Notice 2026-15: Guidance regarding prohibited foreign entity rules

On February 12, 2026, the U.S. Department of the Treasury and the IRS released Notice 2026-15 (the "Notice"), providing the first and long-awaited guidance regarding the new "prohibited foreign entity" ("PFE") rules, as enacted by the One Big Beautiful Bill Act ("OBBBA") on July 4, 2025. The Notice introduces a few new concepts and affirms a draconian view of licensing arrangements for purposes of determining "effective control." However, for the most part, it clarifies and organizes the existing general guidance under new Section 7701(a)(52)(D): specifically, how to determine whether a given project has received a disqualifying amount of material assistance from a PFE. See our prior alert regarding this and other PFE rules here.

As further described below, the Notice sets forth a framework (the "MACR Framework") for:

• identifying (A) the types of manufactured products ("MPs") and manufactured product components ("MPCs") included in a qualified facility ("QF") or energy storage technology ("EST") for purposes of Section 45Y and Section 48E, and (B) constituent elements, materials, or subcomponents incorporated into or consumed in the production of eligible components for purposes of Section 45X ("Constituent Materials") in each case, through a safe harbor (the "Identification Safe Harbor"); and
• calculating the "material assistance cost ratio" ("MACR"), (A) for purposes of QFs and ESTs under Section 45Y and Section 48E (such MACR, the "Clean Electricity MACR"), and (B) for purposes of eligible components under Section 45X (such MACR, the "Eligible Component MACR"), in each case, through any of (x) a safe harbor for determining direct costs (the "Cost Percentage Safe Harbor"), (y) a safe harbor using supplier certifications (the "Certification Safe Harbor"), or (z) a method based on actual direct costs and PFE costs ("Taxpayer-Determined Method").

Embedded in the MACR Framework, the Notice:

• introduces a new de minimis aggregation and assignment rule (the "De Minimis Rule") for QFs and ESTs, intended to afford taxpayers flexibility in assigning the cost of MPs and MPCs (of the same type and that must constitute less than 10% of the total direct cost of the QF or EST) among the QFs and ESTs in a given project;

W&C Observation: Based on the example in the Notice, it appears to be a rule of administrative simplicity that may give taxpayers the luxury of a buffer in determining the MACR for a given QF or EST for MPs or MPCs that do not—in the aggregate—constitute 10% or more of the total direct cost of the applicable QF or EST. For example, if a project consisting of multiple QFs or ESTs contains MPs or MPCs, at least some of which are PFE Produced (as defined below), then the taxpayer may be able to assign the underlying PFE costs to a QF or EST in a manner that would produce a more favorable MACR;

• introduces a cost averaging benefit for the same type of Constituent Materials and ESTs that have a net output of less than 1 MW; the average is determined over a "specified period" and takes into account the ratio of PFE Produced MPs or MPCs of the same type to the total number of MPs or MPCs of such type (the "Cost Averaging Benefit");
• specifies that battery modules using battery cells may be treated as a listed eligible component upon first meeting the applicable Section 45X requirements, notwithstanding when the transformation occurs in the supply chain; however, only battery modules that are "directly incorporated" into a distributed-BESS or grid-scale BESS may be so treated;
• clarifies that the taxpayer must separately calculate the Clean Electricity MACR for qualified interconnection property;
• clarifies that, for purposes of the 80/20 rule, only the direct costs of new MPs and MPCs are considered when calculating the MACR; and
• confirms that costs associated with steel/iron items are disregarded for purposes of calculating the MACR.

The Notice also addresses other PFE rules.

Most importantly, the Notice indicates that forthcoming regulations are expected to clarify that, for purposes of determining whether a PFE has "effective control" over a project (thereby disqualifying the project from tax credits), each enumerated licensing arrangement listed in Section 7701(a)(51)(D)(ii)(III)(aa)(AA)-(GG) must be evaluated separately. As an example, the Notice states that if the taxpayer makes a payment to a "specified foreign entity" ("SFE") under a licensing agreement for the provision of intellectual property with respect to a QF, and such agreement was entered into or modified on or after July 4, 2025, the SFE would be exercising effective control over the QF and the taxpayer would be considered a "foreign-influenced entity."

W&C Observation: As enacted, subclauses (AA) through (EE) describe certain contractual rights, while subclauses (FF) and (GG) refer to a contract with such a contractual right; however, under a plain-reading, subclauses (FF) and (GG) are drafted independently of the other subclauses. This example in the Notice confirms the plain-reading that any licensing agreement for the provision of intellectual property entered into (or modified) on or after July 4, 2025, with a SFE grants such SFE effective control, characterizing the taxpayer as a FIE. Thus, the focus turns to whether a use license is a "provision" of intellectual property.

Further, the Notice confirms that the guidance for beginning of construction for the sunset provisions and for the PFE rules are intended to be separate from each other. Notice 2025-42 restricted the availability of the "5% Safe Harbor" method to establish BOC for certain QFs in connection with the sunset provisions of Section 45Y and Section 48E, and the Notice contained a similar footnote.

W&C Observation: The Notice affirms that, until further guidance is published, certain wind and solar QFs could be subject to different BOC regimes for purposes of the sunset provisions and the PFE rules.

Taxpayers may rely on the Notice to calculate Clean Electricity MACR for QFs or ESTs, the construction of which begins after December 31, 2025, and on or before the date that is 60 days after the publication of forthcoming proposed regulations and safe harbor tables (and other guidance), as applicable.

Taxpayers may rely on the Notice to calculate an Eligible Component MACR for eligible components sold in taxable years beginning after July 4, 2025, and on or before the date that is 60 days after the publication of forthcoming proposed regulations and safe harbor tables (and other guidance), as applicable.

Written comments to the Notice must be submitted by March 30, 2026.

The remainder of this alert discusses the MACR Framework under the OBBBA and the Notice.

Guidance on the Clean Electricity MACR and the Eligible Component MACR

Background

Pursuant to the OBBBA, QFs and ESTs eligible for tax credits under Section 45Y and Section 48E do not include any facility, the construction of which begins after December 31, 2025, and which includes any material assistance from a PFE. Similarly, eligible components under Section 45X do not include any property sold in taxable years beginning after July 4, 2025, if the property includes any material assistance from a PFE. The OBBBA added Section 7701(a)(52) to define "material assistance from a PFE". For each of QFs, ESTs, and eligible components, it means a MACR that is less than a specified threshold, as shown in the tables below.

The specified threshold percentages for the MACR under Section 7701(a)(52) vary depending on the calendar year in which construction of the QF or EST begins. The threshold percentages for the MACR for a QF are as follows:¹

The threshold percentages for the MACR for an eligible component are listed under Section 7701(a)(52)(C)(i) and vary depending on the year in which it is sold and the type: solar energy component, wind energy component, inverter, qualifying battery component and applicable critical mineral.

The Clean Electricity MACR can be expressed as a formula:

• "Total Direct Cost" means the total direct costs attributable to all MPs (including MPCs) included in the QF or EST upon completion of construction.
• "PFE Total Direct Cost" means the total direct costs attributable to all MPs (including MPCs) included in the QF or EST upon completion of construction and which are mined, produced or manufactured by a PFE ("PFE Produced").

The Eligible Component MACR can be expressed as a formula:

• "Total Direct Material Cost" means the total direct material costs paid or incurred by the taxpayer for all Constituent Materials incorporated into or consumed in the production of the eligible component.
• "PFE Total Direct Material Cost" means the total direct material costs paid or incurred by the taxpayer for all Constituent Materials incorporated into or consumed in the production of the eligible component that are mined, produced, or manufactured by a PFE ("PFE Sourced").

Whether an MPC or MPC is PFE Produced or a Constituent Material is PFE Sourced, as applicable is determined as of the taxable year during which the taxpayer paid or incurred costs attributable to such MP or MPC or Constituent Material, not the year the QF or EST was placed in service nor the year the eligible component was sold, as applicable.

W&C Observation: Our interpretation is the taxpayer must first determine the year of the expense, as determined under its accounting method. Then, the taxpayer must determine whether the tested entity was a PFE in the year of the expense based on its taxable year under Section 7701(a)(23), failing which the calendar year is referenced. We note possible ambiguity in respect of the gap between taxable years of the taxpayer and the tested entity. Additionally, because costs may be incurred across multiple tax years, components may require a separate PFE evaluation based on the timing of their incurrence, potentially resulting in differing determinations for multiple periods.

Identification

To determine the MACR, the taxpayer must first identify (i) for the Clean Electricity MACR, the types of MPs and MPCs included in the QF or EST, or (ii) for the Eligible Component MACR, the types of Constituent Materials incorporated into or consumed in the production of each eligible component. To do so, the taxpayer may rely on (i) the definitions under Notice 2023-38 (for MPs, MPCs and related terms) and the Notice (for Constituent Materials), or (ii) the Identification Safe Harbor.

W&C Observation: The definitions of MPs, MPCs and other terms under Notice 2023-38 are non-exhaustive and couched in general descriptions, whereas the Identification Safe Harbor provides for more certainty, at the cost of exclusivity, as discussed further below. The taxpayer's decision to (or not to) use the Identification Safe Harbor for determining the Clean Electricity MACR for a QF or EST may depend on (i) whether MPs or MPCs not listed in the Identification Safe Harbor are PFE Produced, and (ii) whether the taxpayer intends to use the Cost Percentage Safe Harbor (which, as described below, requires the taxpayer to use the Identification Safe Harbor).

The Identification Safe Harbor utilizes the listings of MPs and MPCs provided under prior domestic content guidance for ground-mount solar, rooftop solar, onshore wind, offshore wind and hydropower (collectively, the "DC Table Guidance").² Consistent with prior domestic content guidance under Notice 2025-08 and Notice 2024-41, a taxpayer that uses the Identification Safe Harbor must use the listed MPs and listed MPCs as the exclusive and exhaustive list of MPs, MPCs and Constituent Materials.

The Identification Safe Harbor cannot be used for technology types that do not have specified DC Table Guidance, such as nuclear, fuel cells, or geothermal facilities. Additionally, the Identification Safe Harbor can only be used to identify types of Constituent Materials if the eligible component is a listed eligible component in the Notice.³ The Notice specifically provides that battery modules using battery cells may be treated as a listed eligible component upon first meeting the requirements under Section 45X(c)(5)(B)(iii), notwithstanding when the transformation occurs in the applicable manufacturing production chain. However, only battery modules that are "directly incorporated" into a distributed- or grid-scale-battery energy storage system may be treated as listed eligible components.

Calculation of Direct Costs

Second, the taxpayer may use one of three methods to calculate the direct cost: (i) the Taxpayer-Determined Method; (ii) the Cost Percentage Safe Harbor; or (iii) the Certification Safe Harbor.

(a) Taxpayer-Determined Method

(i) Clean Electricity MACR

Direct costs attributable to an MP produced by the taxpayer include direct material costs and direct labor costs, which will include any production or acquisition costs of applicable MPCs, as determined under Treasury Regulations for Section 263. This will typically be the case for Section 45X credits (as discussed below). However, where the taxpayer acquires an MP (which will typically be the case for Section 45Y and Section 48E credits), the direct costs attributable to such MP are its acquisition costs, and direct costs, including direct labor costs, of incorporating such MP into a QF or EST are excluded.

This isn't the end of the inquiry: the taxpayer must then determine whether the MP is PFE Produced.

• If the taxpayer acquires a PFE Produced MP, but some or all of the applicable MPCs are not PFE Produced, the taxpayer excludes the portion of the MP's acquisition costs attributable to non-PFE Produced MPCs from the PFE Total Direct Costs.
• If a taxpayer acquires a non-PFE Produced MP, but some or all of the applicable MPCs are PFE Produced, the taxpayer includes the portion of the MP's acquisition costs attributable to PFE Produced MPCs in the PFE Total Direct Costs.
• If the taxpayer produces an MP that includes any PFE Produced MPCs, the taxpayer includes the acquisition cost of such PFE Produced MPCs in the PFE Total Direct Costs.

For example, assume the taxpayer acquired a ground-mount PV facility the construction of which began in calendar year 2026 (a QF). If $30 of the taxpayer's direct cost is attributable to the PV tracker produced by a PFE (a PFE Produced MP) included in the ground-mount PV facility, but $20 of such $30 direct cost is attributable to MPCs not produced by a PFE (non-PFE Produced MPCs), the taxpayer will only include $10 (i.e., $30 direct cost attributable to a PFE Produced MP less $20 direct cost attributable to its non-PFE Produced MPCs) in the PFE Total Costs. Conversely, if $70 of the taxpayer's direct cost is attributable to the PV modules (non-PFE Produced MPs) included in the ground-mount PV facility, but $40 of such $70 direct cost is attributable to PFE-Produced PV cells (PFE-Produced MPCs), the taxpayer will include $40 of the direct cost in the PFE Total Direct Costs.

There are two special considerations in the case of the Taxpayer-Determined Method for the Clean Electricity MACR:

• the De Minimis Rule (as discussed above), whereby the taxpayer may assign MPs or MPCs of the same type to QFs or ESTs placed in service during the same taxable year if, for each QF or EST, the total direct costs of all MPs and MPCs so assigned represent less than 10% of the Total Direct Costs of such QF or EST; and
• the Cost Averaging Benefit for ESTs (as discussed above) that are of the same type, have a maximum net output of less than 1 MWac, are placed in service in the same taxable year, and for which the De Minimis Aggregation Rule is not used, whereby the taxpayer may track direct costs using an average formula determined for a specified period. That "specified period" must (A) be a contiguous period of at least one day, (B) for the taxpayer's first specified period, must start on the first day of the taxable year, (C) be no longer than a taxable year, and (D) cover each day of the taxable year. That average is multiplied by the ratio of (x) the number of MPs or MPCs of the same type that are PFE Produced to (y) the total number of MPs or MPCs to determine PFE Total Direct Costs.

(ii) Eligible Component MACR

The Taxpayer-Determined Method for purposes of the Eligible Component MACR is substantially similar to the Taxpayer-Determined Method for purposes of the Clean Electricity MACR. Direct material costs attributable to a Constituent Material include the costs paid or incurred by the taxpayer for materials that become an integral part of the eligible component or are consumed in the ordinary course of production. Where the taxpayer acquires Constituent Materials, the direct material costs attributable to such Constituent Materials are their acquisition costs; direct labor costs of incorporating such Constituent Materials into an eligible component are excluded. In the case of an eligible component produced pursuant to a contract manufacturing agreement (as defined in Treasury Regulations Section 1.45X-1(c)(3)(iii)), direct material costs include (i) the direct material costs paid or incurred by the contractor performing actual production activities (rather than the taxpayer claiming the Section 45X credit), and (ii) to the extent the contractor did not incur any or all direct material costs, the direct material costs incurred by the taxpayer claiming the Section 45X credit.

For Constituent Materials of the same type produced in the same taxable year, the taxpayer may be eligible for the Cost Averaging Benefit (substantially similar to the description above for ESTs) to determine PFE Total Direct Material Cost.

(b) Cost Percentage Safe Harbor

If the taxpayer uses the Identification Safe Harbor, the taxpayer may use the Cost Percentage Safe Harbor instead of calculating the direct costs. The Cost Percentage Safe Harbor is not used to determine whether an MP or MPC is PFE Produced or whether a Constituent Material is PFE Sourced; instead, it relies solely upon numbers provided by the government. Similar to the Identification Safe Harbor, the Cost Percentage Safe Harbor is derived from DC Table Guidance and taxpayers that use them are subject to similar exclusivity rules.

Under the Cost Percentage Safe Harbor, to determine the MACR, the taxpayer must (i) first, using the Identification Safe Harbor, identify the applicable, MPs and MPCs or Constituent Materials, (ii) second, sum the Assigned Cost Percentages (as defined under DC Table Guidance) of each listed MP and MPC (the "Total Percentage"), (iii) third, sum the Assigned Cost Percentages of each listed MP and MPC that is PFE Produced or PFE Sourced (the "Total PFE Percentage"), and (iv) fourth, subtract the Total PFE Percentage from the Total Percentage and divide by the Total Percentage.

(c) Certification Safe Harbor

As an alternative to the Taxpayer-Determined Method or the Cost Percentage Safe Harbor, the taxpayer may rely on the Certification Safe Harbor to determine whether MPs or MPCs are PFE Produced or PFE Sourced and the associated underlying direct costs.⁴ To rely on the Certification Safe Harbor, a valid supplier certification must (i) be attached to the relevant IRS form (such as IRS Form 7211, IRS Form 3468, or IRS Form 7207) for the first tax year the credit is claimed, (ii) include the supplier's EIN or similar foreign identification number, (iii) be signed under penalties of perjury, and (iv) be retained by both the supplier and taxpayer for at least six years for IRS review. The direct supplier may certify either (i) the Total Direct Costs or Total Direct Material Costs paid or incurred by the taxpayer for the MP, MPC, eligible component or Constituent Material that was not PFE Produced or PFE Sourced, or (ii) that the MP, MPC, eligible component, or Constituent Material was not PFE Produced or PFE Sourced. If the taxpayer knows or has reason to know a certification is inaccurate, reliance on the Certification Safe Harbor is not permitted and all related costs must be treated as PFE Produced or PFE Sourced.

_{1 See Section 7701(a)(52)(B)(i)-(ii).
2 The Notice reconciles the gaps in listing/naming conventions in the DC Table Guidance.
3 The listed eligible components include central inverters, commercial inverters, distributed wind inverters, microinverters, residential inverters, utility inverters, solar modules, and battery modules using battery cells. See Section 4.01(3)(d) of Notice 2026-15.
4 If the taxpayer is unable to or chooses not to use the Certification Safe Harbor to determine whether any MPs or MPCs are PFE Produced, then the taxpayer must apply the definition of PFE to the entity that mined, produced or manufactured such MP or MPC.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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