March 13, 2026

Treasury Department, IRS Provide Guidance on Prohibited Foreign Entity Rules

Raghav Agnihotri, Roger Aksamit, Leif Anderson, Elizabeth Crouse, James Dawson, Nicole Elliott, Sanaa Ghanim, Niven Hemraj, Alex Lewis, Bryan Marcelino, Lee Meyercord, Mary Kate Nicholson, Joshua Odintz, Ryan Phelps, Christopher Rizek, Bradley Seltzer, Amish Shah, Samantha Skabelund, Daniel Strickland Holland & Knight LLP + Follow Contact LinkedIn Facebook X Send Embed

Highlights

• The U.S. Department of the Treasury and IRS on February 12, 2026, released Notice 2026-15 to provide initial guidance regarding Prohibited Foreign Entity (PFE) Rules, specifically how to calculate the material assistance cost ratio for a qualified facility, energy storage technology or eligible component for purposes of determining whether a taxpayer received material assistance from a PFE.
• This Holland & Knight alert provides a summary of some key aspects of Notice 2026-15, though it is not intended as a complete guide. The U.S. Department of the Treasury and IRS on February 12, 2026, released Notice 2026-15, which provides initial guidance regarding Prohibited Foreign Entity (PFE) Rules, specifically how to calculate the material assistance cost ratio (MACR) for a qualified facility, energy storage technology or eligible component for purposes of determining whether a taxpayer received material assistance from a PFE.

Background

Under the PFE Rules, certain tax credits – including the Clean Electricity Investment Credit under Section 48E, Clean Electricity Production Credit under Section 45Y, Advanced Manufacturing Tax Credit under Section 45X, Zero-Emission Nuclear Power Production Credit under Section 45U, Clean Fuel Production Credit under Section 45Z and Credit for Carbon Oxide Sequestration under Section 45Q – are disallowed for any entity that is a PFE under the meaning of Section 7701(a)(51) of the Internal Revenue Code. In addition, under Section 7701(a)(52), a taxpayer claiming the Clean Electricity Investment Credit under Section 48E, Clean Electricity Production Credit under Section 45Y or Advanced Manufacturing Tax Credit under Section 45X cannot receive "material assistance" from a PFE. To determine whether a taxpayer received material assistance from a PFE, the MACR must be determined for the qualified facility, energy storage technology or eligible component, as applicable.

| Holland & Knight Insight

Qualified facilities and energy storage technologies under Section 48E and Section 45Y that began construction by December 31, 2025, need not comply with the material assistance rules under Section 7701(a)(52). By contrast, eligible components sold in 2026 generally must comply with the material assistance rules under Section 7701(a)(52). |
Notice 2026-15 largely addresses how to determine the MACR and provides taxpayers with some flexibility and several safe harbors. Notice 2026-15 did not go into detail on how to determine whether an entity is a PFE, instead foreshadowing that future guidance on the topic is forthcoming. This Holland & Knight alert provides a summary of some key aspects of Notice 2026-15, though it is not intended as a complete guide.

Section 45X: Calculating the MACR for Eligible Components

Direct Material Cost Methodology

Under Section 45X, taxpayers need to consider the "Constituent Materials" (constituent elements, materials of subcomponents) incorporated into the eligible component or consumed in the production of the eligible component. More specifically, Section 45X taxpayers need to consider the "direct material costs" they paid or incurred for such Constituent Materials.

| Holland & Knight Insight

Direct material costs are defined in existing Treasury Regulation § 1.263A-1(e)(2)(i)(A) and also include costs associated with the purchase of Constituent Materials such as shipping, tariffs and taxes. |
In addition to identifying the Constituent Materials and direct material costs of the Constituent Materials, Section 45X taxpayers needs to compare the total direct material costs of all Constituent Materials to those direct material costs attributable to a PFE. That is, a taxpayer must identify whether each Constituent Material was mined, produced or manufactured by a PFE.

| Holland & Knight Insight

The status of the supplier (reseller) of the Constituent Material is immaterial to the calculation of the MACR; rather, the taxpayer must determine the status of the entity mining, producing or manufacturing the Constituent Material. Though determining which entity mined, produced or manufactured the Constituent Material may be challenging in complicated supply chains, it is clear from the notice that taxpayers need not consider entities further down the supply chain – that is, second-tier suppliers. |
To conduct the MACR for each eligible component, taxpayers must track each Constituent Material to each eligible component and perform the following calculation:

Total Direct Material Costs Minus PFE Total Direct Material Costs/Total Direct Costs = MACR %

As indicated in the statute, the minimum applicable percentage for eligible components varies by type and year sold.

Additional Flexibilities

| Holland & Knight Insight

Determining the MACR under the Direct Material Cost Methodology can be challenging. Among other things, it requires tracking of individual Constituent Materials to each individual eligible component. Fortunately, the notice provides some additional flexibilities as discussed here, notably the Averaging Methodology and use of three safe harbors. |
Under Notice 2026-15, a taxpayer may track Constituent Materials of a given type incorporated in or consumed in production of the same type of eligible component produced during a "Specified Period of Time," which may be determined by the taxpayer. For example, a taxpayer can track all solar cells (a type of Constituent Material) to all PV modules (a type of eligible components) produced based on a quarterly basis (taxpayer's chosen Specified Period of Time). In using the averaging method, taxpayers consider the "Average Costs" and "PFE Production Percentage." The Average Costs is the average direct material cost of the type of Constituent Materials during the Specified Time Period. The PFE Production Percentage is the average percentage of PFE produced Constituent Materials of the same type during the Specified Time Period.

| Holland & Knight Insight

The ability for taxpayers to choose a Specified Period of Time of less than 12 months will allow taxpayers to demonstrate the MACR over the period and be helpful for taxpayers who want to transfer the Section 45X credit on a basis more frequently than annually. |

Section 48E and Section 45Y: Calculating the MACR for Qualified Facilities and Energy Storage

Direct Cost Methodology

While Section 45X taxpayers consider the "direct material costs" of Constituent Materials, Section 48E and 45Y taxpayers need to consider the "direct costs" of the Manufactured Products (MPs) and Manufactured Product Components (MPCs) that are incorporated into the qualified facility or energy storage technology, as applicable. Direct costs can include direct material and labor costs. The definition of MPs and MPCs follow older IRS guidance on domestic content, specifically IRS Notice 2023-38. The status of the entity that produced or manufactured the MPs or MPCs as PFEs must be considered by a taxpayer, similar to the MACR calculation under Section 45X, and is conducted as follows:

Total Direct Costs Minus PFE Total Direct Costs/Total Direct Costs = MACR %

Additional Flexibilities

As further discussed in Notice 2026-15, taxpayers may be able to avoid tracking MPs or MPCs to specific qualified facilities or energy storage technologies in instances in which they are of the same type and when the total direct costs of all MPs and MPCs assigned to a qualified facility or energy storage technology is less than 10 percent of the total direct costs of which is qualified facility or energy storage technology. The notice also provides some additional flexibility for energy storage technologies of less than one megawatt.

| Holland & Knight Insight

In addition to the 10 percent de minimis assignment-based tracking and special rules for energy storage technologies, Section 48E and 45Y taxpayers can also take advantage of the safe harbors discussed below. |

Safe Harbors for the MACR Under Sections 45X, 48E and 45Y

Notice 2026-15 identified three separate safe harbors, none of which needs to be used by a taxpayer but can be used, possibly in combination, if available.

Identification Safe Harbor

Taxpayers who are able to use the Identification Safe Harbor will be able to rely on earlier IRS notices (specifically the tables provided in Sections 5.05, 5.06, 6.02 and 7.02 of Notice 2025-08, Section 3.02 in Notice 2024-41 for a Hydropower Facility or Pumped Hydropower Storage Facility, and Section 3.04 in Notice 2023-38 for an Offshore Wind Facility) to identify the Constituent Materials, MPs or MPCs that must be considered when calculating the MACR.

For Section 45X taxpayers, only those producing "Listed Eligible Components" can use the Identification Safe Harbor (i.e., an eligible component identified as an Applicable Project Component in earlier IRS notices). Similarly, for Section 48E and 45Y taxpayers, only those with qualified facilities and energy storage technologies lists as Applicable Project can utilize this safe harbor. If able to rely on this safe harbor, the items identified in the earlier IRS notices is the exclusive and exhaustive list of items that are considered in conducting the MACR calculation. That is, if there is an MP that is not listed in an earlier IRS notice but has been incorporated into a qualified facility, the utilized but not listed MP is simply not considered when determining the MACR.

| Holland & Knight Insight

The ability for Section 45X taxpayers to use earlier IRS notices is surprising but welcome; unfortunately, however, until such time as the Treasury Department/IRS releases additional safe harbor tables, only certain Section 45X taxpayers will find the Identification Safe Harbor useful. |

Cost Percentage Safe Harbor

This safe harbor is available to Sections 45X, 48E or 45X taxpayers only if they use the Identification Safe Habor. Under the Cost Percentage Safe Harbor, taxpayers may use the percentages identified in the earlier IRS notices to determine the MACR. Use of this safe harbor still requires the taxpayer to identify the status of the entity that mined, produced or manufactured the MPC listed in the earlier IRS notices but avoids the need for the taxpayer to gather direct material costs or direct costs, as applicable.

| Holland & Knight Insight

In a deviation for the guidance provided for the domestic content bonus, a Section 48E and 45Y taxpayer can consider the status of the entity mined, produced or manufactured the MP (identified in the tables as "APCs") listed and, if it is a non-PFE entity, can benefit from the percentage identified as "production" in the earlier IRS notices. |

Certification Safe Harbor

This safe harbor can be used with the Identification Safe Harbor and/or Cost Percentage Safe Harbor or used as the exclusive safe harbor for Sections 45X, 48E and 45Y taxpayers. In all instances, the taxpayer must receive certification from the direct supplier even if the supplier was simply reseller and not the entity that mined, produced or manufactured the item. If using this safe harbor, the certification must contain the information identified in the statute and notice and be attached to the taxpayer's return. The certification can be used to determine direct costs or direct material costs, as applicable, and/or the status of the entity that mined, produced or manufactured the Constituent Material, MP or MPC.

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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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