During a March 11 webinar, Deloitte tax specialists explained new IRS guidance on prohibited foreign entity (PFE) restrictions for clean energy credits, detailing frameworks and safe harbors for determining if a project received disqualifying “material assistance.”
‘Pass or Fail’
The PFE restrictions were enacted amid bipartisan concerns that adversarial nations — specifically China, Russia, Iran, and North Korea — were benefiting from U.S. tax incentives. This led to what Ross Reiter, a partner in Deloitte’s Global Investment & Innovation Incentive (Gi3) Services practice, described as a strict “pass or fail” test.
There are two primary ways a project can be disqualified under the PFE rules. The first is if the taxpayer claiming the credit is itself a PFE, either by being a “specified foreign entity” or a “foreign-influenced entity” through ownership, debt, or effective control tests. The second, and the main focus of the new guidance, is if the project includes “material assistance” from a PFE in the construction of facilities or the production of components.
Reiter emphasized the absolute nature of the rule, noting that if a project fails the test, “you get to claim zero credit.” This is a departure from initial legislative drafts, which suggested even a single dollar of prohibited assistance could disqualify an entire project. The final law instead established specific thresholds that vary by technology and phase down over time, providing a narrow but critical path to compliance.
Calculating Material Assistance for Different Credits
Recent guidance in Notice 2026-15 clarifies how to calculate the material assistance cost ratio (MACR), the formula used to determine if a project exceeds the PFE threshold. Christine Brynaert, a partner in Deloitte Tax’s Gi3 practice and the webinar’s moderator, highlighted a key distinction for taxpayers. While domestic content rules focus on where a component is manufactured, she explained, “the PFE rules care about who’s manufacturing it.”
The MACR formula and its corresponding thresholds differ based on the credit being claimed. For the clean electricity production and investment credits under IRC § 45Y and § 48E, the ratio is based on the total direct cost of all manufactured products (MPs) and their components (MPCs). For a qualified facility beginning construction in 2026, the MACR must be 40% or higher, a threshold that increases to 60% for projects starting after 2029.
In contrast, for the advanced manufacturing production credit under IRC § 45X, the MACR is based on the direct material costs of all constituent materials (CMs). The thresholds also vary by technology. For example, for battery components sold in 2026, the MACR must be at least 60%, whereas for critical minerals, the threshold is 0%.
Jaime Park, a managing director in Deloitte’s Washington National Tax practice, noted that sectors like batteries and solar are finding it difficult to meet the MACR thresholds because many of their materials have historically been sourced from covered nations, but said “the industry is trying to find ways” to adapt their supply chains.
Leveraging Safe Harbors and Supplier Certifications
To ease the compliance burden, Notice 2026-15 provides three key safe harbors. The identification safe harbor allows taxpayers to use the established tables from domestic content guidance, such as Notice 2025-08, to create an exclusive and exhaustive list of the MPs and CMs that must be analyzed. The cost percentage safe harbor builds on this by allowing taxpayers to use the cost values from those same tables, eliminating the need to determine their own actual costs.
The certification safe harbor allows taxpayers to rely on certifications from their direct suppliers regarding PFE status and associated costs. However, companies must still perform due diligence. Jarrett Jacinto, a principal in the Washington National Tax Credits and Incentives team at Deloitte, advised that taxpayers should ask suppliers the right questions about PFE status and supplement those inquiries with checks of publicly available information to identify any potential red flags.
Under IRC § 6695B, a supplier who provides a false or inaccurate certification can face a penalty equal to the greater of 10% of the tax underpayment or $5,000 if they knew or should have known it was inaccurate. The penalty can be waived only if the supplier can prove to the Secretary that the inaccuracy was due to reasonable cause and not willful neglect, underscoring the need for careful documentation and review by all parties.
Future Guidance and Anti-Circumvention Rules
The speakers repeatedly emphasized that Notice 2026-15 is only interim guidance and that taxpayers should anticipate future developments that will further define the PFE landscape. The notice explicitly states that Treasury and the IRS intend to issue rules to prevent entities from sidestepping the PFE restrictions, with a particular focus on “transfers or alterations of rights or property that are temporary in nature.” This aims to prevent strategies like temporary ownership changes designed purely to avoid the PFE rules.
Further guidance is also expected to provide clear definitions for “effective control,” “specified foreign entity,” and “foreign-influenced entity,” which remain areas of uncertainty for many taxpayers. The current notice provides a crucial reliance period: taxpayers can use this guidance for projects that begin construction before the date that is 60 days after future guidance is published. This creates a strategic window for companies to evaluate their supply chains, renegotiate contracts, and proceed with projects under the current framework.
The statute requires a deadline for this future guidance by the end of the year, but its complexity makes the timing difficult to predict. The development of such comprehensive rules is a major effort for Treasury and the IRS, but any new clarity will be a major benefit for an industry grappling with these new rules. “Any additional clarification [would] be very welcome,” Jacinto said.
For more on the definition of material assistance from a prohibited foreign entity, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-18555.
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