Treasury/IRS issues guidance on energy tax credit prohibited foreign entity and material assistance provisions

Notice highlights:

Foreign-Influenced Entity:  The Notice clarifies that a taxpayer is a “foreign-influenced entity”—and therefore a PFE—if the taxpayer made a payment during the previous taxable year to a PFE pursuant to an IP licensing agreement (other than the outright purchase of IP) and such IP agreement is entered into or modified after July 4, 2025.

Multiple MACR Calculation Methods: The Notice provides multiple methods of determining the MACR for clean electricity facilities (45Y, 48E), for ESTs (48E), and for U.S.-produced eligible components (45X).

45Y/48E facilities/ESTs .

• Taxpayers may determine the MACR (on a per-facility basis) using either (1) direct actual costs of manufactured products (MPs) which includes manufactured product components (MPCs), and percentage thereof derived from PFEs, or (2) using safe harbor tables showing percentage of total cost of the type of facility/EST represented by each MP/MPC. Safe harbor tables are not available for every type of facility, so for some types of facilities (e.g., geothermal, nuclear, fuel cell), direct costs must be used.
• The PFE-status of each MP/MPC contained in the facility/EST must be tracked using either (1) actual cost attributable to PFE source(s) if the MACR is calculated using direct costs (including labor cost for MPs produced by the taxpayer), or (2) supplier certification to determine whether each MP/MPC is PFE-produced if MACR is calculated using safe harbor.
• Iron or steel components included in the facility are not considered in calculating the MACR, unless such iron and steel are part of MPs/MPCs as defined under IRS Guidance issued since 2023.

45X components

• Taxpayers may determine the MACR of eligible components using either (1) direct actual costs of constituent materials (constituent elements, materials or subcomponents) or (2)safe harbor tables, if a relevant safe harbor exists, showing percentage of total cost of the type of component represented by each constituent material.
• Constituent materials used in producing the components must be tracked as to the taxpayer’s direct materials cost including PFE-sourced cost of such materials.
• If using the cost percentage safe harbor to determine direct materials cost, the taxpayer must track only whether each constituent material was PFE-sourced.

Mandatory Supplier Certifications: OBBBA and the Notice require that taxpayers obtain Certifications from direct suppliers of MPs and MPCs (for 45Y/48E facilities/ESTs) and of constituent materials (for 45X components) that such suppliers are not PFEs, and are not resellers selling for PFEs.  Where the taxpayer does not utilize safe harbors, they must obtain Certification as to the cost of MPs/MPCs/constituent materials attributable to PFE-supplied cost up the supply chain.

When taxpayers can use identification and cost percentage safe harbors to calculate the MACR, neither taxpayers nor direct suppliers are obligated to obtain Certifications from sub-suppliers. However, when taxpayers use direct material costs to calculate the MACR, direct suppliers must certify as to cost attributable to PFE-sourced MPs/MPCs/constituent materials and can face penalties for providing certifications they should have known were inaccurate.

In practice, we would expect direct suppliers to request certifications from sub-suppliers, except in scenarios where it is clear that safe harbors can be used such that sub-supplier certifications are not necessary.

OBBBA background

Under the OBBBA, a qualified facility (45Y, 48E), energy storage technology (EST) (48E), or eligible component (45X) is ineligible for the relevant tax credit if the construction of the facility (45Y, 48E) or production of the component (45X) includes material assistance from a PFE—defined as failing to meet an applicable MACR (cost percentage) threshold. To be eligible for the credit, taxpayers must calculate the MACR for qualified facilities and ESTs (45Y and 48E) and the MACR for eligible components (45X).

Material Assistance Cost Ratio

For both 45Y/48E and 45X, the MACR is designed to measure the proportion of value attributable to non‑PFE production or sourcing, based on direct costs of building the facility, or direct material costs of producing the component, respectively.

Notice’s guidance for calculating the MACR

Qualified Facilities and ESTs

For qualified facilities and ESTs, Treasury proposes a multi‑step process that requires taxpayers to:

1. Identify all manufactured products (MPs) and manufactured product components (MPCs) incorporated into the facility or EST;
2. Track Direct Costs and sourcing for each identified MP and MPC, including whether they were mined, manufactured, or produced by a PFE;
3. Determine total Direct Costs attributable to all MPs and MPCs; and
4. Determine PFE Direct Costs, representing the portion of those costs attributable to PFE‑produced items.

The Clean Electricity MACR is then calculated as: (Total Direct Costs − PFE Direct Costs) ÷ Total Direct Costs

A separate MACR must be calculated for each facility or EST placed in service during the taxable year.

Key Definitions:

• Applicable Project is a qualified facility under 45Y/48E or EST under 48E.
• Applicable Project Component is any article, material, or supply, whether manufactured or unmanufactured, which is directly incorporated into an Applicable Project.
• Manufactured Product (MP) is an item produced as a result of the manufacturing process.
• Manufactured Product Component (MPC) is any article, material, or supply, whether manufactured or unmanufactured, which is directly incorporated into an Applicable Project Component that is an MP.

The Notice includes detailed rules governing:

• Allocation of costs when MPs contain a mix of PFE and non‑PFE components;
• Treatment of acquired versus self‑produced MPs;
• The year in which PFE status is determined (generally tied to when costs are paid or incurred); and
• Special rules for shared components and facilities qualifying under the 80/20 rule.

Eligible Components

For eligible components under § 45X, the structure is similar but narrower in scope. Taxpayers must:

• Identify Constituent Materials incorporated into each eligible component;
• Track Direct Material Costs and whether those materials were PFE Sourced; and
• Calculate the Eligible Component MACR using the same formula: (Total Direct Costs − PFE Direct Costs) ÷ Total Direct Costs

Notably, the Notice states that freight, tariffs, and similar costs are included in Direct Material Costs, and provides special rules for contract manufacturing arrangements, allocating costs to the party performing the substantial transformation.

Averaging and Assignment Flexibility—With Limits

Recognizing the administrative burden of granular tracking, Treasury proposes limited flexibility through:

• De minimis assignment‑based tracking for facilities, allowing assignment of MPs or MPCs of the same type across facilities placed in service in the same year if they represent less than 10% of total Direct Costs; and
• Averaging methods for:
• ESTs under 1 MW, and
• Eligible components of the same type produced during defined “specified periods.”

These averaging rules are tightly constrained, requiring contiguous periods, full‑year coverage, and consistency in component type and production methods.

Interim safe harbors

Perhaps the most practically significant aspect of the Notice is the establishment of three interim safe harbors taxpayers may elect to use while awaiting final regulations. These safe harbors would significantly ease the burden of calculating the MACR using the methods outlined above.

1. Identification Safe Harbor

The Identification Safe Harbor allows taxpayers to identify MPs, MPCs, or constituent materials by reference to the 2023–2025 Safe Harbor Tables, rather than undertaking an individualized analysis. The 2023-2025 Safe Harbor Tables include Notice 2023-38,  Sec. 3.04 (offshore wind facility); Notice 2024-41, Sec. 3.02 (Hydropower facility); Notice 2025-08, Sec. 5.05 (Solar PV ground mount), with definitions in Sec. 5.07(13) and (14) (fixed tilt and tracker, respectively), Sec. 5.06 (Solar PV Rooftop), with definitions in Sec. 5.07 (18) and (19) (MLPE and string inverter, respectively), Sec. 6.02 (Land-based wind), with definitions in Sec. 6.03(2) and, Sec. 7.02 (battery energy storage systems), with definitions in Sec. 7.03(6).

Key limitations include:

• The facility or component must be listed in the Safe Harbor Tables;
• Listed items are treated as an exclusive and exhaustive list—unlisted items are disregarded even if actually used;
• Steel and iron items in facilities/ESTs are excluded, unless part of MPs/MPCs; and
• Identification Safe Harbor generally cannot be used for qualified interconnection property.

  For eligible components, only a narrow set—including certain inverters, solar modules, and battery modules using battery cells—qualify as “listed eligible components.”
  

2. Cost Percentage Safe Harbor

The Cost Percentage Safe Harbor allows taxpayers to calculate MACR using IRS‑assigned cost percentages instead of actual costs. This safe harbor is available only if the taxpayer first uses the Identification Safe Harbor and is subject to significant constraints, including:

1. Mandatory use of assigned percentages as an exclusive cost set;
2. Disregard of listed but unutilized items;
3. Ineligibility for facilities qualifying under the Incremental Production Rule; and
4. Special rules for partial replacements under the 80/20 rule.

While administratively appealing, the Cost Percentage Safe Harbor may produce counterintuitive results for retrofits or incremental upgrades.

3. Certification Safe Harbor

Finally, the Certification Safe Harbor permits taxpayers to rely on supplier certifications to establish either:

• That property was not produced or sourced by a PFE, or
• The amount of costs not attributable to PFE production.

Certifications must meet strict formal requirements (including attachment to the relevant credit form and six‑year retention), and taxpayers may not rely on a certification if they know or have reason to know it is inaccurate.

Conclusion

Up‑front supply chain diligence will be critical, particularly for developers relying on third‑party equipment and manufacturers operating across multiple jurisdictions. While safe harbors will simplify PFE compliance, they may also be constraining. Taxpayers may consider modeling MACR results under both actual cost and safe harbor approaches before committing to a particular approach. Additionally, transaction documents will need to evolve, including supply agreements, certifications, and representations tied to PFE status and MACR outcomes.

Treasury and the IRS have emphasized that Notice 2026‑15 is interim guidance and that comprehensive proposed regulations addressing material assistance from PFEs and related concepts such as effective control are forthcoming. The Notice requests public comment due by March 30, 2026.

Given the breadth of the material assistance framework, and the operational complexity of the MACR calculations, taxpayers, developers, manufacturers, and investors should consider submitting comments to highlight practical challenges, unintended outcomes, and areas where additional clarity or flexibility may be warranted—particularly with respect to supply‑chain tracing, averaging methodologies, certification reliance, and transition issues.

Hogan Lovells is closely monitoring developments in this area and will continue to provide clients detailed guidance on the evolving PFE and material assistance rules. We’d be pleased to discuss these developments in more detail with you.

Authored by James M. Wickett, Steven R. Schneider, Scott Friedman, and Erida Tosini-Corea.