IRS Issues New Guidance on Foreign Entity Restrictions Affecting Clean Energy Tax Credits

The Internal Revenue Service and the Department of the Treasury have issued Notice 2026-15, which provides the first detailed guidance on how recently enacted foreign entity restrictions apply to several cornerstone clean energy tax credits. These rules were added by the One Big Beautiful Bill Act and materially affect eligibility for credits that many developers, investors, and manufacturers rely upon when planning projects and supply chains.

Although Treasury has indicated that proposed regulations and updated safe harbor tables will follow, this notice is effective now and may be relied upon during the interim period.

Credits and Activities Covered by the New Rules

The guidance applies to three major clean energy incentives. The clean electricity production credit under Section 45Y and the clean electricity investment credit under Section 48E are affected for facilities and energy storage technologies that begin construction after December 31, 2025. The advanced manufacturing production credit under Section 45X is affected for eligible components sold in taxable years beginning after July 4, 2025.

For taxpayers operating across multiple segments of the clean energy market, these rules may apply simultaneously to generation assets, storage projects, and domestic manufacturing operations.

What the Government Means by a Prohibited Foreign Entity

A central feature of the new regime is the concept of a prohibited foreign entity, often referred to as a PFE. The definition is significantly broader than traditional notions of foreign ownership.

A prohibited foreign entity can include certain designated foreign entities identified under national security statutes, foreign-controlled entities, and entities that are considered foreign-influenced. An entity may be treated as foreign-influenced based on ownership thresholds, debt holdings, governance rights, or contractual arrangements that give a foreign party effective control over production, operations, or output.

Importantly, an entity does not need to be headquartered outside the United States to fall within this definition. Domestic companies may be treated as PFEs if their ownership or contractual relationships meet the statutory thresholds.

The Meaning of Material Assistance and Why It Is Critical

A project or component becomes ineligible for the relevant tax credit if it includes material assistance from a prohibited foreign entity. This determination is not made using a simple yes-or-no test. Instead, it relies on a quantitative calculation known as the Material Assistance Cost Ratio, or MACR.

Under the statute, the applicable MACR threshold depends on the type of project or component and the year construction begins or the year of sale. For qualified electricity-generating facilities that begin construction in 2026, non-PFE costs generally must account for at least 40 percent of total direct costs. For energy storage technologies beginning construction in 2026, the required percentage is 55 percent. For eligible components sold in 2026 for purposes of the Section 45X credit, the threshold is 50 percent. These required percentages increase over time in later years.

In practical terms, the MACR measures the percentage of total direct costs that are attributable to sources other than PFEs. If that percentage falls below the applicable statutory threshold, the credit is fully disallowed. Partial eligibility is not available under these rules.

As a result, even limited reliance on PFE-sourced components can jeopardize an otherwise qualifying project or manufactured product, particularly where high-value components are involved.

How Costs Are Evaluated Under the Guidance

The notice focuses on direct costs associated with manufactured products and their components, including direct material and direct labor costs. For manufacturing credits, the analysis centers on the constituent materials that are consumed in production. Steel and iron generally are excluded unless they are treated as manufactured products under existing guidance.

The analysis is conducted on a project-by-project or component-by-component basis, which means that supply chain decisions must be evaluated at a granular level rather than through portfolio-wide assumptions.

Interim Safe Harbors Provided by the IRS

To address the practical difficulty of tracing complex supply chains, the IRS has authorized several interim safe harbors that taxpayers may use until updated tables and regulations are issued.

First, taxpayers may rely on existing IRS safe harbor tables to identify which manufactured products and components are relevant for common project types such as solar, wind, and battery storage. These tables operate on an exclusive basis, meaning that items not listed generally are disregarded for purposes of the calculation.

Second, eligible taxpayers may use assigned cost percentages published by the IRS rather than tracking actual costs. This approach simplifies compliance but is subject to important limitations, including restrictions on use for incremental retrofits and special rules for facilities qualifying under the eighty-twenty repowering standard.

Third, taxpayers may rely on certifications from suppliers regarding whether products or components were produced by a prohibited foreign entity and what portion of costs are attributable to non-PFE sources. This safe harbor is conditioned on reasonable diligence. If a taxpayer knows or should know that a certification is inaccurate, reliance is not permitted.

Increased Enforcement and Documentation Expectations

The notice makes clear that these rules will be enforced rigorously. The statute lowers the threshold for accuracy-related penalties when a credit is disallowed due to material assistance issues. The limitations period for IRS assessments is extended to six years for errors tied to these determinations. In addition, suppliers that provide false certifications may be subject to separate penalties.

Taken together, these provisions signal that the government views foreign entity compliance as a core eligibility requirement rather than a secondary reporting matter.

Practical Implications for Clients

For project developers and owners, early supply chain diligence will be essential. Contracts that provide suppliers with operational authority, intellectual property control, or long-term service rights should be reviewed carefully for potential foreign influence concerns. Decisions regarding reliance on safe harbors should be made deliberately and documented thoroughly.

For manufacturers, ownership structures, financing arrangements, and licensing agreements warrant close scrutiny. Internal systems should be implemented to track sourcing and to support certifications that can withstand examination.

For all taxpayers seeking to claim affected credits, coordination among tax, legal, procurement, and compliance teams will be necessary. MACR analysis should be incorporated into project planning rather than deferred until credit filing.

What to Expect Next

Treasury has stated that it intends to issue proposed regulations and updated safe harbor tables, and it has invited public comments on definitional issues, anti-circumvention rules, and documentation standards. They are accepting comments until March 30, 2026. Until the additional regulations are finalized.  Notice 2026-15 governs and may be relied upon, provided it is applied consistently with the statute’s purpose.