Treasury, IRS release interim guidance on ‘prohibited foreign entity’ restrictions for solar tax credits

The U.S. Treasury Department and Internal Revenue Service (IRS) have issued long-awaited interim guidance regarding restrictions on material assistance from “foreign entities of concern” (FEOC) and other “prohibited foreign entities” (PFEs) as required by the “One, Big, Beautiful Bill Act” (OBBBA).

The guidance, issued in Notice 2026-15, outlines how clean energy project owners calculate whether their projects are eligible for the Clean Electricity Production Credit (Section 45Y) and the Clean Electricity Investment Credit (Section 48E), and also whether a domestic manufacturing facility can qualify for Section 45X manufacturing tax credits for the eligible components they produce.

To enable that calculation, the document establishes rules for determining the “Material Assistance Cost Ratio” (MACR) of facilities and components, which represents the percentage of total direct costs for the “Manufactured Products” (MPs) and “Manufactured Product Components” (MPCs) used in the construction of the facility that were not produced by PFEs.

Essentially, the percentage of direct costs of a facility represented by non-PFE materials must meet or exceed a minimum threshold for the facility to be eligible for the 45Y or 48E tax credits.

For installations that begin in 2026, the threshold for “qualified facilities” (e.g. solar installations) is 40%, while the threshold for energy storage technology is 55%. The threshold for eligible components sold in 2026 is 50%.

Importantly, the guidance contains provisions to allow taxpayers to use existing domestic content tables to determine the percentage of costs to attribute to different kinds of MPs and MPCs.

The agencies say they intend to issue proposed regulations that will include the rules described in the interim guidance document, but have requested comments from the public and stakeholders to be submitted by March 30, 2026 before finalizing that submission.

The interim guidance can be used to calculate the MACR for projects that begin construction after December 31, 2025 and within 60 days after the proposed regulations are published in the Federal Register.

MACR calculations and safe harbors

Several provisions within the guidance outline provisions of the MACR calculation that affect how taxpayers will determine project tax credit eligibility.

First, steel or iron components not treated as manufactured products are not considered in the calculation of total direct costs of the facility.

Second, the MACR for qualified interconnection property (QIP) must be calculated separately from the costs of a facility. The facility can still qualify for tax credits if the QIP costs do not meet the non-PFE threshold. However, costs for QIP that would meet eligibility thresholds cannot qualify for tax credits if the associated facility does not.

As required by the OBBBA, the guidance provides further details on safe harbor provisions available to taxpayers that ease MACR compliance. The three safe harbors outlined in the interim guidance are the Identification Safe Harbor, Cost Percentage Safe Harbor and Certification Safe Harbor.

Under the Identification Safe Harbor, taxpayers can rely on IRS-provided tables to identify which manufactured products and components must be tracked. Any item not explicitly listed in these tables is disregarded for the calculation, simplifying the process..

The Cost Percentage Safe Harbor allows taxpayers to use fixed “Assigned Cost Percentages” from IRS tables for each identified non-PFE MP and MPC.

The Certification Safe Harbor relies on sworn certifications from suppliers stating that a specific MP or MPC was not produced by a PFE or specifying the exact dollar amount of the product’s costs that are non-PFE. These affidavits are valid for compliance unless the taxpayer “knows or has reason to know” that the certification is inaccurate.

Rapid reactions from industry experts

Within two hours of the release, several clean energy industry tax and development experts had weighed in on the guidance on LinkedIn.

Joshua Morris, a partner at noted CPA and consulting firm Novogradac, pointed to several helpful examples the IRS and Treasury Department provided in the document, and provided a decision tree graphic to assist project owners in determining whether an entity qualifies as PFE.

Morris promised a forthcoming FEOC special report from Novogradac would arrive soon.

Bryen Alperin, partner and managing director at investment management firm Foss & Company, said he was surprised by the stipulation that items not listed in the safe harbor tables can be disregarded, calling the provision “a huge practical simplifier” for developers.

Alperin also pointed out that the guidance may make it harder for retrofit and incremental production facilities to qualify for tax credits, stating that these projects may require “more bespoke diligence, and wider pricing dispersion.” Finally, he pointed out that errors in MACR are subject to a six-year assessment window, cautioning that this could complicate project indemnity and insurance concerns.

Those concerns were echoed and amplified by Rhone Resch, former president & CEO of the Solar Energy Industries Association (SEIA) and current head of strategic consulting firm Advanced Energy Advisors.

Resch cautioned readers not to wait for any final guidance that may result from this interim document, pointing out that “tax equity will take a conservative view” and project financiers “will underwrite to this Notice.”

“Run your material assistance modeling now for any project targeting a 2026 construction start,” he urged developers, adding, “Later years likely get more complex, not less.”

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