In Notice 2026-15 (the Notice, released February 12, 2026), the Treasury Department and IRS provided interim guidance on the enhanced foreign-entity-of-concern (FEOC) restrictions for renewable energy projects, which were created by Public Law 119-21, also known as the One Big Beautiful Bill Act (OBBBA). The Notice provides temporary guidance on calculating the amount of prohibited materials used in a project through either the direct cost method or through a combination of interim safe harbors for the purpose of qualifying for IRC Section 45X, 45Y or 48E credits.

Background

The OBBBA created additional restrictions on taxpayers' ability to claim credits under IRC Sections 45X, 45Y or 48E by imposing a minimum percentage of materials that must be sourced from entities that are not prohibited foreign entities (PFEs), as defined by IRC Section 7701(a)(51). Additionally, the OBBBA prohibited PFEs from claiming tax credits under IRC Sections 45X, 45Y or 48E (see Tax Alert 2025-1608). Under IRC Section 7701(a)(51), a PFE is either a:

• Specified foreign entity, which includes foreign entities related to or controlled by nations considered "adversaries," under the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021, or foreign-controlled entities and entities as defined under Public Laws 117-78 and 118-31
  or
• Foreign-influenced entity, which refers to entities that show signs of effective control by specified foreign entities based on ownership, management or control criteria, including licensing agreements

The OBBBA also introduced the concept of material assistance from a PFE, measured through a material assistance cost ratio (MACR). The MACR must be greater than the applicable threshold percentage (percentage of costs that must be from non-PFEs) to qualify for the credit. This threshold varies by credit type, facility or eligible component type and either the beginning-of-construction date (for IRC Sections 45Y and 48E credits) or the sale date of the eligible components (for IRC Section 45X credits).

Interim framework for determining material assistance

The Notice provides additional details about the methodology that taxpayers must use to compute the MACR for IRC Sections 45Y and 48E (Clean Electricity MACR), and IRC Section 45X (Eligible Component MACR). If the MACR is less than the applicable threshold percentage, the project is ineligible for the associated credit. Taxpayers must make these calculations for each facility and eligible component.

For all property types, taxpayers must complete a four-step process before they can determine their MACR percentage for the project. The taxpayer must identify the relevant property, track the property, determine its cost for the property and determine the PFE direct cost.

Taxpayers that have completed the data-gathering process can calculate their MACR based on this formula:

The Notice offers three safe harbors that may impact how a taxpayer chooses to gather the necessary data points for determining a project's MACR.

Identifying materials to be tracked

Taxpayers must identify the types of manufactured product (MP), manufactured product component (MPC) or constituent materials used in a qualified facility, energy storage technology (EST) or eligible component (collectively, Projects). This can be done manually, in a manner consistent with the phrase "manufactured products" (including components) in IRC Section 45Y(g)(11) and at a level of detail similar to that provided by the 2023–-2025 domestic content safe harbor tables in Notices 2023-38, 2024-41 and 2025-08 (Tables).

Alternatively, taxpayers may choose to use the Identification Safe Harbor.

The Identification Safe Harbor is only available for Projects that are listed as an Applicable Project or Applicable Project Component in the Tables.

If a taxpayer chooses to use the Identification Safe Harbor, the list in the Tables is exclusive. Any MP, MPC or constituent material used by the taxpayer that does not appear in the Tables is disregarded. If a taxpayer does not utilize one of the MPs, MPCs or constituent materials that is listed in the Tables, the percentage assigned to that MP, MPC or constituent material is disregarded from the MACR calculation. The Notice provides examples for using the Identification Safe Harbor Table.

Tracking

Taxpayers must track the source of the identified MP, MPC or constituent materials to be used in their Projects. Except in limited circumstances, MPs, MPCs and constituent materials must be individually tracked to the specific Project into which they are incorporated. The taxpayer may either (1) track the direct costs of each MP, MPC and constituent material and whether each was mined, manufactured or produced by a PFE; or (2) use the Cost Percentage Safe Harbor. Taxpayers can only use the Cost Percentage Safe Harbor if they have used the Identification Safe Harbor.

The Cost Percentage Safe Harbor assigns a percentage of Project value to each MP, MPC or constituent material based on the Tables. As with the Identification Safe Harbor, taxpayers choosing to use the Cost Percentage Safe Harbor may only use the listed assigned cost percentages in the Tables. Any MP, MPC or constituent material used but not listed must be disregarded from the MACR calculation. Additionally, any cost percentage that is listed but not used must be disregarded.

Determining total costs

For IRC Section 45Y and 48E credits, taxpayers must determine the total cost of the qualified facility or EST by including their direct costs for material and labor, which for any MP would include the costs of any included MPC(s), whether produced or purchased by the taxpayer. If a taxpayer acquires an MP, the taxpayer’s Direct Costs attributable to the MP are its acquisition costs with respect to the MP.  Direct costs, including direct labor costs, of incorporating MPs into the qualified facility or EST are not included as part of direct costs attributable to an MP.    

For IRC Section 45X credits, taxpayers must determine the direct material costs, which are defined as those costs that (1) are paid or incurred "for materials that become an integral part of the eligible component produced by the taxpayer and for those materials that are consumed in the ordinary course of production" and (2) "can be identified or associated with particular units or groups of units of the eligible component."

Alternatively, taxpayers can use the Cost Percentage Safe Harbor to determine these costs. As a second alternative, taxpayers can use the Certification Safe Harbor to determine total costs, as discussed later.

Determining PFE Direct Costs

The final step before calculating the MACR is to determine the direct costs of the project that are attributable to a PFE.

For IRC Sections 45Y and 48E, a taxpayer using the direct cost method must determine the direct costs attributable to (1) each PFE-produced MP and (2) each PFE-produced MPC included in an MP. If a taxpayer acquires a PFE-Produced MP, but some or all of the MPCs included in the MP are from non-PFE sources, then the taxpayer excludes from the PFE Direct Costs the portion of the MP that is from a non-PFE source. If a taxpayer acquires MP from a non-PFE, and some or all of the included MPCs are from PFEs, the taxpayer includes in PFE Direct Costs the portion of the MP's acquisition costs that are attributable to the PFE-Produced MPCs. To determine whether MPs or MPCs are PFE-sourced, the taxpayer must apply the PFE definition to the entity that mined, produced or manufactured the relevant MP or MPC.

For IRC Section 45X, taxpayers must determine the direct material costs (as defined in Treas. Reg. Section 1.263A-1(e)(2)) that are attributable to each PFE-sourced constituent material. To determine whether a constituent material is PFE-sourced, the taxpayer must apply the definition of a PFE to the direct supplier of the MP, MPC or constituent material for all costs associated with material procured from that supplier. Where the eligible component is produced under a contract manufacturing arrangement, the direct material costs paid or incurred by the contract manufacturer are used to calculate the MACR. The costs of the party contracting with the manufacturer may also need to be considered in the MACR if the contract manufacturer did not incur any or all costs in the production of the eligible component. If the direct supplier is merely a reseller, the taxpayer applies the PFE definition to the entity that mined, produced or manufactured the purchased material.

Taxpayers must use the same method to determine their PFE Direct Costs as they use to determine the total direct costs (i.e., using direct cost data or the Cost Percentage Safe Harbor).

Certification Safe Harbor

The Certification Safe Harbor provides another alternative method for taxpayers to determine the total direct costs and the PFE-sourced direct costs for their Projects.

The certifications must be attached to the tax return for the first year in which the taxpayer claims the credit. A valid certification must satisfy the following requirements:

• Include the supplier's EIN number (or similar number issued by a foreign government)
• Be signed under penalty of perjury
• Be retained by the supplier and the taxpayer for at least six years
• Come from the supplier from which the taxpayer purchased any MP, MPC or constituent elements, materials or subcomponents of an eligible component
• Include a statement from the supplier stating that the property was not produced or manufactured by a PFE and that the supplier does not know (or have reason to know) that any prior supplier in the chain of production was a PFE
• List, for purposes of IRC Section 45X, the total direct material costs for each component, constituent element, material, or subcomponent that was not produced or manufactured by a PFE; or, for purposes of IRC Sections 45Y and 48E, the total direct costs attributable to all MPs that were not produced or manufactured by a PFE

Taxpayers may rely on this certification unless they know or have reason to know that it is inaccurate. If it is determined that a taxpayer knew or had reason to know that a certification was inaccurate, the entire value of all materials listed in that certification is treated as PFE- produced or sourced.

Additional items of note

Average costs calculation

A manufacturer of an eligible component under IRC Section 45X may calculate the average cost of a given constituent material incorporated or consumed in the production of all the same type of eligible components produced during a specified period. The "specified period" must be at least one day and start on the first day of the taxpayer's tax year. Specified periods cannot be longer than the taxpayer's tax year and specified periods shorter than a full tax year must be contiguous.

For EST Units under 1 megawatt (MW) of the same type and placed in service in the same year, taxpayers may also use this averaging cost method rather than item-level tracking.

80/20 rule

For purposes of the Notice, only the direct costs of new MPs and MPCs incorporated into a qualified facility under the 80/20 rules are considered when calculating the Clean Energy MACR.

Treatment of steel and iron

The Clean Energy MACR calculation does not include components that meet the description of steel or iron components under Notice 2023-38, Section 3.02.

Qualified interconnection property

A taxpayer seeking to claim a credit under IRC Section 48E for a qualified facility without including qualified interconnection property in the MACR must not include the cost of this property when calculating the basis for the IRC Section 48E credit. Taxpayers seeking to claim an IRC Section 48E credit that includes qualified interconnection property in its basis must calculate a separate Clean Energy MACR for the qualified interconnection property. The qualified interconnection property can fail the required MACR without invalidating the credit for the qualified facility. However, if the qualified facility fails to meet the required MACR, the taxpayer cannot claim a credit for the qualified interconnection property, even if it separately meets the required MACR.

De minimis assignment

The Notice includes a de minimis assignment rule that allows taxpayers to avoid item-specific tracking in limited circumstances. A taxpayer may assign MPs or MPCs of the same type across facilities and/or ESTs placed in service in the same tax year if the combined direct cost of items assigned to each facility or EST is less than 10% of the facility's total direct costs.

PFE determination

While omitting specifics on making PFE determinations under the definitions provided in the OBBBA, the Notice specifically states that the IRS and Treasury plan to promulgate regulations to prevent the evasion, circumvention or abuse of the PFE restrictions. It also sheds some light on the meaning of "effective control," which is determined independently under each provision of IRC Section 7701(a)(51)(D)(ii)(III)(aa)(AA) through (GG) and specifically calls out payments made under licensing agreements.

Transition rules and reliance periods

Taxpayers may rely on the interim procedures in the Notice as follows:

• IRC Sections 45Y and 48E (Clean Electricity MACR): For qualified facilities or ESTs beginning construction after December 31, 2025, and until 60 days after proposed regulations or safe harbor tables are published
• IRC Section 45X (Eligible Component MACR): For components sold in tax years beginning after July 4, 2025, until 60 days after new safe harbor tables are issued

The Notice states that the forthcoming proposed regulations will include (1) additional guidance to assist with determining whether a specified foreign entity exercises effective control over a qualified facility; and (2) rules to prevent circumvention of the provisions.

Request for comments

The Treasury and IRS requested comments on whether further guidance is needed to clarify how to determine total direct costs and what those clarifications should include. Written comments should be submitted by March 30, 2026.

Implications

The Notice is primarily focused on calculating the MACR and does not fully address the circumstances in which a specified foreign entity is determined to exercise effective control. That said, the Notice allows taxpayers to obtain Supplier Certifications from only their direct vendors and does not require taxpayers to collect and remit Supplier Certifications from any further up the supply chain. It also appears that not all materials procured from a taxpayer's direct vendor will be considered as PFE-sourced or produced if that vendor is a PFE.

The ability to average over specified periods provides relief to producers of eligible components under IRC Section 45X. While limited to constituent materials used in the production of the same type of eligible component, averaging alleviates the need for manufacturers to calculate the MACR on a component-by-component basis, which would have required the implementation of robust supply chain and production tracking mechanisms.

Given the impact of FEOC non-compliance, taxpayers and potential credit buyers may want to consider additional measures, beyond the Supplier Certification from their direct vendors, to increase the likelihood that the appropriate MACR is met and the tax credits they are claiming or buying withstand potential IRS audits down the line. Such measures may include requiring their direct vendors to submit documentation supporting their Supplier Certification, requesting certification from their vendors' suppliers or other additional steps to support that that taxpayer had no "reason to know" that the Supplier Certification was false.