“One Big Beautiful Bill Act” signed into law: Clean energy credits and new FEOC/ Prohibited Foreign entity rules

This table that an entity is a calendar year taxpayer.

Specified Foreign Entity Restriction Effective Date: The effective date for the specified foreign entity restriction for all tax credits is the taxable year beginning after enactment. For calendar year taxpayers, this restriction would be not be effective until the 2026 tax year.

Foreign-Influenced Entity Restriction Effective Date: The effective date for the foreign entity restriction depends on the tax credit. For §45Y, §48E, §45X, and §45Q it is the taxable year beginning after exactment.  For §45U and §45Z, it is the taxable year beginning after two years after the date of enactment. For calendar year taxpayers, this restriction would be not be effective until the 2028 tax year.

Material assistance exception:  Manufactured products, components, subcomponents, and material that was acquired pursuant to a binding contract entered into before June 16, 2025, and used in solar or wind facilities that begin construction before Aug 1, 2025 and are placed in service by Dec 31, 2027 do not have to be, but can be, included in a taxpayer’s material assistance ratio calculation.

Key PFE (i.e. FEOC) provisions

Under the bill as enacted, eligibility for credits is generally denied if the taxpayer is a PFE or  where a PFE is involved in aspects of the facility’s development or ownership.

A PFE can be a Specified Foreign Entity (SFE) or a Foreign-Influenced Entity (FIE).

• SFE’s are defined as
  • FEOCs as defined in Section 9901(8) of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021;
  • entities identified as Chinese Military Companies operating in the United States;
  • entities listed on various U.S. restricted party lists (e.g., the Bureau of Industry and Security’s Entity List or the Uyghur Forced Labor Prevention Act’s Entity List);
  • Battery-producing entities that are ineligible for Department of Defense contracts; and
  • Entities owned or controlled by the government, citizens, residents of a covered nation (e.g., China, Russia, Iran, or North Korea), entities organized under the laws of a covered nation, or entities controlled (generally 50%+ direct or indirect interest) by any of the foregoing
• FIE’s are defined as entities over which a SFE exercises influence, including through
• a right to directly or indirectly appoint a covered officer;
• having 25% ownership over the entity;
• owning, in the aggregate, alongside other SFE’s at least 40% of the entity;
• holding, in the aggregate, at least 15% of the debt of the entity.
• FIE’s also include
  • Entities which makes a payment during the previous taxable year to a SFE that entitles the specified foreign entity effective control over (i) any qualified facility or energy storage technology of the taxpayer, or (ii) any eligible component produced by the taxpayer.
  • Effective control is defined as
    • agreements that provide contractual counterparties to the taxpayer specific authority over key aspects of the production of eligible components, energy generation, or energy storage which are not included in the measures of control through authority, ownership or debt held.
    • licensing agreement that allows the contractual counterparty to do the following as it as it relates to aqualified facility, energy storage technology, or in the production of an eligible component:
      • Specify/direct sources of components, subcomponents, or applicable critical minerals utilized,
      • direct the operation of
      • limit the utilization of intellectual property or
      • receive royalties

Material Assistance

The material assistance restrictions may be the most challenging for many taxpayers. The bill as enacted  defines the material assistance formula as a “cost ratio” with respect to a qualified facility or a product line producing eligible components, setting forth the minimum threshold by cost of the components, subcomponents and materials that make up such facility or component that must be sourced from non-PFE sources. The bill specifies the threshold percentage per calendar year for qualified facilities, energy storage technology, solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals. The Bill as enacted includes the following material assistance threshold percentages:

Material Assistance Threshold Percentages

Material assistance cost ratio:

• With respect to qualified facilities: (1) the total costs to the taxpayer attributable to all manufactured products (including components) which are incorporated into the qualified facility or energy storage technology minus (2) the total cost to the  taxpayer attributable to all manufactured products which are incorporated into the qualified facility or energy storage technology and mined, produced, or manufactured by a prohibited entity divided by the amount described in (1).

With respect to eligible components (1) total direct material costs that are paid or incurred by the taxpayer for production of such eligible components minus (2) the total direct materials costs that are paid or incurred by the taxpayer for production of such eligible component that are attributable to a prohibited foreign entity, divided by the amount described in (1).

Safe Harbor Tables

The Bill as enacted requires Treasury to issue safe harbor tables before December 31, 2026. Until then taxpayers can use the safe harbor tables listed in Internal Revenue Service Notice 2025-08 as applied to the construction of a qualified facility or energy storage technology which begins on or before the date which is 60 days after the date of issuance of the new treasury safe harbor tables.

Penalties

• Penalty assessment time period:A deficiency related to meeting the material assistance threshold can be assessed at any time within 6 years after a return was filed.
• Standard for penalty: Taxpayer knew or reasonably should have known that certification related to material assistance threshold was inaccurate or false with respect to either (i) whether the property was produced or manufactured by a prohibited foreign entity or (ii) the total direct costs of the property that was not produced or manufactured by a prohibited foreign entity. Taxpayer can avoid penalty is they establish that the inaccuracy/falsity was due to a reasonable cause and not willful neglect.
• Penalty amount:
  • A 1% misstatement of tax liability will trigger a 20% penalty under § 6662(d).
  • If the inaccuracy/falsity in certifications related to material assistance resulted in understatement of income tax for the respective taxable year by 5% or $100,000, then the penalty will be the greater of (i) 10% of the amount of the underpayment due to the inaccuracy/falsity OR (ii) $5,000.

Authored by James Wickett, Steven Schneider, and Erida Tosini-Corea.