IRS Releases Guidance on Use of Foreign Equipment in Clean Energy Projects

On February 12, the IRS issued Notice 2026-15 containing long-awaited interim guidance on how to determine whether a clean energy power project or energy storage facility incorporates too much equipment from entities tied to China or other foreign entities of concern to qualify for federal clean energy tax credits.

OBBBA

Effective January 1, 2026, the One Big Beautiful Bill Act (OBBBA) prohibits electric generating and energy storage facilities from claiming the Section 45Y clean electricity production credit or Section 48E clean electricity investment credit if the project receives "material assistance" from a prohibited foreign entity (PFE). Although PFEs include entities with ties to North Korea, Russia, and Iran, the law was targeted at Chinese equipment manufacturers and was designed to prevent them from directly or indirectly benefitting from U.S. energy tax incentives.

Another part of the law, not addressed in Notice 2026-15, prevents project companies that are PFEs from claiming energy tax credits, which status can result from one or more specified foreign entities holding a significant amount of the company's equity or debt or otherwise having rights to control the project, including through board participation.

Material Assistance Cost Ratio (MACR)

To determine whether a project has received material assistance from a PFE, the taxpayer must calculate a "material assistance cost ratio" (MACR), the numerator of which is the cost of a facility's manufactured products (including components) that are not manufactured by a PFE (the "good" manufactured products) and the denominator of which is the total cost of all of the facility's manufactured products (including components).

To qualify for the tax credits, the MACR, expressed as a percentage, must equal or exceed the applicable threshold for the year in which the facility begins construction. The threshold percentage for electric generating facilities begins at 40% for 2026 and increases to 60% for 2030 and later years. The threshold percentage for energy storage facilities begins at 55% for 2026 and increases to 75% for 2030 and later years.

If the MACR is less than the applicable threshold percentage for the year in which the facility begins construction, the facility will be considered to have received material assistance from a PFE and accordingly will not qualify for the tax credits.

IRS Notice 2026-15 contains detailed rules, expected to be included in forthcoming proposed regulations, for how to identify manufactured products and components included in a facility, and for determining their direct costs and whether they were manufactured or produced by a PFE.

Interim Safe Harbors

As an alternative to requiring taxpayers to identify and track the actual direct costs of a facility to calculate the MACR, Notice 2026-15 provides taxpayers with three interim "safe harbors" to determine whether a facility is considered to receive material assistance from a PFE:

• Identification Safe Harbor. Solar, wind, energy storage, and certain other facilities that are listed as Applicable Projects in the safe harbor tables published by the IRS that are used to determine eligibility for the domestic content bonus tax credits (Notices 2025-8, 2024-41, and 2023-38) can use those tables to identify a facility's manufactured products and components for purposes of calculating the facility's MACR.
• Cost Percentage Safe Harbor. Where a taxpayer uses the Identification Safe Harbor to identify the manufactured products and components included in a facility, the MACR can be calculated using a five-step process using the assigned cost percentages for the manufactured products and components contained in the domestic content bonus tax credit tables.
• Certification Safe Harbor. A taxpayer may rely upon certifications from its equipment suppliers that the manufactured products and components used in the facility are not supplied by a PFE. The certificates must contain certain statements about the equipment, its production, and any upstream suppliers in the chain of production, include the supplier's EIN (or similar foreign ID number), be signed under penalties of perjury, and be filed with the taxpayer's tax return for the first year in which the tax credit is claimed for the facility. The certificates must be retained for at least six years. Taxpayers may rely on a certificate unless they know or have reason to know it is inaccurate.

Exceptions to Manufactured Product and Component Tracking

Notice 2026-15 provides two exceptions to having to individually track each and every manufactured product and component to a facility if the taxpayer is not using the safe harbors. A "de minimis" rule is available for taxpayers building and placing multiple facilities of a similar type in service within the same year. The rule allows taxpayers to assign common equipment or components across the facilities, without tracking the equipment to a specific facility, but only where the cost of the assigned equipment or components is less than 10% of the facility's total costs. In addition, for energy storage facilities having a maximum net output of less than 1 megawatt where the facilities are of the same type and are placed in service during the same year, in lieu of the above de minimis rule, taxpayers can use the average costs and PFE content of all of the equipment and components across the units to calculate the MACR. These rules provide a practical approach to the realities of how equipment is sometimes procured for multiple projects built at the same time.

Additional Guidance and Next Steps

Notice 2026-15 also provides guidance on how to calculate the MACR for repowering projects. Among other things, the MACR should be calculated solely with respect to the new manufactured products and components used in the repowered facility.

Forthcoming proposed regulations are expected to include rules to prevent entities from evading PFE status or abusing the PFE restrictions, including by transferring or altering rights that result in temporary lapses of restricted foreign ownership or control.

The IRS is requesting comments on Notice 2026-15 by March 30, 2026. The IRS specifically requests comments on the clarity of the provisions and on rules to prevent the circumvention of the PFE rules and restrictions.

In the interim, taxpayers may rely on the safe harbors and other rules set forth in Notice 2026-15 for facilities beginning construction after December 31, 2025, until the date that is 60 days after publication of the forthcoming proposed regulations and/or safe harbor tables, as applicable.

Notice 2026-15 also provides guidance on similar rules for purposes of claiming the Section 45X Advanced Manufacturing Production Credit.

If you have questions about Notice 2026-15 or how it may affect current or proposed projects, please contact Pamela Charles or Merrill Kramer.