Treasury Department, IRS Provide Guidance on Prohibited Foreign Entity Rules

The U.S. Department of the Treasury and IRS on February 12, 2026, released Notice 2026-15, which provides initial guidance regarding Prohibited Foreign Entity (PFE) Rules, specifically how to calculate the material assistance cost ratio (MACR) for a qualified facility, energy storage technology or eligible component for purposes of determining whether a taxpayer received material assistance from a PFE.

Background

Under the PFE Rules, certain tax credits – including the Clean Electricity Investment Credit under Section 48E, Clean Electricity Production Credit under Section 45Y, Advanced Manufacturing Tax Credit under Section 45X, Zero-Emission Nuclear Power Production Credit under Section 45U, Clean Fuel Production Credit under Section 45Z and Credit for Carbon Oxide Sequestration under Section 45Q – are disallowed for any entity that is a PFE under the meaning of Section 7701(a)(51) of the Internal Revenue Code. In addition, under Section 7701(a)(52), a taxpayer claiming the Clean Electricity Investment Credit under Section 48E, Clean Electricity Production Credit under Section 45Y or Advanced Manufacturing Tax Credit under Section 45X cannot receive "material assistance" from a PFE. To determine whether a taxpayer received material assistance from a PFE, the MACR must be determined for the qualified facility, energy storage technology or eligible component, as applicable.

Notice 2026-15 largely addresses how to determine the MACR and provides taxpayers with some flexibility and several safe harbors. Notice 2026-15 did not go into detail on how to determine whether an entity is a PFE, instead foreshadowing that future guidance on the topic is forthcoming. This Holland & Knight alert provides a summary of some key aspects of Notice 2026-15, though it is not intended as a complete guide.

Section 45X: Calculating the MACR for Eligible Components

Direct Material Cost Methodology

Under Section 45X, taxpayers need to consider the "Constituent Materials" (constituent elements, materials of subcomponents) incorporated into the eligible component or consumed in the production of the eligible component. More specifically, Section 45X taxpayers need to consider the "direct material costs" they paid or incurred for such Constituent Materials.

In addition to identifying the Constituent Materials and direct material costs of the Constituent Materials, Section 45X taxpayers needs to compare the total direct material costs of all Constituent Materials to those direct material costs attributable to a PFE. That is, a taxpayer must identify whether each Constituent Material was mined, produced or manufactured by a PFE.

To conduct the MACR for each eligible component, taxpayers must track each Constituent Material to each eligible component and perform the following calculation:

Total Direct Material Costs Minus PFE Total Direct Material Costs/Total Direct Costs = MACR %

As indicated in the statute, the minimum applicable percentage for eligible components varies by type and year sold.

Additional Flexibilities

Under Notice 2026-15, a taxpayer may track Constituent Materials of a given type incorporated in or consumed in production of the same type of eligible component produced during a "Specified Period of Time," which may be determined by the taxpayer. For example, a taxpayer can track all solar cells (a type of Constituent Material) to all PV modules (a type of eligible components) produced based on a quarterly basis (taxpayer's chosen Specified Period of Time). In using the averaging method, taxpayers consider the "Average Costs" and "PFE Production Percentage." The Average Costs is the average direct material cost of the type of Constituent Materials during the Specified Time Period. The PFE Production Percentage is the average percentage of PFE produced Constituent Materials of the same type during the Specified Time Period.

Section 48E and Section 45Y: Calculating the MACR for Qualified Facilities and Energy Storage

Direct Cost Methodology

While Section 45X taxpayers consider the "direct material costs" of Constituent Materials, Section 48E and 45Y taxpayers need to consider the "direct costs" of the Manufactured Products (MPs) and Manufactured Product Components (MPCs) that are incorporated into the qualified facility or energy storage technology, as applicable. Direct costs can include direct material and labor costs. The definition of MPs and MPCs follow older IRS guidance on domestic content, specifically IRS Notice 2023-38. The status of the entity that produced or manufactured the MPs or MPCs as PFEs must be considered by a taxpayer, similar to the MACR calculation under Section 45X, and is conducted as follows:

Total Direct Costs Minus PFE Total Direct Costs/Total Direct Costs = MACR %

Additional Flexibilities

As further discussed in Notice 2026-15, taxpayers may be able to avoid tracking MPs or MPCs to specific qualified facilities or energy storage technologies in instances in which they are of the same type and when the total direct costs of all MPs and MPCs assigned to a qualified facility or energy storage technology is less than 10 percent of the total direct costs of which is qualified facility or energy storage technology. The notice also provides some additional flexibility for energy storage technologies of less than one megawatt.

Safe Harbors for the MACR Under Sections 45X, 48E and 45Y

Notice 2026-15 identified three separate safe harbors, none of which needs to be used by a taxpayer but can be used, possibly in combination, if available.

Identification Safe Harbor

Taxpayers who are able to use the Identification Safe Harbor will be able to rely on earlier IRS notices (specifically the tables provided in Sections 5.05, 5.06, 6.02 and 7.02 of Notice 2025-08, Section 3.02 in Notice 2024-41 for a Hydropower Facility or Pumped Hydropower Storage Facility, and Section 3.04 in Notice 2023-38 for an Offshore Wind Facility) to identify the Constituent Materials, MPs or MPCs that must be considered when calculating the MACR.

For Section 45X taxpayers, only those producing "Listed Eligible Components" can use the Identification Safe Harbor (i.e., an eligible component identified as an Applicable Project Component in earlier IRS notices). Similarly, for Section 48E and 45Y taxpayers, only those with qualified facilities and energy storage technologies lists as Applicable Project can utilize this safe harbor. If able to rely on this safe harbor, the items identified in the earlier IRS notices is the exclusive and exhaustive list of items that are considered in conducting the MACR calculation. That is, if there is an MP that is not listed in an earlier IRS notice but has been incorporated into a qualified facility, the utilized but not listed MP is simply not considered when determining the MACR.

Cost Percentage Safe Harbor

This safe harbor is available to Sections 45X, 48E or 45X taxpayers only if they use the Identification Safe Habor. Under the Cost Percentage Safe Harbor, taxpayers may use the percentages identified in the earlier IRS notices to determine the MACR. Use of this safe harbor still requires the taxpayer to identify the status of the entity that mined, produced or manufactured the MPC listed in the earlier IRS notices but avoids the need for the taxpayer to gather direct material costs or direct costs, as applicable.

Certification Safe Harbor

This safe harbor can be used with the Identification Safe Harbor and/or Cost Percentage Safe Harbor or used as the exclusive safe harbor for Sections 45X, 48E and 45Y taxpayers. In all instances, the taxpayer must receive certification from the direct supplier even if the supplier was simply reseller and not the entity that mined, produced or manufactured the item. If using this safe harbor, the certification must contain the information identified in the statute and notice and be attached to the taxpayer's return. The certification can be used to determine direct costs or direct material costs, as applicable, and/or the status of the entity that mined, produced or manufactured the Constituent Material, MP or MPC.

Holland & Knight Can Help

Holland & Knight's Energy Tax Team is available to assist in determining whether an entity is a PFE and the eligible component, qualified facility or energy storage technology received material assistance from a PFE. Please reach out to the authors should you have questions, as this alert was only intended only as a summary. Subscribe to our alerts and access the Holland & Knight Energy Tax Resource Library.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.