention of PFE restrictions, and substantiation requirements for anti-circumvention rules.
Comments are due by March 30, 2026, and can be submitted electronically via the Federal eRulemaking Portal or by mail.
For more information about material assistance from a prohibited foreign entity, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-18555.
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