The IRS recently issued interim guidance to assist taxpayers claiming certain clean energy tax credits comply with new restrictions on material assistance from prohibited foreign entities (PFEs). Tax practitioners welcomed the guidance, but say it leaves open important questions about when an entity qualifies as a PFE. Nonetheless, practitioners are urging their energy clients to begin reviewing their supply chains immediately.
Practitioners Welcome Safe Harbors
The One Big Beautiful Bill Act (OBBB) set forth new restrictions for taxpayers claiming the IRC § 45X Advanced Manufacturing Production Credit, IRC § 45Y Clean Electricity Production Credit, and IRC § 48E Clean Electricity Investment Credit for their facility, energy storage technology, or components. Taxpayers are ineligible for these credits if they exceed set thresholds of material assistance from PFEs.
Notice 2026-15, issued February 12, provides two methodologies for complying with the material assistance requirements – a direct cost method and a safe harbor method. The latter includes three safe harbors that can be used in concert: the identification safe harbor, the cost percentage safe harbor, and the certification safe harbor. These methods largely track provisions in the OBBB.
Practitioners expect the safe harbors will be the preferred route for taxpayers whenever possible. “Anytime there’s safe harbor is available, there’s typically a preference to utilize those safe harbors,” said Brian Murphy, who is a power, utilities, and renewables tax leader for EY.
Murphy told Checkpoint that “to prove direct cost will be significantly more data intensive.” The safe harbors “bring a layer of a level of simplification,” he added. Beyond that, Murphy suggested that using the safe harbors “gives probably more certainty to counterparties in the market.”
Heather Cooper of McDermott Will & Schulte, likewise, feels that “in most cases, anybody who could possibly use safe harbors is probably going to want to use them, versus the direct cost method.” She explained during a February 17 webinar that the OBBB already “teed up” the three safe harbors. In her view, the recent notice doesn’t provide “new safe harbor information,” rather it “clarified a bit more so we have more certainty about exactly how we’re applying these domestic content safe harbors, and what we can rely on and what certifications we need.”
Cooper said that taxpayers who choose to rely on safe harbors will, at a minimum, need to use the identification safe harbor. That safe harbor allows taxpayers to use the lists of components and manufactured products from prior domestic content guidance (the 2023-2025 Safe Harbor Tables) to identify the relevant parts of their project.
She described the cost percentage safe harbor as what “we’d all thought the Congress intended when they said you can use the domestic content tables for purposes of material assistance.” That safe harbor permits taxpayers to use the cost percentages assigned to components in the domestic content tables instead of calculating their own actual direct costs.
The certification safe harbor also was “clearly contemplated in the statute,” said Cooper. It allows a taxpayer to rely on a supplier’s certification to substantiate the non-PFE status of a manufacturer and the direct costs of components. It shifts the penalty risk for an inaccurate certification to the supplier, as long as the taxpayer had no reason to know it was false.
Not all taxpayers will be able to take advantage of the safe harbors, however. Cooper gave the example of a supplier who is not comfortable certifying “no prior supplier in the chain of production is a PFE.” In addition, not all products and components are covered in the 2023-2025 Safe Harbor Tables.
Key Questions Remain on PFE Definition
While the guidance clarifies the material assistance calculation, it provided almost no new information on the fundamental definition of a PFE, particularly regarding ownership and effective control.
“The material assistance calculation is important,” said Murphy, but “another critical piece” is clarification of the PFE definition. He explained that taxpayers seek details on when the definition applies to developers, manufacturers, and suppliers.
Murphy is hoping for guidance soon on two specific issues – debt restrictions and effective control. Getting clarity and guidance on these two issues is “top of mind right now” for a lot his clients.
Under the OBBB, an entity can be deemed a PFE if a specified foreign entity holds at least 15% of its debt. But Murphy explained that more details are needed on “how to measure and trace that debt.”
In addition, the OBBB includes provisions where contracts can grant a PFE “effective control” of a facility. Cooper agrees that more detail is needed on this as well, explaining that existing guidance does not address the “scope of contracts that implicate effective control.”
Cooper, however, noted the recent guidance “did confirm a strict statutory rule that any licensing agreement for intellectual property entered into or modified after July 4, 2025, with a specified foreign entity constitutes de facto effective control.” That aligns with language in the OBBB, said Cooper, adding that “the IRS is now telling us, yeah, there’s no way to get around that language.”
Proactive Supply Chain Vetting Encouraged
Given the complexity of the rules, practitioners are advising all taxpayers to begin preparing for compliance now. Taxpayers may even want to look toward compliance for projects that began construction before the end of 2025 and are exempt from the new material assistance rules.
“I would encourage renewable companies to take this guidance and develop your processes and your supply chain relationships to ensure compliance now and not wait,” Murphy advised. “Compliance with these rules is going to be challenging, and there is a bit of strategy involved to ensure now that your supply chain is going to stand up to the rules.”
Cooper echoed this, stating that developers will “have to pay important attention to your supply chains and identifying your PFE risks.” This includes carefully vetting suppliers and updating procurement contracts to require the necessary certifications.
The IRS is requesting comments on the guidance by March 30, 2026, which can be submitted via the Federal eRulemaking Portal at regulations.gov.
For more on material assistance from a PFE, see Checkpoint’s Federal Tax Coordinator 2d ¶ L-18555.
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