Anthony Zoppo: Welcome to Tax Notes Talk, a podcast from Tax Notes, the leading source of tax news, information, and analysis.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: credit limits.

Recently, Treasury and the IRS released the first round of guidance for some of the clean energy credits under the One Big Beautiful Bill Act. These credits are affected by new material assistance and prohibited foreign entity rules, which many in the industry find complex and in need of clarification.

So how does the new guidance fit in, and how is the industry responding to it? Here to talk more about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast.

Marie Sapirie: Thanks for having me again.

David D. Stewart: Now, I understand you recently spoke with someone about this. Who did you talk to?

Marie Sapirie: I spoke with Jennifer Bernardini, who is the managing director at PwC. She also teaches at Georgetown Law Center on taxation of energy markets. And she had a career also at Treasury in the Office of Tax Policy and the IRS Office of Associate Chief Counsel, Passthroughs and Special Industries, where she specialized in energy tax.

David D. Stewart: And what all did you talk about?

Marie Sapirie: We discussed the recently issued Notice 2026-15 that the IRS and Treasury issued addressing the material assistance rules that were introduced in the One Big Beautiful Bill Act. The rules help taxpayers understand how to determine the material assistance cost ratio, or MACR, for a qualified facility, energy storage technology, or eligible component.

David D. Stewart: All right. Let's go to that interview.

Marie Sapirie: Thank you, Jennifer, for joining me today to discuss the material assistance rules for some of the energy credits and the advanced manufacturing credit.

Jennifer Bernardini: Thanks, Marie. I appreciate you having me.

Marie Sapirie: So today we'll be mostly talking about the new rules in Notice 2026-15, which the IRS and Treasury issued in response to changes to the section 45Y clean energy production credit, the section 48E clean electricity investment credit, and the section 45X advanced manufacturing production credit in the One Big Beautiful Bill Act last July. But before we get to the notice, would you set the stage by giving us an overview of the prohibited foreign entity rules and how the material assistance rules fit into those?

Jennifer Bernardini: Sure. I'd be glad to. They're very complicated. I guess we could say that. It's been a pretty amazing challenge for our industry to sort of get our minds wrapped around it. So essentially there are two levels of inquiry to the prohibited foreign entity rules. And one of the things that I think is a challenge is none of us can figure out what to call them. Some of us call them the PFE rules, some of them call it the FEOC rules. It's sort of an outgrowth of the foreign entity of control — FEOC — rules that we saw become popular with Congress during IRA and even before that, with the bill law, for the section 48D semiconductor investment tax credit, and also the 30D EV credit. So it's sort of a build-out of the concepts of trying to minimize foreign control of U.S. supply chains, foreign interaction with energy projects, and the energy incentives.

And now with the PFE rules, it's a dual-level inquiry. One of them is very focused on the taxpayer, and the other one, the MACR rule, is more focused on the facility or the eligible component that's the subject of the credit. So in terms of the taxpayer rules, we have taxpayer-level tests, which I like to call the prohibited foreign entity tests. And it's really measuring whether the taxpayer that could be taking the credit, including by transfer, is a specified foreign entity or a foreign influenced entity. And for a specified foreign entity, you're essentially looking at, are these entities that are controlled or owned by a covered nation or their citizens? And the focus here is obviously on China, Russia, Iran, and North Korea. It really requires an analysis of ownership structures. And there's some exceptions for publicly traded entities, but it's probably the less tough of those two tests, but it is more challenging than I think most of our clients and I think most of us reading the law for the first time really assumed.

There's going to be a lot of need for tracing and corporate governance and taxpayers to really monitor their own behaviors, because we're dealing with entities that are often parts of bigger structures, looking at their big picture of corporate governance. The other part of that test is a foreign influenced entity test. And I think that that's really probably the bigger focus and the one that I was less aware of initially, all the twists and turns. And I think our clients also have been surprised as we unpack it. And it really looks at two things. One is during the taxable year, it's looking at whether there are entities that are SFEs, specified foreign entities, that have authority to do certain things that influence a taxpayer that would claim the credits.

One of them is appointing officers owning at least 25 percent or if there's more than one SFE, owning at least 40 percent or, this is the big one that seems to be tripping us up the most, if at least 15 percent of the debt of the taxpayer that would be seeking to claim one of these credits has been issued in the aggregate to one or more SFEs. And that's measured during the taxable year. So when you think about the timing of these rules, I think the timing rules are probably important to point out here because for the first year you're measuring on the first day, but for years after that, you're measuring on the last day of the taxable year. So I spent a lot of time thinking about this, and I'm sure a lot of other people do, and it's caused a lot of anxiety about how taxpayers can trace all of the behavior that goes into their governance, corporate structures for banks, and financial institutions. Their day-to-day business is impacted by this.

The other test that certainly is equally important and has its own twists is sort of the effective control test, and it measures activity during the previous taxable year. It measures whether an entity — the taxpayer that would be claiming the credit — made any payments to an SFE pursuant to a contract or an arrangement, which entitles the SFE to exercise effective control over projects such as the qualified facility or energy storage technology or eligible components that would be produced and for which a taxpayer would claim the 45X credit. And this effective control test looks at a bunch of things, but I think some of the most important ones are quantity or timing of production, purchasing or use of output of a project, licensing.

Licensing is a really big one. And we have clients that didn't think that they would be impacted by the prohibited foreign entity rules at all and have found out that licensing intellectual property agreements could really trip them up. So I think it's really important to look at that. And then the other part of the prohibitive foreign entity rules are the MACRs tests, and that's really a facility- or component-level test where you're looking at has a prohibited foreign entity provided material assistance. And I can talk more about that, but that sort of gives you, I think, the two halves of the challenge or two halves of the whole rule set.

Marie Sapirie: Turning to Notice 2026-15, would you describe the material assistance cost ratio and how it works?

Jennifer Bernardini: Absolutely. So the material assistance cost ratio, or MACRs, as we're calling it — I think we have to find a new acronym because I work in an accounting firm and we have another popular MACRs provision that we deal with every day. So it's measuring whether a facility or a component, an eligible component, during the construction of a facility or the production of that component, whether a PFE, prohibited foreign entity, has provided material assistance. And there's no credit if the facility or the energy storage technology includes material assistance above a permissible ratio from a PFE. And this is not applicable to the traditional energy credits 45 and 48. So we're just looking at the construction of facilities beginning after 2025. Similarly, for 45X, there's no credit if an eligible component includes material assistance above a permissible ratio, and that's for taxable years beginning after July 4, 2025.

So the way that the material assistance cost ratio works is it's trying to isolate the amount of material assistance, so any sort of payments that are made to a specified foreign entity above a permissible ratio. And the statute provides quite a bit of guidance there, and then the notice really builds it out. So the statute provides that material assistance exists and a credit's denied if the cost ratio is less than a statutory percentage. It gives a formula, and then it's basically just isolating PFE direct costs and stating that the PFE direct costs can't be over a certain percentage. For 45Y and 48E credits, a percentage is applied based on the beginning construction date of the facility. And for 45X, the percentage is applied based on the year of sale of the eligible component. The statute actually points — says that the government will issue safe harbor tables by 2027.

We didn't have safe harbor tables provided in Notice 2026-15, but we did have a tremendous development of very detailed rules and safe harbors around what the statute already gave us. And I personally was really impressed by it. I was really impressed by the level of time and effort put into developing the examples because these are very technical, mechanical rules for MACRs. And I think it's somewhat rare in my experience in the government to see, particularly, an initial piece of guidance be that technical and go that far to help taxpayers really work through the steps to apply the rules.

So the statute itself points to guidance under existing domestic content rules and says that until guidance is passed, taxpayers can use those rules — particular subset of those rules — and supplier certifications consistent with the 45X regulations. It also states, though, that a taxpayer has a reason-to-know standard that applies for a taxpayer to use the supplier certifications. So the notice really spends a lot of time breaking that apart and talking about how certifications would need to be done, how taxpayers need to consider those when looking at safe harbors, and, really, how to use the existing domestic content safe harbor tables for the available types of components they address to approach the MACRs rules.

The issues we have, and we'll talk a little bit more about that, is those domestic content tables only cover wind, solar, and energy storage. So the notice only gets us so far, but for folks in those industries, I think that the notice does a tremendous amount to get people started on complying with the MACRs rules.

Marie Sapirie: You mentioned the interim safe harbors in the notice that taxpayers can choose to apply when they're calculating the clean energy material assistance cost ratio or the eligible component material assistance cost ratio. Could you go into how those work in a little more detail?

Jennifer Bernardini: Sure. I mean, it's kind of amazing the detail to which was put into these safe harbors. So there's a default approach where taxpayers would essentially calculate MACRs using the actual direct costs of MPs, which are manufactured products, and MPCs, manufactured project components, and constituent materials that are incorporated into the project being measured. And the taxpayer has to identify the relevant components, determine their direct costs, and determine whether produced or sourced by a PFE. This default rule really provides the most precise result, but it requires detailed supply chain and cost tracking, so it's very burdensome. There is a de minimis assignment rule that can be used with this method to simplify tracking of smaller components by allowing certain items, representing less than 10 percent of direct costs, total costs, to be assigned across facilities rather than individually tracked. I don't know how many taxpayers are actually using this.

I have a feeling this is not anyone's first choice, but particularly for taxpayers that are not covered by the domestic content tables, this may be where they land, where they end up, depending on the data they have available. There's another safe harbor, which we're calling the identification safe harbor, which it basically simplifies how MPs, MPCs and constituent materials are identified for purposes of the calculation. It allows taxpayers to rely on predefined lists of components provided in the notice for specific technologies instead of performing their own engineering analysis to develop the relevant items. Again, this is useful for wind, solar, energy storage, certainly, but for other industries, it's not as useful. The safe harbor does not determine direct costs and does not determine whether items are PFE produced or sourced. Taxpayers still have to determine costs using either the actual direct cost method or the cost percentage safe harbor to compute MACRs.

We see a lot of our clients really attracted to this in using this process. There is another safe harbor, which we're calling the cost percentage safe harbor, which allows taxpayers to calculate MACRs using assigned cost percentages rather than determining the actual direct cost of each MP or MPC. The assigned percentages are based on the IRS guidance for domestic content. This is very popular. One elected taxpayer applies those percentages to total direct costs to determine the cost attributed to each MP or MPC for MACRs purposes. It significantly reduces cost-tracing requirements, but it's generally used together with the identification safe harbor and applies only to listed technologies, as I mentioned before: wind, solar, and storage. I think the most popular approach that we're seeing is the certification safe harbor, which allows taxpayers to rely on supplier certifications to determine whether MPs, MPCs, or constituent materials were produced or sourced by a PFE.

Certifications substitute for the taxpayer's independent verification of PFE status and may include certified cost information in some cases. However, taxpayers must still determine MACRs using either the actual direct cost method or the cost percentage safe harbor. So when this safe harbor is used, the relevant certification must be attached to the taxpayer's return, along with the required safe harbor statement. And I think that that's been an important point. I think initially folks read the notice and thought, we have a certification safe harbor. There's only one statement that has to be submitted to the IRS, and that's for the certifications. And in fact, there is language in the notice that says the taxpayer choosing any of the safe harbors has to provide IRS with a statement identifying a specific safe harbor and the details behind how they've used it.

So just to sort of summarize the safe harbors that I mentioned, the direct cost method determines MACRs using actual costs. The cost percentage safe harbor substitutes table-based cost allocations for those costs. The identification safe harbor affects only how components are defined. You still need to compute MACRs using one of the cost-determination methods. And similarly, the certification safe harbor affects PFE status, and sometimes cost information is verified, but again, you need to compute MACRs using one of the cost-determination methods.

Marie Sapirie: The notice also says that the IRS is thinking about antiabuse rules, and more specifically, it explains that they intend to propose rules to prevent evasion, circumvention, or abuse of restrictions with respect to prohibited foreign entities through "transfers or alterations of rights, property, or both, including transfers or alterations resulting in lapses of restricted foreign ownership or control that are temporary in nature." What do you expect might be coming in that regard?

Jennifer Bernardini: This has been a tremendous focus of the industry. I think that's the biggest question. I think the language is very interesting. I've heard all sorts of different interpretations of it. I think looking at the background and the conversations that were occurring on the Hill during the drafting of OBBBA, I think that this is aimed — when I think of transfers or alterations of rights, property, or both, I'm thinking of IP rights. That was a big source of controversy at that time. I think there's also potentially concern about restructurings, but the temporary-in-nature language to me seems to point more towards IP than restructuring, but I think it's unclear. We really thought that there were more rules coming when Notice 2026-15 was issued. And I think that this is likely an area where there's a lot of political crosswinds between Treasury and the Hill and the White House.

And I think people are rightfully concerned, and they're unclear what they're going to get. So I think that particularly since we're hearing that the proposed regulations may not come out until the fall, likely even after midterms, we could see, depending on what comments come in and what world events affect the energy market between now and then, we could see a whole evolution of where these rules land. So we're really working with clients to reach out to Treasury as much as possible, follow up on comments, and really have a dialogue around how the rules could work with taxpayers really trying to comply with the spirit of the rules but wanting to continue business as usual and in a very compliant, tax-compliant, rule-compliant way.

Marie Sapirie: Now that the comment period for the notice has ended, did you see any trends in the comment letters or other noteworthy points be made in them?

Jennifer Bernardini: We saw a lot of trends. Obviously, there's a very big rule set, so there were a lot of different areas that were touched upon. I think the big-picture reaction was — Well, first, there's some open questions that were not answered in the notice. And I think that we see a tremendous amount of effort in terms of outreach to Treasury and coordination between associations and taxpayers on those issues. And those are really focused on determining whether a taxpayer is a foreign-influenced entity because at least 15 percent of the debt of the taxpayer has been issued in the aggregate to one or more SFEs. This is a very, very big issue for the energy industry because the energy credits are largely, and at least traditionally, these projects have been financed by tax equity. Now we get private equity involved. And so the whole banking industry is very involved in the energy credit space.

And so there's a tremendous amount of concern about financing for projects where the actual corporate governance of banks wouldn't necessarily lend them to be able to trace every transaction to be sure that they can continue to finance these projects and not trigger the PFE rules. So questions are being asked like, what is debt and to what entity is test applied, particularly in terms of partnerships? So those comments on those issues were really paramount. I would say overall, the comments focus on administrability, stakeholders request clearer definitions, workable safe harbors, reduced tracing and certification burdens. But in terms of the actual unanswered issues, the debt task, I think, is the biggest one that people are focused on right now. There are quite a few other themes, and I'm happy to run through them, but —

Marie Sapirie: Yeah, I'd be interested in the other themes that you've seen in the comment letters so far.

Jennifer Bernardini: So the themes are, I'm going to go over them at a high level. Some of them are very detailed, but I was actually really impressed, and we work with a lot of associations as well. So I was kind of proud of how well industry has really come together to unify comments in a way that are very consistent and are easier for Treasury and IRS chief counsel to work with. There were a lot of comments asking for clearer definitions and guardrails, certainly reacting to the antiabuse language and the wide scope of Treasury's authority to issue rules in that area and asking for examples, asking for safe harbors. For the MACRs calculation, we had a lot of follow-up questions in the comments, which I think are great and reflect the fact that the notice provided a very fulsome rule set so that folks could really dig in and ask follow-up questions to nail down fine points.

So we had questions around how to scope direct costs, constituent materials, de minimis incidental inputs, and what belongs to the numerator and denominator of the material assistance cost ratio. Generally, taxpayers want to see less upstream tracing, but I think that there is overall a lot of interest in just knowing the rules so that taxpayers can comply. In terms of the safe harbor tables that are referenced, what I pointed to earlier is a big issue where they're just technology coverage gaps. Those tables that were provided for domestic content purposes and can now be used for MACRs certification safe harbor only cover wind, solar, and energy storage. So there are a lot of industries and facilities that are not covered, and there are a lot of components for 45X purposes that are not covered. So industry is very focused on getting a broader safe harbor set and tables that would allow that.

Certification reliance and limited tracing — certification reliance is very important. There's a real desire to have certification at the supplier counterparty level and not at distributors or deeper into supply chains. During the process that led to the issuance of the notice, there's different comments made by government folks and people in the industry that are talking to each other. I think people were very concerned that the supply certification safe harbor would require two or three levels of certifications. So still sort of on the lookout for that. But I think in general, folks were very happy with the way that the certification safe harbor was drafted in the notice. Effective control rules, many are asking Treasury to avoid overbroad interpretations around licensing payments, certainly around financing and debt tests, and to focus on actual control and meaningful influence. There are a lot of comments about timing, transition, retroactivity, and recapture risk, and those comments call for clear testing dates, transaction date reliance, and rules that avoid retroactive disqualification or recapture.

There was another group of comments about just trying to isolate and possibly have the government provide examples of what it would consider abusive structures or transactions around these rules so that industry can avoid them and have more clarity about what types of things Treasury and the IRS are focused on. And finally, there have been a lot of questions about the qualified interconnection property rules, which are very unusual for the FEOC rules. The cost of that property is added to the qualified investment in a facility for purposes of 45Y and 48E. But the strange thing about it — 48E — the strange thing about it was that during the enactment of 48E, while the costs were included, particularly the statute was open on this point, but during the regulation process, Treasury determined that for purposes of, say, the prevailing wage and apprenticeship rules and other purposes, that we would not be looking at qualified interconnection property as part of a qualified facility or an energy storage technology.

And that makes sense because that property is actually not owned by the taxpayer. So now we have a strange twist that the FEOC rules by statute actually include qualified interconnection property as subject to the FEOC rules. So there's been a lot of questioning about that, how to handle that. There are no safe harbor tables for the type of equipment that's used for qualified interconnection property. So that's sort of a smaller issue, one that's been bubbling up very recently and one that made it into several comments.

Marie Sapirie: To wind things up, what do you anticipate seeing in future guidance related to the prohibited foreign entities? You've addressed this a little bit before, but what other items are of great interest to taxpayers?

Jennifer Bernardini: Well, I think that there's a good chance that we'll see subregulatory guidance, possibly another notice, before we see the proposed regulations on these rules. And I think that for the purposes of addressing where industry is expressing the most anxiety right now, I think we're going to see rules around debt and application of the rules to partnerships. I also think that there's a lot of concern about treatment of IP rights and potentially on restructurings. So those are the things I think we're going to see in the short term. I think that there's going to be pressure for the proposed regulations really to focus more on the definitions and guardrails and possibly safe harbors and examples, like we saw for MACRs, but for the prohibited foreign entity taxpayer analysis, I think that's what we're going to see. I suspect we'll see more nuance on MACRs.

Remember, we're talking about a proposed regulation. So the nice thing is because Treasury came out with this guidance, it's starting out with a proposed rule set that's already informed by industry comments. So I expect to see a very high-quality proposed regulation. I do expect to see, as we often see, some very stringent rules and possibly some messaging from the administration on particular concerns in the proposed rules. And that's generally how the process works. And it allows taxpayers to really come back then and provide more guidance. And there's a public hearing, and it gives everyone an opportunity to be part of the process, which is very important. It helps the government to understand the issues faced by industry. And because this rule set applies to a really broad industry — including the PFE rules, touches on biofuels, it touches on all sorts of different areas, even carbon capture and sequestration — different parts of the industry are going to be using their voices hopefully together to ask for guidance. And during the proposed regulation period, that whole period where we have comments and we have folks coming in for hearings, that gives government an opportunity to really sort of calibrate the rules that it's come out with and make them more effective and benefit from industry input. And also it helps the industry understand where the government's coming from. We're looking at possibly having final regulations, I would say, in 2027, but anything could happen.

Marie Sapirie: Well, thank you, Jennifer, for joining us on the podcast today.

Jennifer Bernardini: Thank you for having me.

David D. Stewart: That's it for this week. You can follow me online at TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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