March 2, 2026

IRS Issues Guidance on Prohibited Foreign Entity Safe Harbors and Material Assistance Calculation for Clean Energy Tax Credits

Vivian Bridges, Jay Buchman, Michael Evans, Rebecca Kim, Martha Pugh, David Skillman, Dylan A. Van Sky K&L Gates LLP + Follow Contact LinkedIn Facebook X Send Embed

On 12 February 2026, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2026-15 (the Notice), to provide interim guidance for determining whether a project has received material assistance from a prohibited foreign entity (PFE).

The One Big Beautiful Bill Act (OBBBA) imposed new restrictions relating to PFEs in several clean energy tax provisions in the Internal Revenue Code. Among these changes, OBBBA disallowed credits under Section 45Y, Section 48E, and Section 45X for qualified facilities, energy storage technologies (ESTs), or eligible components that receive “material assistance” from a PFE. Whether assistance from PFEs constitutes “material assistance” is determined on a percentage basis using a material assistance cost ratio (MACR). OBBBA establishes acceptable MACR threshold percentages for qualified facilities, ESTs, and eligible components. If the relevant MACR is below the applicable threshold percentage, then the associated taxpayer cannot claim the Section 45Y, Section 48E, or Section 45X credits.

The Notice provides interim steps for determining the MACR, as well as certain safe harbors for taxpayers seeking to claim Section 45Y, Section 48E, and Section 45X tax credits. Treasury indicates it plans to issue comprehensive rules relating to material assistance and the determination of PFE status, as well as additional guidance relating to safe harbors.

MACR Calculation

The Notice provides preliminary rules, subject to forthcoming regulations and guidance, for determining the MACR for qualified facilities, ESTs, and eligible components.

Clean Electricity MACR

The notice provides a four-step process to identify the variables used to calculate the MACR for the clean electricity MACR for qualified facilities and ESTs. Taxpayers are directed to:

• Identify the types of manufactured products (MPs) and manufactured product components (MPCs) included in the qualified facility or EST.
• Track the relevant characteristics—i.e., the MP’s or MPC’s PFE or non-PFE status—of each MP and MPC included in the qualified facility or EST.
• Determine the taxpayer’s direct costs attributable to the identified MPs (including MPCs) (Direct Costs).
• Determine the Direct Costs attributable to each of the identified MPs and MPCs that were mined, manufactured, or produced by a PFE (PFE Direct Costs). Once the Direct Costs and PFE Direct Costs have been established, the taxpayer must subtract the PFE Direct Costs from the total Direct Costs and divide this number by the total Direct Costs. Each qualified facility or EST will have its own MACR, regardless of whether it is owned by the same taxpayer.

The Notice allows for a de minimis tracking carveout, which permits taxpayers to assign MPs or MPCs of the same type to qualified facilities or ESTs placed in service during the same taxable year without individually tracking them to such qualified facilities or ESTs, if the total assignment is less than 10% of the Direct Costs for the qualified facility or EST. Subject to certain limitations, the cost of steel and iron may be excluded from the clean electricity MACR calculations.

Taxpayers may rely on this interim Notice for purposes of calculating the clean electricity MACR for any Section 45Y and Section 48E qualified facility or EST for 60 days after the additional safe harbor tables are released.

Eligible Component MACR

To determine the MACR of eligible components, taxpayers follow a four-step process similar to that described above to identify the relevant variables:

• Identify the constituent elements, materials, or subcomponents (the Constituent Materials) incorporated into the eligible component or consumed in production of the eligible component.
• Track the relevant characteristics (i.e., whether PFE-sourced) of each Constituent Material.
• Determine the taxpayer’s direct materials cost for each Constituent Material used to produce the eligible component (Direct Material Costs).
• Determine the Direct Material Costs attributable to PFE-sourced Constituent Materials (PFE Direct Material Costs). Once the relevant variables have been identified, the eligible component MACR is calculated in the same manner as the clean electricity MACR.

By default, taxpayers must identify each specific MP, MPC, and Constituent Material and track such MP’s, MPC’s, or Constituent Material’s PFE characteristics. As discussed below, the Notice also allows two alternative methods for tracking these characteristics. Taxpayers may employ the Identification Safe Harbor or the Cost Percentage Safe Harbor, or they may employ them both in combination. Second, taxpayers may employ an averaging method. This method allows taxpayers to categorically identify and track a given type of MP, MPC, or Constituent Material, assigning an average Direct Cost, Direct Material Cost, PFE Direct Cost, and PFE Direct Material Cost, as applicable. Averages are taken over the course of a “specified period of time,” which may be selected by the taxpayer, within certain limits prescribed by the Notice.

PFE Direct Material Costs include the costs attributed to each PFE-produced MP and MPC, as well as each PFE-sourced Constituent Material. The PFE Direct Material Costs may be identified using the Certification Safe Harbor. Alternatively, taxpayers may determine this value by applying the PFE definition to the direct supplier of the MP, MPC, and Constituent Material; however, if the direct supplier of an MP, MPC, or Constituent Material is a reseller, the PFE definition is applied to the entity that mined, produced, or manufactured the Constituent Material. Whether an MP, MPC, or Constituent Material is PFE-produced or PFE-sourced is dependent on the relevant supplier’s status in the taxable year during which the taxpayer paid or incurred the Direct Costs of such qualified facility or EST, or the Direct Material Costs of such Constituent Materials.

Taxpayers may rely on this interim Notice for purposes of calculating the eligible component MACR for Section 45X-eligible components sold in taxable years beginning after the passage of OBBBA until additional safe harbor tables are released.

Interim Safe Harbors

The Notice provides three interim safe harbors upon which taxpayers may rely: (i) the Identification Safe Harbor, (ii) the Cost Percentage Safe Harbor, and (iii) the Certification Safe Harbor. Note that the Identification Safe Harbor and Cost Percentage Safe Harbor incorporate the safe harbor tables set forth in the IRS domestic content bonus notices (Safe Harbor Tables).

Identification Safe Harbor

Taxpayers may rely upon the Identification Safe Harbor to identify the status of (i) MPs and MPCs of a qualified facility or EST, and (ii) Constituent Materials of eligible components, provided that the subject property is either an “Applicable Project” or “Applicable Project Component.” This is accomplished using the applicable Safe Harbor Table, which distinguishes between items that are (i) MPs or MPCs, and (ii) steel or iron. When using the Identification Safe Harbor, if an item of MP or MPC is not listed in the Safe Harbor Tables, it is disregarded for the MACR calculation.

Cost Percentage Safe Harbor

In lieu of tracking actual costs, taxpayers may rely on the assigned cost percentages set forth in the applicable Safe Harbor Table to allocate costs among MPs and MPCs of a qualified facility or EST, as well as among Constituent Materials for eligible components. Note that the characteristics of MPs, MPCs, and Constituent Materials must be analyzed separately from the Safe Harbor Table; this Safe Harbor Table simply helps taxpayers in tracing Direct Material Costs, which then may be attributed among PFE-sourced and non-PFE-sourced items. The Cost Percentage Safe Harbor is applied using a five-step process:

• Identify MPs and MPCs, or Constituent Materials, as applicable.
• Track the PFE character of each MP, MPC, and Constituent Material.
• Determine the total percentage of all MPs and MPCs, or Constituent Materials, using the Safe Harbor Tables.
• Determine the PFE percentage (i.e., the cost percentage attributed to MPs, MPCs, and Constituent Materials that are PFE-produced or PFE-sourced).
• Calculate the applicable MACR using a fraction, the numerator being total percentage less PFE percentage, and the denominator being total percentage.

Certification Safe Harbor

The Certification Safe Harbor allows taxpayers to rely on certifications from suppliers reciting (i) Direct Costs, Direct Material Costs, PFE Direct Costs, and PFE Direct Material Costs of the component or Constituent Materials supplied; and (ii) whether MPs and MPCs are PFE-produced or whether Constituent Materials are PFE-sourced. Such certifications must be attached to the applicable form used by the taxpayer to claim the tax credit. A taxpayer may rely on a completed certification unless the taxpayer knows, or has reason to know, that such certification is inaccurate. This safe harbor helps to remedy a troublesome information gap, as suppliers often possess critical details that taxpayers cannot obtain from any source other than the supplier.

Taxpayers may rely on these safe harbors in combination, but they should closely monitor records with respect to these determinations to ensure compliance with the elevated compliance and record-keeping requirements imposed under OBBBA.

Effective Control

The guidance briefly addresses how to determine whether an entity is subject to “effective control” by a specified foreign entity and therefore is a foreign influenced entity (qualifying it as a PFE) in the following three points:

• First, it states that Treasury and the IRS “expect to include” this discussion in forthcoming proposed regulations addressing certain PFE restrictions.
• Second, the guidance discusses effective control in the context of intellectual property (IP) licensing agreements. Section 7701(a)(51)(D)(ii) defines “effective control” as agreements granting contractual counterparties authority over key aspects of production and establishes tests that apply prior to the issuance of guidance, including a general set of tests and a special set applicable to IP licensing agreements. An IP licensing agreement is one that meets any test in subclauses (AA) through (GG) of Section 7701(a)(51)(D)(ii)(II)(aa). Subclauses (AA) through (FF) describe substantive arrangements deemed to confer effective control, such as rights to direct materials or operations, limit IP use, receive royalties, provide long term services, or withhold information necessary for facility operation. Subclause (GG), by contrast, provides that effective control exists if an IP licensing agreement was entered into or modified on or after 4 July 2025.
• Third, the guidance states that “effective control is determined independently under each provision” and applies this interpretation to conclude that any IP licensing agreement entered into or modified on or after 4 July 2025 confers effective control regardless of whether subclauses (AA) through (FF) apply. As a result, IP licensing agreements entered into before that date confer effective control only if they meet one of the substantive tests in subclauses (AA) through (FF), while agreements entered into, on, or after that date automatically confer effective control under subclause (GG).

Conclusion

The publication of Notice 2025-16 represents an important step in clarifying the tax landscape in the wake of OBBBA. Comments on the Notice are open until 30 March, and more guidance is expected to follow.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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