IRS Issues Interim Guidance on “Material Assistance” from a Prohibited Foreign Entity

On February 12, 2026, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) released Notice 2026-15 (the “Notice”), providing long-awaited interim guidance on the restrictions on receiving “material assistance” from a prohibited foreign entity (“PFE”) that were enacted by the One Big Beautiful Bill Act (the “OBBBA”). The Notice provides important clarifications to the application of the “material assistance” requirement which generally can disqualify a taxpayer from being able to claim the Advanced Manufacturing Tax Credit (Section 45X), Clean Electricity Production Credit (Section 45Y) and the Clean Electricity Investment Credit (Section 48E) if the taxpayer’s project costs attributable to equipment manufactured by a PFE (e.g., solar panels manufactured in China) exceed a certain threshold. The Notice describes (1) rules expected to be included in forthcoming proposed regulations; (2) guidance regarding the calculation of the material assistance cost ratio (“MACR”) for purposes of determining whether there was material assistance from a PFE; (3) Identification, Cost Percentage, and Certification interim safe harbors; and (4) guidance on reliance, substantiation, and penalties.

The Notice provides meaningful guidance on material assistance mechanics, but largely leaves PFE/Foreign Entity of Concern (FEOC) ownership and broader effective control questions to be addressed in future guidance. It also does not address the determination of whether a project began construction prior to January 1, 2026, for purposes of being exempt from these “material assistance” restrictions.

Material Assistance and the MACR Calculation for Manufactured Products and Manufactured Product Components

“Material assistance from a PFE” is defined as a MACR that falls below the applicable statutory threshold percentage. The threshold percentages vary based on when construction begins (for qualified facilities and Energy Storage Technologies (ESTs)) or when the eligible component is sold (for Section 45X purposes). Similar to qualification for the domestic content bonus credit, taxpayers have two paths for compliance, either through safe harbors described below or direct cost accounting. Like the domestic content bonus credit, we expect that developers (and their financing parties) will prefer the certainty afforded by the safe harbors over the direct cost accounting method.  

The Notice provides two distinct MACR formulas: one for qualified facilities and ESTs under Sections 45Y and 48E, and one for the advanced manufacturing tax credit under Section 45X, each as discussed immediately below.

1. Clean Electricity MACR: Rules for Qualified Facilities and ESTs under Sections 45Y and 48E

Under the Notice, any Section 45Y or 48E qualified facility or EST that begins construction after December 31, 2025, can rely on the Clean Electricity MACR calculations provided until 60 days after the publication of forthcoming safe harbor tables.

Step 1: Identification. Taxpayers must identify the types of Manufactured Products (“MPs”) and Manufactured Product Components (“MPCs”) incorporated into the qualified facility or EST. These items must be identified consistent with the meaning of the phrase “manufactured products (including components)” in Section 45Y(g)(11) and the guidance in Notice 2023-38, and at a level of detail substantially similar to the 2023-2025 safe harbor tables. A taxpayer may rely on the definitions of “Applicable Project Component,” “Manufactured Product,” and “Manufactured Product Component” in Notice 2023-38 to identify types of MPs and MPCs. Alternatively, taxpayers may be able to rely on the Identification Safe Harbor (discussed below). Notably, the incorporation of the standard under the 2023-2025 safe harbor tables and the ability to rely on the Identification Safe Harbor means that the tracking stops at the subcomponent level, similar to the rules for the domestic content bonus credit.

Step 2: Track individual MP and MPC characteristics. The taxpayer must track the direct costs of each MP or MPC incorporated into each qualified facility, and also track whether the MP or MPC was mined, manufactured, or produced by a PFE. For ESTs, if the MP and MPCs are incorporated in the same type of EST in the same specified period, taxpayers can take the average of MP and MPC costs for both non-PFE and PFE costs. Alternatively, taxpayers may be able to rely on the Cost Percentage Safe Harbor (discussed below).

• De Minimis Rule: individual tracking is not required if, for each qualified facility or EST, the total direct cost of all such allocated MPs and MPCs represent less than 10% of the “total direct costs” of such qualified facility or EST.
• Tracking for ESTs Under 1MW: for ESTs that are of the same type, each with a maximum net output of less than 1MW, and placed in service during the same taxable year, a taxpayer can average MP and MPC costs (both Non-PFE and PFE).
• Specified Periods: The “specified period” for purposes of the Clean Electricity MACR for ESTs must be at least one day and not longer than the taxpayer’s taxable year. Thus, specified periods can be less than one year, allowing taxpayers to break up projects by contiguous time periods.

Step 3: Determine direct costs for qualified facilities and ESTs. Direct costs attributable to an MP produced by a taxpayer include direct material costs and direct labor costs to the taxpayer as defined in Treasury Regulation Section 1.263A-1(e)(2)(i)(A) and (B). Taxpayers may be able to rely on the Cost Percentage Safe Harbor or the Certification Safe Harbor (discussed below) to determine direct costs.

Step 4: Determine PFE direct costs. The taxpayer must determine the direct costs attributable to each MP and MPC that is mined, manufactured or produced by a PFE (a “PFE Produced”). For an MP that is not PFE Produced but that contains PFE Produced MPCs, the taxpayer must include in the direct cost the portion of acquisition costs that is attributable to the PFE Produced MPCs. For a PFE Produced MP that contains non-PFE Produced MPCs, the taxpayer may exclude from direct costs the portion attributable to the non-PFE Produced MPCs. Taxpayers may be able to rely on the Cost Percentage Safe Harbor to determine PFE direct costs and/or the Certification Safe Harbor to determine whether an MP or MPC is PFE Produced.

Whether an MP or MPC is PFE Produced looks to the taxable year of the entity that mined, produced or manufactured the MP or MPC, not the taxable year of the purchaser of the MP or MPC, to see if the entity carrying out such activity was a PFE in the tax year the date the payment for such MP or MPC was made. If such entity does not use a taxable year under Section 7701(a)(23), the determination is based on such entity’s PFE status for the calendar year the taxpayer paid or incurred the cost of the MP or MPC, as applicable. The Notice does not appear to explicitly consider that a status of an entity as a PFE could only apply for a partial tax year.

2. Eligible Component MACR: Rules for Section 45X Components

Under the Notice, any Section 45X eligible components sold in taxable years beginning after July 4, 2025 can rely on the MACR calculations provided until the date forthcoming safe harbor tables are published.

Step 1: Identification. For Section 45X eligible components, taxpayers must identify constituent elements, materials or subcomponents (“Constituent Materials”) incorporated into the eligible component or consumed in the production of the eligible component. Each eligible component is considered a separate component for Eligible Component MACR calculation purposes. Taxpayers may be able to rely on the Identification Safe Harbor (discussed below) to identify constituent materials, but only to the extent the eligible component is specifically listed in the Notice. For example, the list includes solar modules but does not include solar cells. Thus, a taxpayer that produces a solar module would not need to track subcomponents other than those listed in the Identification Safe Harbor (i.e., similar to the rules for the domestic content bonus credit), whereas a taxpayer that produces solar cells would not be able to rely on the Identification Safe Harbor for determining which subcomponents constitute Constituent Materials.

Step 2: Track Constituent Materials. Individual tracking of the direct material cost of each Constituent Material used to produce each eligible component and whether it is PFE Produced is required unless the taxpayer is relying on the Cost Percentage Safe Harbor, in which case only tracking of whether the Constituent Material is PFE Produced is required. Averaging of costs is permitted if not relying on a safe harbor. 

Step 3: Determine direct material costs. For eligible components, direct material costs include direct material costs as defined in Treasury Regulation Section 1.263A-1(e)(2)(i)(A) (unlike the Clean Electricity MACR, which also takes into account direct labor costs in clause (B) of such Treasury Regulation). The inability to incorporate US labor costs in the context of the calculation for the 45X credit likely makes complying with the criteria more difficult. However, taxpayers may be able to rely on the Cost Percentage Safe Harbor or the Certification Safe Harbor (discussed below) to determine direct material costs.

Step 4: Determine PFE direct material costs. The taxpayer must determine the direct material costs attributable to each PFE Produced Constituent Material. Whether a Constituent Material is PFE Produced depends on whether the direct supplier (that is not a reseller) that sold the Constituent Material was a PFE in the direct supplier’s tax year that includes the date the taxpayer paid for the Constituent Materials. If the direct supplier does not use a taxable year under Section 7701(a)(23), the PFE status of the entity is based on the entity’s status for the calendar year in which the taxpayer paid or incurred the direct material costs of such Constituent Materials. If the direct supplier is a reseller, the taxpayer needs to look to the original producer who mined, produced or manufactured the Constituent Materials. Alternatively, the taxpayer may be able to rely on the Cost Percentage Safe Harbor or the Certification Safe Harbor (discussed below). 

Interim Safe Harbors

Section 4 of the Notice provides three interim safe harbors that taxpayers may use to simplify compliance.

1. Identification Safe Harbor: This safe harbor allows taxpayers to use the 2023-2025 safe harbor tables (from Notices 2023-38, 2024-41, and 2025-08) to identify MPs and MPCs when the qualified facility or EST is an applicable project listed in the safe harbor table. Any MP or MPC not listed in the applicable table is disregarded for MACR calculation purposes. Thus, the calculation may be done on a basis where the assigned cost percentages do not sum to 100% due to disregarded MPs and MPCs. The safe harbor tables may also be used to identify constituent materials for Section 45X purposes but only if the eligible component is also listed as an eligible component in the table included in the Notice.
2. Cost Percentage Safe Harbor: This safe harbor permits taxpayers to use the assigned cost percentages from Notice 2025-08 to determine direct costs and PFE direct costs in lieu of tracking actual costs. This safe harbor is only available to taxpayers who also use the Identification Safe Harbor. Taxpayers still must track whether each MP, MPC, or constituent material was produced or sourced by a PFE. 
3. Certification Safe Harbor: This safe harbor allows taxpayers to rely on supplier certifications to determine (1) the total direct material costs paid or incurred by the taxpayer of such MP, MPC, eligible component, or constituent material that was not PFE produced or sourced, or (2) to establish that MPs, MPCs, eligible components, or constituent materials were not PFE produced or PFE sourced. Certifications must include the supplier’s employer identification number (or foreign equivalent), be signed under penalties of perjury, and be retained for at least six years. Taxpayers may not rely on a certification if they know or have reason to know that the certification is inaccurate. When in doubt, all relevant costs must be treated as attributable to a PFE.

Existing Binding Contract Exception

The Notice provides important relief for components acquired pursuant to existing binding contracts. Upon election, the cost of any MP, eligible component, or constituent element, material, or subcomponent acquired or manufactured pursuant to a binding written contract entered into before June 16, 2025, may be excluded from the MACR calculation if:

• The item is placed in service before January 1, 2030 (or January 1, 2028 for qualified wind or solar facilities) in a facility whose construction began before August 1, 2025; or
• In the case of a constituent element, material, or subcomponent, used in a product sold before January 1, 2030 (or January 1, 2027 for Section 45X purposes).

This grandfathering provision offers a pathway for projects that had already secured supply arrangements prior to the OBBBA’s enactment.

Other Notable Items:

• 80/20 Rule: For facilities that qualify as “originally placed in service” under the 80/20 Rule (where the fair market value of used components represents no more than 20% of the total value of the unit of a qualified facility), only the direct costs of new MPs and MPCs incorporated into a qualified facility under the 80/20 Rule are considered when calculating the Clean Electricity MACR. Taxpayers may disregard used property for purposes of using the safe harbors.
• Iron and steel components listed in the tables and incorporated into the taxpayer’s qualified facility or EST are disregarded for purposes of calculating the Clean Electricity MACR.
• Section 6662(m) provides that in the case of a disallowance of a Section 45X, 45Y, or 48E credit by reason of overstating a MACR, the threshold for a substantial understatement of income tax is reduced from 10% to 1%.
• Section 6501(o) provides a six-year statute of limitations for any deficiency attributable to an error with respect to a MACR determination.
• Substantiation and Certification Requirements: Taxpayers using any of the safe harbors must attach a statement to their annual return (Form 7211, Form 3468, or Form 7207, as applicable) identifying the specific safe harbor (including, if applicable, the safe harbor table) used and its application. All taxpayers must maintain books and records sufficient to substantiate their MACR calculations and credit claims in accordance with Section 6001.
• The Notice states that the Treasury and IRS intend to issue comprehensive proposed regulations and other further guidance with respect to the definition of a PFE and the material assistance rules to prevent evasion or circumvention of PFE restrictions, including through stockpiling of components prior to the effective date or temporary lapses in foreign ownership or control. Further guidance will also include new safe harbor tables as authorized in the OBBBA.