Despite rhetoric to the contrary, clean energy credits remain in place despite the One Big Beautiful Bill Act (OB3). However, to continue obtaining credits, developers, investors, and manufacturers are now navigating the complex rules introduced by the legislation. Some of the most complicated are the prohibited foreign entity (PFE) rules. Built off the “foreign entity of concern (FEOC) rules” from the Inflation Reduction Act (IRA), OB3 expanded their scope to strip out direct and indirect participation of certain countries in the U.S. clean energy market. Note that in the industry and throughout this article, PFE and FEOC are colloquially used interchangeably, even though FEOC is now technically a subset of the PFE rules.
While we continue to wait on regulations in this area, the U.S. Department of the Treasury issued Notice 2026-15 (the Notice), which clarifies significant portions (though not all) of the FEOC changes from the OB3. The Notice focuses on calculating material assistance cost ratios (MACR1 )—with interim safe harbors or otherwise—but does not provide much needed clarification on the PFE prong of the FEOC framework.
PFE Background
Generally speaking, there are four prongs to the PFE rules (FEOC framework):
- PFEs cannot benefit (indirectly or directly) from the credits
- “Material Assistance”: To be eligible for a credit, clean energy property can only be sourced with a certain percentage of PFE-derived product
- Restrictions on licensing intellectual property by PFEs
- Prevention of specific financial arrangements (like debt or payment arrangements)
Arguably the most involved—and also the most restrictive—of these prongs are the first two—PFEs and material assistance. On a high level, a PFE functions as an “umbrella term,” given a PFE can be either a specified foreign entity (SFE) or a foreign-influenced entity (FIE). SFEs and FIEs are defined by their level of direct or indirect involvement with “covered nations”—generally China, Russia, Iran, and North Korea. There are numerous ways to fall subject to a PFE classification. For example, entities that are majority owned by an entity or citizen of these countries are considered SFEs. Entities making a payment to SFEs pursuant to a contract that provides for effective control over clean energy technology are considered FIEs. While these rules are lengthy and complicated, Notice 2026-15 does not focus on this portion of the FEOC framework.
The material assistance rules, however, require a certain percentage of the clean energy property to be produced by a non-PFE source. In short, with implementing material assistance into the IRA’s FEOC rules, Congress was trying to promote domestic manufacturing of clean energy property. However, with China remaining the largest manufacturer of much of this property, clean energy developers, investors, and manufacturers are considering their options. Whether a shift in vendors, a move for manufacturing facilities, or a change to the specs of their property, it might be worth a pivot in strategy depending on the magnitude of the potential clean energy credit. Even so, before these more dramatic shifts are made, taxpayers should calculate whether their current property would meet the material assistance guidance now outlined in the Notice.
Material Assistance—Calculation Clarifications
Prior to detailing interim safe harbors, the Notice provides an overview of the MACR calculation, along with some notable clarifications. On a high level, the MACR is calculated using the following formula:
(Total Direct Costs – PFE Direct Costs) / Total Direct Costs = MACR
The percentage in 2026 for the investment and production tax credits (non-energy storage) is at least 40%, but this percentage varies by technology and credit. It also increases over time, making it more difficult to meet the requirements in the future.
The Notice outlines five steps for calculating the MACR:
- Identify types of manufactured products (MPs) and manufactured product components (MPCs) included in a clean energy-qualified facility or energy storage technology (for more on manufactured products and components, see our FORsights™ article, “IRS Issues Detailed Guidance for the Domestic Content Bonus Credit”)
- Track characteristics of the MPCs and MPs identified in the first step
- Determine direct costs in total
- Determine direct costs attributable to a PFE
- Complete MACR formula above
The Notice also briefly details PFE anti-abuse rules and the dates for which the taxpayer can rely on the Notice while waiting for formal regulations to be issued.
Other clarifications from the Notice include the following:
Tracking
If not using the safe harbors, the Notice provides for special consideration for the “tracking” step. First, the Notice allows for taxpayers to avoid specifically identifying and tracking certain “de minimis” components and products. This treatment can apply if the MPs or MPCs are the same type and are placed in service in various qualified facilities during the tax year, as long as their total direct costs “represent less than 10 percent of the Total Direct Costs of such qualified facility.” Essentially, this eases the administrative burden of tracking small or insignificant components between projects.
In addition, specifically for energy storage technology (ESTs), the Notice provided that for ESTs under one megawatt (MW), as long as they are placed in service in the same taxable year (and do not use the de minimis method outlined previously), the taxpayer can track characteristics using an average of direct costs. The MPs and MPCs within the EST must be 1) incorporated into the same type of EST, and 2) the ESTs must be placed in service during the same specified period of time.
Acquisition Costs
Acquisition costs are considered direct costs if the taxpayer acquires an MP. However, in the exercise of separating PFE and non-PFE direct costs, the taxpayer considers whether the MP or any MPCs are PFE produced. If the MP is PFE produced but some of the MPCs within it are not, then the taxpayer can exclude the acquisition costs attributable to the non-PFE MPCs from “PFE Total Direct Costs.” The same applies to the opposite scenario—if the MP is non-PFE produced but the MPCs are, the taxpayer includes the PFE MPC attributable acquisition costs. For manufacturers of MPs, any PFE MPC acquisition costs are included in PFE direct costs.
Timing: Determining Direct Costs
The direct costs includible in the MACR calculation depend on the taxpayer’s method of accounting, along with the timing of certain activities. For cash basis taxpayers, the year that the taxpayer pays for the product or component is the same year the direct costs are includible. For accrual basis taxpayers, the year of the MP or MPC’s production (or the year they are obtained) dictates the timing of the direct costs’ inclusion.
Special Considerations
Similar to the treatment of steel or iron within the domestic content rules, generally steel and iron (with some exceptions) are not considered when calculating the MACR. Interconnection costs are a bit more complicated, however. Taxpayers need to consider which costs are included in the credit itself to determine treatment. If interconnection costs are not included in the credit calculation, then they are disregarded by the MACR. If the credit includes interconnection costs, the taxpayer should calculate a MACR calculation for the facility and the interconnection costs separately. A “failed” MACR for only the interconnection calculation does not “taint” the facility overall; however, the interconnection costs would not be allowable in the base of the credit calculation. Note that a taxpayer cannot use the identification safe harbor (detailed below) for interconnection property.
Safe Harbors
There were three safe harbors introduced by the Notice: the identification safe harbor, the cost percentage safe harbor, and the certification safe harbor.
Identification Safe Harbor
As noted above, the first step in calculating the MACR is to identify types of MPs and MPCs included in a qualified facility. To do this, the identification safe harbor uses the listing of applicable facilities in the 2023–2025 safe harbor tables (within Notices 2023-38, 2024-41, and 2025-08). However, these tables can only be relied on if they are considered the exclusive list of MPs and MPCs. Said another way, regardless of whether there are additional MPCs within the taxpayer’s property that might help with the MACR, these “excess” MPCs are disregarded if not listed in the 2023–2025 tables. The Notice also includes special requirements for battery modules for the 45X manufacturing credit, considers the “80/20 Rule” for improved property, and excludes steel, iron, and interconnection property as noted previously.
Cost Percentage Safe Harbor
Once the MPs and MPCs are identified using the identification safe harbor, the actual direct costs (and the portion that are PFE direct costs) can be calculated with the cost percentage safe harbor. Note that specifically identifying MPCs and MPs without the identification safe harbor would not allow for the use of the cost percentage safe harbor.
In addition, the qualified facility or EST must be one of the applicable projects specifically in the 2023–2025 safe harbor tables and must use the assigned cost percentages of the listed MPs, MPCs, or Constituent Materials within the tables as the exclusive listing of costs. Similar to the identification safe harbor, those MPs or MPCs not listed in the tables are not considered when calculating the MACR. Alternatively, if there is a listed MP or MPC in the tables that is not included in the taxpayer’s property, then the “listed but unutilized” MP or MPC is ignored.
Certification Safe Harbor
Practically speaking, this safe harbor is what most taxpayers have been anxiously awaiting. Given the difficulty of tracking MPs and MPCs, calculating direct costs, etc., many taxpayers have been depending on the certification from vendors that their products are not PFE produced. The Notice provides guidelines as to what should be included in the certification, what forms with which it should be filed, and examples. Here are some important takeaways:
- The certification must be signed under penalties of perjury.
- Both the taxpayer and the supplier must retain the certification for at least six years.
- The supplier must affirm that they don’t know that “any prior supplier in the chain of production of that property is a PFE.”
The last point is especially important for clean energy manufacturers, as they must attest to not only their involvement in the product, but also that of any prior suppliers.
Action Items & Next Steps
Even given all of these rules, it’s important to note that “non-PFE” does not necessarily mean produced in the U.S., as production from other foreign countries (the European Union, South Korea, India, etc.) qualify. As a result, taxpayers may consider shifting vendors or manufacturing operations to one of these countries. This kind of move could result in substantial cost and administrative headaches, begging the question: in light of the FEOC framework requirements, are the clean energy credits worth it?
Modeling the MACR calculation with various vendors and specs could influence decisions about supply chain and more. Layering in the Domestic Content bonus credit requirements could also impact this strategy and possibly offset some of the additional costs of shifting the supply chain.
Regardless, documentation should be top of mind—as either a manufacturer, developer, or investor of clean energy technologies. When using the certification safe harbor, taxpayers and vendors should ensure that the certificate is both maintained and completed to the standards of the Notice. When not using a safe harbor, careful records of direct costs of each MP and MPC are of upmost importance in the event of exam.
To learn more about opportunities and strategies related to investing, manufacturing, and developing clean energy technologies, please reach out to a professional at Forvis Mazars.
- 1For the purposes of this article, MACR includes both Clean Electrical MACR and Eligible Component MACR.