The IRS has issued Notice 2026-15, offering critical clarification on material assistance from prohibited foreign entities in clean energy tax credits. This guidance addresses restrictions enacted by the One Big Beautiful Bill Act of 2025. This article examines the regulatory details, business impacts, compliance steps, and future implications of these rules.
Regulatory Landscape
Key laws and frameworks: The primary framework stems from the One Big Beautiful Bill Act (OBBBA) of 2025, amending Internal Revenue Code Sections 45Y (Clean Electricity Production Credit), 48E (Clean Electricity Investment Credit), and 45X (Advanced Manufacturing Production Credit). These sections now restrict credits if a qualified facility, energy storage technology, or eligible component receives material assistance from a prohibited foreign entity (PFE), defined under new Section 7701(a)(51).
Material assistance occurs when the Material Assistance Cost Ratio (MACR) exceeds specified thresholds, calculated as the ratio of direct costs from PFE-sourced items to total direct costs. PFEs include specified foreign entities from China, Russia, North Korea, or Iran, entities on U.S. bad actor lists, and foreign-influenced entities with thresholds like 25% ownership by a single specified foreign entity or 15% debt issuance to such entities. The IRS and Treasury oversee enforcement, with Notice 2026-15 providing interim safe harbors until proposed regulations.
The notice details three safe harbors: Identification (relying on supplier certifications), Cost Percentage (using interim tables for certain technologies), and Certification (documented supplier attestations). It applies to facilities with construction beginning after December 31, 2025, and Section 45X components sold after July 4, 2025.
Why This Happened
Policy drivers: These rules aim to curb reliance on adversarial nations in U.S. clean energy supply chains, promoting domestic manufacturing and national security. Enacted amid rising geopolitical tensions, OBBBA responds to concerns over Chinese dominance in solar, batteries, and critical minerals.
Prior to OBBBA, Inflation Reduction Act credits lacked stringent foreign entity restrictions; this guidance fulfills statutory mandates for Treasury to define material assistance and PFEs. The timing aligns with effective dates starting January 1, 2026, addressing industry uncertainty post-enactment on July 4, 2025. Comments are due by March 30, 2026, signaling ongoing refinement.
Impact on Businesses and Individuals
Operational and financial consequences: Businesses in clean energy face disqualification of tax credits if MACR thresholds are exceeded, potentially costing millions in forgone incentives for projects involving PFE components.
- Supply chain disruptions require auditing suppliers for PFE ties, increasing due diligence costs.
- Penalties include a reduced 1% substantial understatement threshold under Section 6662(m), six-year assessment periods, and $5,000+ fines for false certifications under Section 6695B.
- Tax-exempt entities electing direct pay face excessive payment recapture.
- Individuals or small developers risk liability for inaccurate supplier reliance, affecting project viability.
Decision-making shifts toward domestic sourcing, with transferability buyers demanding robust PFE documentation to mitigate risk.
Enforcement signals heightened IRS scrutiny, with enhanced audit windows and penalties targeting MACR miscalculations. Industries like solar and battery storage are accelerating supplier audits and safe harbor adoption, while credit markets price in compliance premiums for verified domestic production. Experts note strategic safe harbor selection influences credit quality, with full safe harbors for wind and batteries contrasting stricter rules for nuclear or upstream minerals.
Compliance Expectations & Best Practices
Core compliance steps: Taxpayers must compute MACR for each project or component, electing applicable safe harbors and maintaining records for IRS review.
- Conduct supplier questionnaires to identify PFE status and obtain certifications.
- Track direct material and labor costs, excluding pre-June 16, 2025, binding contracts where elected.
- Monitor ownership, debt, and contracts for foreign-influenced entity risks, especially IP licenses post-July 4, 2025.
- Submit comments on open issues like anti-circumvention by March 30, 2026.
Practical Requirements
Organizations should implement a PFE compliance program tailored to their supply chain depth. For manufacturers, this involves tiered supplier mapping; for developers, project-level MACR modeling.
- Map full supply chain to flag specified foreign entities, using public lists from the IRS and Commerce Department.
- Secure written certifications from suppliers affirming no material PFE assistance, renewed annually.
- Elect safe harbors strategically: use Cost Percentage for listed technologies like solar modules; fall back to Identification for others.
- Avoid common mistakes such as ignoring debt thresholds (15%+ to SFEs), assuming pre-OBBBA contracts are safe without election, or overlooking effective control in licenses (e.g., long-term royalties).
- For continuous improvement, automate cost tracking software, conduct quarterly audits, and train staff on evolving guidance; establish cross-functional teams to review contracts for control rights like production directives or data access.
As regulations finalize, expect tighter anti-abuse rules targeting temporary ownership lapses or restructurings. Businesses prioritizing early compliance will secure premium credits in a market favoring verified domestic supply chains, while ongoing Treasury updates shape long-term strategies amid rising MACR thresholds.
FAQ
1. What is a prohibited foreign entity under the new rules?
Ans: A PFE includes specified foreign entities from China, Russia, North Korea, or Iran, entities on U.S. security lists, and foreign-influenced entities meeting ownership (25%/40%), debt (15%), or effective control thresholds via contracts or IP rights.
2. How does the MACR test work?
Ans: MACR is the ratio of direct costs attributable to PFE-sourced materials or labor divided by total direct costs; exceeding statutory thresholds disqualifies credits, with safe harbors providing calculation relief.
3. Can pre-OBBBA contracts avoid MACR inclusion?
Ans: Yes, taxpayers may elect to exclude costs of items under binding written contracts before June 16, 2025, if manufactured or acquired accordingly.
4. What safe harbors are available?
Ans: Three interim safe harbors: Identification (supplier docs), Cost Percentage (tables for select tech), and Certification (attestations); applicable until formal tables issue.
5. What are the penalties for non-compliance?
Ans: Includes 1% understatement threshold, six-year audits, $5,000+ per false certification, and recapture for direct pay elections; applies post-2025.