The Internal Revenue Service recently issued its long-awaited guidance on how to determine whether a clean energy project uses too much equipment from Chinese or other prohibited foreign entities to qualify for valuable federal clean energy tax credits (IRS Notice 2026-15).
The One Big Beautiful Bill Act (OBBBA) enacted last year imposed restrictions on a clean power generating and energy storage facility using parts and equipment from entities with ties to China or other prohibited foreign entities and claiming federal tax credits under Sections 45Y, 48E of the Internal Revenue Code. The law was designed to prevent Chinese companies from directly or indirectly benefitting from U.S. energy tax incentives. The law also prevents certain foreign entities from holding a material amount of a company’s equity or debt or having control over a company claiming the tax credits.
COMMENTARY
Material Assistance Cost Ratio (MACR)
The IRS uses a “material assistance cost ratio,” or MACR, to determine whether a project has received material assistance from a prohibited foreign entity, or “PFE.” The company claiming the tax credits must calculate a ratio, the numerator of which is the cost of a facility’s manufactured parts and equipment 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 parts and equipment.
To qualify for the tax credits, the MACR, as a percentage, must equal or exceed a stated threshold. The threshold for electric generating facilities begins at 40% in 2026 and increases to 60% in 2030 and beyond. The threshold percentage for energy storage facilities begins at 55% in 2026 and increases to 75% in 2030 and beyond. If the MACR does not satisfy the applicable percentage in the year in which the facility begins construction, the facility will be considered to have received material assistance from a PFE and will not qualify for tax credits. The IRS Notice contains detailed rules for how to identify manufactured products and components included in a facility, their direct costs, and whether they were manufactured or produced by a PFE.
Use of Safe Harbors
Rather than having to track the actual direct costs of a facility, the IRS allows companies to use three “safe harbors” to calculate the MACR:
- Identification Safe Harbor. A taxpayer can use domestic content safe harbor tables previously published by the IRS to calculate a facility’s MACR where those facilities are listed as Applicable Projects in the domestic content tables (published in IRS Notices 2025-8, 2024-41, and 2023-38).
- Cost Percentage Safe Harbor. If a taxpayer uses the Identification Safe Harbor tables to identify manufactured products and components, it may calculate the MACR using a five-step process assigning cost percentages for the manufactured products and components contained in the domestic content 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 and be signed under penalties of perjury. Taxpayers may rely on a certificate unless they know or have reason to know it is inaccurate.
Exceptions to Tracking Parts and Equipment
Where a taxpayer does not use the safe harbors, the IRS provides two exceptions to having to track every manufactured product and component in a facility. A “de minimis” rule allows a company installing multiple facilities of a similar type in the same year to assign common pieces of equipment or components across the facilities without tracking the equipment or components to a specific facility, but only where the specific equipment or component constitutes less than 10% of the facility’s total costs. In addition, storage facilities of the same type with a net output of less than 1 megawatt each that are placed in service during the same year can use the average costs 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.
The Notice further 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 in the repowered facility. The IRS Notice sets forth similar guidance for companies wishing to claim the Section 45X Advanced Manufacturing Production Credit.
Next Steps
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. Companies may rely on the guidance in the Notice for facilities that begin construction in 2026 up until the date that is 60 days after publication of the forthcoming proposed regulations.
—Merrill Kramer is a partner and co-head of the Project Finance practice at Davis Wright Tremaine. Pamela Charles is a partner and chair of the Tax Practice with Davis Wright Tremaine.
