Late last week, the Treasury Department and the Internal Revenue Service issued IRS Notice 2026-15, available here, which provides guidance regarding the “material assistance” prong of the new prohibited foreign entity requirements (also referred to as foreign entity of concern or “FEOC” requirements) under Sections 45X, 45Y and 48E of the Code. While the rules applicable to the production of eligible components and applicable minerals under Section 45X of the Code are similar to the rules applicable to qualified facilities, qualified interconnection property and energy storage technology (“EST”) under Sections 45Y and 48E of the Code, as applicable, our analysis regarding the application of IRS Notice 2026-15 to Section 45X of the Code will be included in a separate blog post.
As a general matter, taxpayers may rely on the guidance regarding the direct cost method for qualified facilities and ESTs the construction of which begins after December 31, 2025 and on or before the day that is 60 days after forthcoming proposed regulations are published. Alternatively, taxpayers may rely on the guidance regarding the safe harbor method for qualified facilities and ESTs the construction of which begins after December 31, 2025 and on or before the day that is 60 days after forthcoming safe harbor tables (and other guidance) is published.
1. Background
For taxable years beginning after July 4, 2025, no credit is allowed under Sections 45Y and 48E of the Code for taxpayers that are considered “specified foreign entities” under Section 7701(a)(51)(B) of the Code or for taxpayers that are considered “foreign influenced entities” under Section 7701(a)(51)(D) of the Code (the “Prohibited Foreign Entity Exclusion”). In addition, no credit is allowed under Sections 45Y and 48E of the Code if the taxpayer makes a payment, in the prior taxable year, to a specified foreign entity that entitles such entity to exercise effective control over the qualified facility or EST (the “Effective Control Exclusion”). Finally, under Sections 45Y and 48E of the Code, for qualified facilities and EST the construction of which begins on or after January 1, 2026, no credit is allowed if the construction, reconstruction, or erection of such facility or property includes any material assistance from a prohibited foreign entity under Section 7701(a)(52) of the Code (the “Material Assistance Exclusion”). While IRS Notice 2026-15 briefly touches on the Effective Control Exclusion, this notice primarily contains guidance regarding the Material Assistance Exclusion.
2. Guidance Regarding the Material Assistance Exclusion
Under Section 7701(a)(52) of the Code, the term “material assistance from a prohibited foreign entity” means, with respect to any qualified facility, qualified interconnection property or EST, a material assistance cost ratio (“MACR”) that is less than the applicable threshold percentage (the “Threshold Percentage”), as set forth below.
| Construction Begins | Threshold Percentage | |
Qualified Facilities/Qualified Interconnection Property | ESTs | |
| 2026 | 40% | 55% |
| 2027 | 45% | 60% |
| 2028 | 50% | 65% |
| 2029 | 55% | 70% |
| 2030 and later | 60% | 75% |
For purposes of the Material Assistance Exclusion, the term “qualified facility” means (i) a qualified facility, as defined in Section 45Y(b)(1) of the Code, (ii) a qualified facility, as defined in Section 48E(b)(3) of the Code, and (iii) any qualified interconnection property, as defined in Section 48E(b)(4) of the Code) which is part of the qualified investment with respect to a qualified facility under Section 48E of the Code.
IRS Notice 2026-15 provides guidance on how to calculate the MACR of a given qualified facility or EST.
3. MACR Computations
The Direct Cost Method
The baseline approach, although certainly not the most likely to be utilized in its entirety for solar, wind, and EST projects, is the direct cost method.
- Identification Step. First, similar to the original rules regarding the domestic content bonus credit found in IRS Notice 2023-38, the MACR can be calculated using the total direct costs and the “prohibited foreign entity produced” direct costs. To do so, taxpayers would first need to identify the types of manufactured products (“MPs”) and manufactured product components (“MPCs”) included in the qualified facility or EST.
- Tracking Step. Second, taxpayers would need to individually track each MP and MPC, including the direct costs of each and whether each was mined, manufactured or produced by a prohibited foreign entity (“PFE-Produced”). There are certain exceptions that allow taxpayers to avoid the Tracking Step under certain circumstances, but these exceptions appear limited and, absent unique circumstances, are unlikely to apply in most cases.
- Direct Cost Calculation Step. Third, taxpayers would need to determine the direct costs attributable to the identified MPs and MPCs (the “Total Direct Costs”). If such MPs and MPCs were produced by the taxpayer, the taxpayer can include direct material costs and direct labor costs in its calculation of Total Direct Costs. If such MPs and MPCs were acquired by the taxpayer, the taxpayer can simply include the acquisition costs in the calculation of Total Direct Costs. However, under no circumstances can the costs of incorporating MPs and MPCs into a qualified facility or EST be included in the calculation (i.e., installation costs are not included).
- Computation Step. Finally, taxpayers would need to determine the direct costs attributable to each PFE-Produced MP and each PFE-Produced MPC included in an MP (the “PFE-Produced Direct Costs”) and calculate the relevant MACR by subtracting the PFE-Produced Direct Costs from Total Direct Costs and dividing such amount by Total Direct Costs. If such MACR is less than the relevant Threshold Percentage, such qualified facility, qualified interconnection property or EST is ineligible for the tax credit under Section 45Y or 48E of the Code, as applicable.
The Safe Harbor Methods
However, in lieu of completing the steps above, IRS Notice 2026-15 offers various safe harbors that taxpayers may be able to use to simplify the MACR calculation of a given qualified facility or EST. Note that these safe harbors are not available for qualified interconnection property, which must apply the direct cost method. Certain tax reporting requirements apply.
The Identification Safe Harbor
Rather than completing the Identification Step, taxpayers can use the identification safe harbor to identify MPs and MPCs of a qualified facility or EST listed as an “Applicable Project” in the domestic content safe harbor tables set forth in IRS Notice 2024-41[TR1] and IRS Notice 2025-08[TR2] (the “Domestic Content Safe Harbor Tables” and, such safe harbor, the “Identification Safe Harbor”). Under the Identification Safe Harbor, the same rules apply with respect to listed and unlisted MPs and MPCs as those set forth in the domestic content notices. In addition, when using the Domestic Content Safe Harbor Tables, any item identified as steel or iron is disregarded when identifying MPs and MPCs.
The Cost Percentage Safe Harbor and the Certification Safe Harbor
In calculating the MACR, taxpayers that utilize the Identification Safe Harbor also may use either the Cost Percentage Safe Harbor or the Certification Safe Harbor.
Under these circumstances, rather than completing the Direct Cost Calculation Step, taxpayers may use the “Assigned Cost Percentages” as set forth in the Domestic Content Safe Harbor Tables and then use that information for to complete the Computation Step (the “Cost Percentage Safe Harbor”). Taxpayers that choose to use the Cost Percentage Safe Harbor must use the “Assigned Cost Percentages” as the exclusive and exhaustive set for the relevant MPs and MPCs.
Alternatively, taxpayers may rely on a certification from a supplier that certifies either the total direct cost to the taxpayer paid or incurred by the taxpayer of such MP or MPC that was not PFE-Produced or that such MP or MPC was not PFE-Produced (the “Certification Safe Harbor”).
4. A Quick Note on the Effective Control Exclusion
While IRS Notice 2026-15 primarily covers the material assistance rules, for purposes of the “effective control” prong of FEOC limitations, it clarifies that any licensing agreement for intellectual property entered into or modified on or after July 4, 2025 with a specified foreign entity is treated as granting effective control of the applicable qualified facility or EST to such specified foreign entity.
The Foley team will continue to monitor developments with respect to the Material Assistance Exclusion and other foreign entity of concern rules under Sections 45Y and 48E of the Code. Please reach out to one of the team members identified below with any questions.
