On Feb. 12, 2026, the IRS released interim guidance in the form of IRS Notice 2026-15 (the Notice), on the new prohibited foreign entity (PFE) regime and its material assistance cost ratio (MACR) test applicable to clean electricity projects claiming tax credits under Sections 45Y and 48E, and advanced manufacturing production credits under Section 45X of the Internal Revenue Code (Code). The Notice’s MACR guidance establishes practical safe harbors and methodologies that are generally favorable, particularly for distributed battery energy storage systems (BESS) under 1 MWAC and Section 45X producers. However, the guidance does not resolve key questions surrounding the PFE and specified foreign entity (SFE) status.
For projects beginning construction in 2026 or later and eligible components sold in a taxpayer’s first year beginning after July 4, 2025, MACR thresholds apply, with new allocation methods for eligible components (ECs) and BESS systems under 1 MWAC. Renewable energy projects also benefit from a de minimis 10% allocation method and pro rata methodologies that are less onerous than domestic content applications. The Notice contains other deviations from the domestic content rules that are also favorable.
Generally, MACR can be applied using the safe harbor tables for domestic content found in 2025-08. Treasury plans proposed regulations and must publish PFE-specific safe harbor tables by Dec. 31, 2026; comments for proposed regulations are due March 30, 2026.
In sum, this new guidance provides developers, OEMs and fuel producers with workable methods to proceed in 2026, but they should plan around open issues concerning PFE and SFE status.
The MACR Framework
The One Big Beautiful Bill Act (OBBBA) introduced foreign entity of concern (FEOC) rules to Sections 45Y, 48E and 45X of the Code. Under these rules, tax credit eligibility can depend on whether a taxpayer’s qualified facility (QF), energy storage technology (EST) or eligible component (EC) includes “material assistance” from a PFE. For QFs and ESTs, the Clean Electricity MACR equals total direct costs of manufactured products and components incorporated into the QF or EST at completion, reduced by the direct costs of those items that were mined, produced or manufactured by a PFE, divided by total direct costs. For ECs, the MACR is computed using the direct material costs in a similar way. If the MACR meets or exceeds the statute’s threshold for the applicable year, the property is not considered to include material assistance from a PFE.
The threshold percentages for QFs and ESTs are listed below:
| Calendar Year Construction Begins | QF | EST |
|---|---|---|
| 2026 | 40% | 55% |
| 2027 | 45% | 60% |
| 2028 | 50% | 65% |
| 2029 | 55% | 70% |
| 2030 and later | 60% | 75% |
The threshold percentages for ECs are listed below:
| EC Category | Sold in 2026 | Sold in 2027 | Sold in 2028 | Sold in 2029 | Sold in 2030 and later |
|---|---|---|---|---|---|
| Solar Energy Components | 50% | 60% | 70% | 80% | 85% |
| Wind Energy Components | 85% | 90% | N/A (terminated) | N/A (terminated) | N/A (terminated) |
| Inverters | 50% | 55% | 60% | 65% | 70% |
| Qualifying Battery Components | 60% | 65% | 70% | 80% | 85% |
| Applicable Critical Minerals | 0% | 0% | 0% | 0% | 25% (2030), 30% (2031), 40% (2032), 50% (2033+) |
Relevancy of MACR Tests
The Clean Electricity MACR test applies to QFs and ESTs that begin construction after Dec. 31, 2025. The EC MACR test applies to ECs sold in taxable years beginning after July 4, 2025. In each case, if the MACR does not meet or exceed the threshold ratio listed above, the QF, EST or EC is ineligible for tax credits under Sections 45Y, 48E or 45X of the Code, as applicable.
The Notice only provides interim guidance. Section 7701(a)(52) of the Code requires the Treasury to publish safe harbor tables identifying assigned cost percentages by Dec. 31, 2026. Additionally, the Treasury intends to publish proposed regulations regarding MACR calculations. The Notice requests comments on the foregoing by March 30, 2026.
Generally, the Notice provides that a taxpayer may calculate its MACR using: (i) the direct cost method without any safe harbor, (ii) the direct cost method using the Identification Safe Harbor, or (iii) the safe harbor method using the Notice 2025-08 domestic content assigned cost percentages. For purposes of calculating MACR of a QF, EST or EC, taxpayers may rely on supplier certifications to establish either (i) the direct costs attributable to PFE-manufactured components, or (ii) whether a component was manufactured by a PFE.
Calculation of MACR and Safe Harbors
The Clean Electricity MACR calculation involves three steps: (i) identify the types of manufactured products (MPs) and manufactured product components (MPCs) incorporated into the QF or EST, (ii) determine direct costs for each, and (iii) subtract costs attributable to PFE-produced MPs and MPCs. The MACR is the total direct costs reduced by PFE costs, divided by total direct costs.
If an MP is PFE-produced but includes MPCs that are not PFE-produced, only the PFE-produced MPCs are against the MACR. In other words, taxpayers retain “credit” for non-PFE content, and they lose “credit” only to the extent of any PFE-produced content.
The EC MACR follows similar logic.
Identification Safe Harbor
To give taxpayers certainty as to the scope of the components measured, the Identification Safe Harbor allows taxpayers to use the Notice 2025-08 domestic content safe harbor tables as an exclusive list of MPs and MPCs for listed technologies. Unlisted items are disregarded when using the safe harbor. The Identification Safe Harbor therefore anchors MACR analysis to a manageable and standardized list of components.
Cost Percentage Safe Harbor
When the Identification Safe Harbor applies, taxpayers may also elect to use the Cost Percentage Safe Harbor which substitutes “Assigned Cost Percentages” for fact-specific direct cost determinations. Under this approach, taxpayers calculate a “Total Percentage” by summing the Assigned Cost Percentages for all listed MPs and MPCs incorporated into the QF or EST. Taxpayers then calculate a “Total PFE Percentage” by summing only the Assigned Cost Percentages for MPs or MPCs that were PFE-produced. The Clean Electricity MACR equals the total percentage minus the total PFE percentage, divided by total percentage.
Steel and iron components listed on the safe harbor are disregarded when using the Cost Percentage Safe Harbor.
Certification Safe Harbor
Taxpayers may rely on supplier certifications to (i) substantiate whether or not the items are PFE-produced or PFE-sourced, and (ii) determine the direct costs attributable to PFE-produced or PFE-sourced components, provided the taxpayer does not know or have reason to know of inaccuracy. This option allows taxpayers to rely on a certificate instead of conducting extensive PFE diligence. Provided the taxpayer had no prior knowledge of the manufacturer’s PFE status, the certificate also protects the taxpayer if that manufacturer is later found to be a PFE. The certification safe harbor can be particularly useful when the configuration of a QF, EST or EC does not allow for use of the Cost Percentage Safe Harbor.
The Notice also clarifies that only the manufacturer’s PFE status, not the supplier’s, is relevant in determining if a MP or MPC was produced by a PFE. A manufacturer’s PFE status generally is tested in the year that the MP or MPC is purchased.
Distributed BESS and EC Allocation Methods
The Notice provides valuable allocation methods for ESTs with capacity less than 1 MWAC (the 1 MW BESS Allocation Method) and ECs (the EC Allocation Method). Both allocation methods rely on a “specified period of time” that taxpayers may select, subject to certain requirements. For both allocation methods, specified periods must: (i) be at least one whole calendar day in length, (ii) start on the first day of the taxpayer’s taxable year for the first specified period, (iii) be contiguous if shorter than a full taxable year, (iv) collectively cover every day of the taxpayer’s taxable year, and (v) not exceed the taxpayer’s taxable year.
In practice, taxpayers appear to have significant flexibility in structuring specified periods, so long as the periods are contiguous and collectively cover the entire taxable year. This flexibility is particularly valuable for taxpayers transitioning their supply chains mid-year or finding difficulties with blending components to meet threshold ratios on a QF, EST or EC basis.
The 1 MW BESS Allocation Method
The 1 MW BESS Allocation Method applies to ESTs with capacity less than 1 MWAC that are placed in service in the same taxable year. Rather than tracking each EST individually, taxpayers may compute average direct cost for each MP or MPC type and a “PFE Production Percentage” based on the proportion of those items that were PFE-produced across a specified period. This approach dramatically reduces administrative burden across rollouts of distributed BESS fleets. Moreover, it alleviates the need to meet the threshold ratio for each EST in which potential issues arise when blending MPs and MPCs within the same EST.
EC Allocation Method
For ECs, the guidance introduces a similar specified-period allocation method. Taxpayers determine an average direct cost for each constituent material type and a PFE Production Percentage based on quantities produced during the period. That percentage is then applied to the direct material cost of each EC to compute the EC MACR. This approach brings practicality and flexibility for EC manufacturers claiming 45X, although individual tracking will be required to accommodate customers looking to use the ECs in QFs and ESTs that are subject to the MACR requirement.
Domestic Content vs. MACR: Direct Costs, De Minimis Allocation for QFs and ESTs, and Treatment of ‘Production’ Costs
Direct Costs — Domestic Content vs. MACR
The definition of “direct costs” under the domestic content and the MACR frameworks is materially different when calculated outside of the Cost Percentage Safe Harbor. For domestic content purposes, direct costs include direct material and labor costs under Treasury Regulations Section 1.263A-1(e)(2)(i), covering costs paid by the manufacturer to produce the manufactured product or by the manufacturer of non-U.S. manufactured products to produce or acquire U.S. components.
For Clean Electricity MACR purposes, direct costs attributable to an MP produced by a taxpayer include both direct material and labor costs under Treasury Regulations Section 1.263A-1(e)(2)(i)(A) and (B). However, if a taxpayer acquires an MP (rather than produces it), the taxpayer’s direct costs are simply its acquisition costs with respect to the MP (and incorporated MPCs).
For the EC MACR purposes, the calculation narrows further to direct material costs only, excluding direct labor entirely.
10% De Minimis Allocation and Moving Away From Nameplate Capacity Tests
Under Sections 48E and 45Y of the Code, the domestic content safe harbor relies heavily on nameplate-capacity weighting to allocate cost percentages across mixed-source MPs and MPCs. By contrast, the MACR Cost Percentage Safe Harbor dispenses with nameplate-capacity weighting altogether. Instead, it applies Assigned Cost Percentages with a binary PFE-produced determination for each listed item. To the extent an MPC is mixed source, it is weighted pro rata for purposes of the Clean Electricity MACR.
Additionally, the IRS adopts a new 10% de minimis allocation rule for QFs and ESTs. Under this rule, taxpayers may assign MPs or MPCs of the same type across QFs or ESTs placed in service during the same taxable year without QF- or EST-specific tracking, so long as assigned items represent less than 10% of the total direct costs of the QF or EST. Together, these changes remove a source of complexity from the domestic content framework and are generally favorable to utility-scale solar and grid-scale BESS portfolios.
Treatment of Assigned Costs for ‘Production’
The domestic content rules count the “Production” line item on the safe harbor tables for a MP only if all its listed MPCs are domestically produced. Under the MACR Cost Percentage Safe Harbor, the “Production” Assigned Cost Percentage is counted as PFE-produced if the MP itself is PFE-produced. This difference matters when a taxpayer utilizes PFE-produced MPCs inside an MP that is not PFE-produced, or vice versa, and it can meaningfully shift the MACR in favor of a taxpayer compared to a strict all-or-nothing approach.
It is important to note that, in an apparent inconsistency, for purposes of the Cost Percentage Safe Harbor, the Notice allows manufacturers to count the Assigned Cost Percentage for “Production” for purposes of the EC MACR. In contrast, only material direct costs are taken into account when using the direct cost method and labor direct costs (analogous to the “Production” line item) are ignored. For taxpayers utilizing the Cost Percentage Safe Harbor for ECs, this enhances the appeal of the safe harbor.
FEOC — Unanswered Questions
Ownership Look-Through and ‘Effective Control’
The Notice includes some discussion of how “effective control” will be determined under the statute’s foreign-influenced entity provisions, but it does not finalize key definitional tests (including the definition of a “licensing agreement”). It is also unclear whether the IRS will utilize the authority granted under Section 7701(a)(51)(D)(ii)(II) of the Code to override the current statutory definition of effective control with respect to QFs, ESTs and EC manufacturing processes.
The issue remains unresolved as to whether the Treasury will address complicated ownership structures and attribution rules for purposes of determining an entity’s SFE or PFE status, or whether taxpayers will be able to rely on a safe harbor certification to document an entity’s SFE status, as is permitted with the MACR safe harbor certification. Proposed Treasury Regulations issued on Oct. 21, 2025, suggest that the current Treasury may be considering adoption of a “no-look-through” approach similar to the one it applied under the proposed regulations under Section 897 to domestically controlled real estate investment entities, which simplified ownership tracing through the use of domestic blockers. The proposed regulations under Section 897 defined “foreign-controlled entity,” a term that otherwise appears only in Section 7701(a)(51) of the Code, as amended by OBBBA, and not elsewhere in the Code or the Treasury Regulations.
Adding a safe harbor or “no-look-through” rule would significantly enhance taxpayer certainty in renewables project finance. Unless and until the concepts of ownership and effective control — and other definitional questions relating to PFE and SFE — are resolved, taxpayers will face significant diligence burdens and continued uncertainty.
MACR-Specific Safe Harbor Tables
In the OBBBA, Congress directed the Treasury to publish PFE safe harbor tables by Dec. 31, 2026. In the interim, the Notice ties identification and cost-percentage methods to existing domestic content tables, but taxpayers will need to reassess MACR positions once the PFE tables are published. It remains unclear whether Treasury will adopt a specific safe harbor table for the MACR calculation or whether it will continue to use the same tables for both MACR and domestic content.
Projects that begin construction more than 60 days before the release of the MACR safe harbor tables may rely on the domestic content safe harbor tables utilized by the Notice to calculate the Clean Electricity MACR. For ECs, taxpayers are able to rely on the same for ECs that are sold up until the date the new safe harbor tables are published.
McGuireWoods’s Renewable Energy Practice Group continues to monitor developments related to the energy tax credit FEOC regime. McGuireWoods is closely tracking these issues and is available to assist clients in assessing the implications for their projects and compliance obligations. For advice on this issue, contact the authors.