IRS Notice 2026-15 Provides Taxpayers with Additional Guidance on Material Assistance Under New Foreign Entity of Concern Rules

Despite this important guidance, Notice 2026-15 reveals little on many other open questions on how to determine whether an entity qualifies as a PFE in the first place. In particular, no specifics are included in Notice 2026-15 as to when and how contractual arrangements grant “effective control” to Specified Foreign Entities (SFEs), thus making them PFEs. Additionally, while the safe harbors should prove helpful for taxpayers, the Foreign Entity of Concern (FEOC) rules significantly heighten supply chain diligence obligations and compliance risk for clean energy project developers, manufacturers, private equity sponsors and corporate taxpayers operating in global procurement environments. Pillsbury’s extensive Minerals, Metals and Materials Supply Chain practice combined with our Tax and Energy practices, are uniquely situated to assist projects in complex project diligence.

Background
The OBBBA added new restrictions to IRC Sections 45Y, 48E and 45X, denying clean energy credits where a qualified facility, EST or eligible component includes material assistance from a PFE. For IRC Sections 45Y and 48E, the restrictions generally apply to facilities and ESTs for which construction begins after December 31, 2025. For IRC Section 45X, the restrictions apply to eligible components sold in taxable years beginning after July 4, 2025. If the material assistance test is not satisfied, the credit is fully disallowed for the qualified facility, EST or eligible component to which the material assistance relates.

New IRC Sections 7701(a)(51) and (52) define both PFE and “material assistance.” A PFE includes SFEs as well as Foreign-Influenced Entities (FIEs) meeting ownership, debt or effective control thresholds. Material assistance is determined through a cost-based MACR that compares total direct costs (or direct material costs, in the case of IRC Section 45X) against the portion attributable to products or materials mined, produced or manufactured by a PFE. If the applicable MACR falls below a statutory threshold percentage for the relevant year, the facility, EST or component is deemed to include material assistance from a PFE and is therefore ineligible for credit.

Calculating the MACR
Notice 2026-15 establishes detailed computational rules for determining whether a qualified facility, EST or eligible component includes material assistance from a PFE. Notice 2026-15 also addresses several structural issues that may affect eligibility. For facilities qualifying under the 80/20 rule (i.e., upgraded facilities that are treated as newly placed in service based on 80 percent or more of the facility, by fair market value, being represented by newly installed property), only new property costs are included in the MACR calculation. Qualified interconnection property requires a separate MACR analysis under IRC Section 48E, although failure of the interconnection property to meet the MACR test does not automatically disqualify the underlying facility. Steel and iron components generally are excluded from the MACR framework unless specifically treated as manufactured products.

The Clean Electricity MACR
For qualified facilities and ESTs, the Clean Electricity MACR compares total direct costs of manufactured products incorporated into the project against the portion of those costs attributable to products mined, produced or manufactured by a PFE. Taxpayers must identify all manufactured products (MPs) and manufactured product components (MPCs) included in the facility, determine direct costs (including direct material and labor costs for produced items or acquisition costs for purchased items) and isolate costs attributable to PFE-produced items.

The Clean Electricity MACR equals total direct costs minus PFE Direct Costs, divided by total direct costs. A separate calculation is required for each qualified facility or EST placed in service.

Notice 2026-15 also imposes detailed tracking requirements. In general, MPs and MPCs must be traced to specific facilities, though limited assignment and averaging rules are available in certain circumstances. Importantly, PFE status is determined based on the supplier’s taxable year in which the taxpayer paid or incurred the relevant costs, not the year the facility is placed in service, making procurement timing a potentially material factor in eligibility.

The Eligible Component MACR
For IRC Section 45X, the Eligible Component MACR applies at the product level. Rather than focusing on manufactured products incorporated into a facility, this test examines direct material costs of constituent elements used to produce an eligible component. Taxpayers must determine total direct material costs and then identify which of those costs are attributable to PFE-sourced materials.

The Eligible Component MACR equals total direct material costs minus PFE Direct Material Costs, divided by total direct material costs. A separate calculation is required for each type of eligible component sold during the taxable year. The Notice permits averaging of material costs and sourcing percentages across identical components produced during specified periods, subject to documentation requirements.

Safe Harbors
Notice 2026-15 establishes interim safe harbors designed to simplify compliance with the MACR test pending issuance of final safe harbor tables. Taxpayers may rely on these approaches in lieu of full cost tracing, subject to specified conditions and consistency requirements. The three principal safe harbors included in Notice 2026-15 are an Identification Safe Harbor, a Cost Percentage Safe Harbor and a Certification Safe Harbor.

Identification Safe Harbor
The Identification Safe Harbor permits taxpayers to use the existing 2023-2025 domestic content tables to identify the MPs, MPCs or, for IRC Section 45X, constituent materials included in a facility or eligible component. If elected, the listed components generally are treated as exclusive and exhaustive for purposes of the safe harbor methodology. Unlisted components are disregarded and listed, but unused components are excluded from the calculation. Steel and iron items generally are excluded unless specifically treated as manufactured products. Use of the Identification Safe Harbor is required in order to rely on the Cost Percentage Safe Harbor.

Cost Percentage Safe Harbor
The Cost Percentage Safe Harbor allows taxpayers to rely on assigned cost percentages from the existing 2023-2025 Safe Harbor Tables for domestic content in lieu of actual direct cost tracing. Rather than computing total direct costs and PFE-attributable costs from accounting records, taxpayers may aggregate assigned percentages to determine a Total Percentage and a Total PFE Percentage and compute the MACR using those amounts.

This approach materially reduces administrative burden but is subject to limitations. It is unavailable for certain facilities qualifying under the Incremental Production Rule (relating to credit eligibility for increased capacity) and may not be used for qualified interconnection property. For facilities qualifying under the 80/20 rule, only new property is considered in the calculation, but the full assigned percentage for that property must be used without adjustment for partial replacement. Importantly, the Cost Percentage Safe Harbor does not determine whether an item is PFE-produced or PFE-sourced; taxpayers must separately determine PFE status.

Certification Safe Harbor
The Certification Safe Harbor permits taxpayers to rely on supplier certifications regarding whether products or materials were PFE-produced or PFE-sourced and, if applicable, the portion of direct costs not attributable to PFEs. Certifications must include the supplier’s identification number, be signed under penalties of perjury and be retained for at least six years.

Taxpayers may not rely on certifications they know or have reason to know are inaccurate. Where actual or constructive knowledge exists, the full direct cost of the relevant item must be treated as PFE-attributable.

Enhanced Penalties and Enforcement Exposure
The OBBBA materially increases enforcement risk associated with material assistance determinations. Notice 2026-15 highlights several statutory changes that elevate both audit exposure and penalty consequences where a credit is disallowed due to overstating the MACR.

First, the substantial understatement threshold is significantly reduced in the case of an applicable energy credit disallowance attributable to MACR overstatement. Instead of the traditional 10 percent threshold, a 1 percent threshold applies in determining whether an understatement is substantial. This change substantially lowers the bar for imposition of the 20 percent accuracy-related penalty under Section 6662.

Second, new Section 6501(o) provides a six-year statute of limitations for deficiencies attributable to errors in determining material assistance under Section 7701(a)(52). This extended assessment period applies specifically to MACR-related determinations, increasing long-tail exposure for taxpayers claiming Sections 45Y, 48E or 45X credits.

Third, new Section 6695B imposes penalties directly on suppliers that provide inaccurate certifications regarding PFE status or cost allocations, where the inaccuracy results in credit disallowance and a material tax understatement. Although this penalty is imposed on the certifying party, taxpayers remain responsible for ensuring they do not rely on certifications they know or have reason to know are inaccurate.

Finally, OBBBA also introduced a 10-year recapture provision for the ITC if the taxpayer is determined to have made an “applicable payment” to a SFE pursuant to a contract which permits the SFE to exercise effective control over the facility itself, certain production of components or the extraction, processing or recycling of critical minerals. One area of particular concern for technologies where long-term or exclusive contracts are common, is that the statute currently defines “effective control” to mean an exclusive contractual right to for maintenance and repair of the plant or equipment by an SFE or even a right to a service contract greater than two years with an SFE. The IRS indicated that these issues will be addressed in forthcoming regulations, but in the meantime, this determination requires careful review of supplier contractual terms.

Collectively, these provisions reflect a clear legislative intent to treat material assistance compliance as a high-priority enforcement area. For taxpayers, the practical effect is that MACR determinations should be approached with the same level of diligence, documentation and internal controls typically associated with transfer pricing or research credit substantiation.

Future Proposed Regulations
In Notice 2026-15, the IRS announced that future proposed regulations would include provisions dealing with the application of the rules relating to FIE status, most importantly including effective control determinations. By way of example, the IRS indicated that licensing agreements entered into (or modified) after the date of enactment of the OBBBA, or July 4, 2025, would be considered to convey effective control to a SFE if a payment under the licensing agreement is made to the SFE. Future proposed regulations also will include anti-abuse rules intended to prevent entities from evading, circumventing or abusing the FEOC restrictions under IRC sections 7701(a)(51).

Final Thoughts
Notice 2026-15 provides welcomed clarity around calculating MACR for those technologies with existing safe harbor tables (nuclear energy technology notably is excluded). However, there are many questions left unanswered until proposed regulations are issued, particularly as relates to effective control and FIE status. The IRS has requested comments on determinations of total direct costs, as well as the adoption of anti-abuse rules and substantiation rules. Comments are due by March 30, 2026.

Please reach out to one of your Pillsbury team members to discuss the impact of Notice 2026-15 or to assist with submitting comments to such Notice.