FEOC Rules and Solar Tax Credits: What We Know, What We Don’t, and What to Do Now

If you advise clients on solar tax equity transactions, you have probably heard the term “FEOC” thrown around a lot over the past year. There is enormous confusion in the market about what the new Prohibited Foreign Entity rules actually require, what has been clarified by Treasury, and what remains genuinely unsettled. This article is our attempt to give you a clear, plain-English framework for what you need to know right now.

A Brief Background on Section 48E

The Section 48E clean electricity investment tax credit was created by the Inflation Reduction Act of 2022 as the successor to the earlier Section 48 investment tax credit. Where Section 48 provided credits for specific enumerated technologies, Section 48E adopted a technology-neutral approach: any facility that generates clean electricity (with zero or near-zero greenhouse gas emissions) can qualify. In practice, for most of our clients, that means solar. But 48E also covers battery storage, wind, geothermal, nuclear, and other qualifying technologies. The credit is generally 30% of the cost basis of the eligible property (or 6% without prevailing wage and apprenticeship compliance), and it has been the primary economic driver of direct-investment solar tax equity transactions since the IRA’s enactment.

Understanding 48E’s origins matters here because the new FEOC restrictions layered on by the OBBBA did not replace 48E. They modified it. The credit still exists and still works largely the same way it did before. But now there is a new set of eligibility hurdles that can disqualify a project entirely, and those hurdles are what this article is about.

What Is FEOC and Why Does It Matter?

The One Big Beautiful Bill Act (Pub. L. 119-21), signed into law on July 4, 2025, introduced a set of restrictions on clean energy tax credits tied to foreign entities of concern. In practice, the industry still calls these the “FEOC rules,” but the statute’s operative term is “Prohibited Foreign Entity,” or PFE. The distinction matters because the OBBBA’s PFE framework is different from (and broader than) the FEOC concept used in the Inflation Reduction Act’s electric vehicle credit rules under Section 30D.

Here is the bottom line: if a solar project claiming the Section 48E clean electricity investment tax credit is owned by a PFE, or if the project receives “material assistance” from a PFE above a certain cost threshold, the entire credit is denied. There is no reduction for partial compliance; the project either qualifies or it doesn’t. And for projects placed in service in 2028 and beyond, there is an additional 100% recapture risk that extends for ten years after the project is placed in service. These are not minor compliance technicalities. They are existential risks to the economics of a solar tax equity deal.

Who Are the Prohibited Foreign Entities?

The PFE rules target entities connected to four “covered nations”: the People’s Republic of China, the Russian Federation, North Korea, and Iran. The list is imported from 10 U.S.C. Section 4872(d)(2) and was not expanded by the OBBBA.

Under new IRC Section 7701(a)(51), a Prohibited Foreign Entity is the umbrella category. It includes two subsets, each with different definitions and (in some cases) different consequences.

Specified Foreign Entities (SFEs) are defined by reference to several existing government lists and a broad “Foreign-Controlled Entity” prong. The government-list categories include entities designated as FEOCs under the FY2021 NDAA (the Mac Thornberry Act), entities on the DOD’s Chinese Military Companies list under Section 1260H, entities on the Uyghur Forced Labor Prevention Act Entity List, and battery-producing entities ineligible for DOD contracts under Section 154(b) of the FY2024 NDAA (currently including CATL, BYD, Envision, EVE Energy, Hithium, and Gotion). The Foreign-Controlled Entity prong is the one that catches most people off guard: it includes the government of a covered nation, citizens or nationals of a covered nation (other than U.S. citizens or lawful permanent residents), entities organized in or with a principal place of business in a covered nation, and entities more than 50% owned or controlled (directly or indirectly) by any of the foregoing.

Foreign-Influenced Entities (FIEs) are the second subset. An entity is an FIE if, during the taxable year, any of the following is true: a single SFE owns 25% or more of the entity; one or more SFEs own 40% or more in the aggregate; SFEs hold 15% or more of the entity’s debt at original issuance; an SFE has direct authority to appoint a “covered officer” (board member, C-suite executive, general counsel, or senior VP); or, for Sections 45Y and 48E specifically, the entity made a payment to an SFE during the prior taxable year under a contract conferring “effective control” over the facility.

The ownership and debt thresholds are tested on the last day of the taxable year. One important nuance for publicly traded companies: Section 7701(a)(51)(E) limits the application of the FIE rules for publicly traded entities and their 80%-or-more subsidiaries, generally restricting the ownership tests to holders who are required to report beneficial ownership under SEC Rule 13d-3 (typically 5% holders) or a foreign equivalent. However, the carve-out does not apply if securities trade on an exchange located in a covered nation.

Both SFEs and FIEs are Prohibited Foreign Entities and are barred from claiming the Section 48E ITC or the Section 45Y PTC. Additionally, the amended Section 6418(g) prohibits the transfer of tax credits to an SFE (note: the transferability bar uses “SFE,” not the broader “PFE” category).

The Material Assistance Restriction

Beyond the entity-level ownership bars, the OBBBA introduced a project-level test that applies regardless of who owns the project. This is the “material assistance cost ratio,” or MACR, and it is the provision generating the most day-to-day compliance work in solar tax equity transactions.

The concept is straightforward: if too large a share of a project’s direct costs is traceable to PFE sources, the project loses its credit eligibility entirely. The statute establishes a minimum ratio of non-PFE costs to total direct costs, and that ratio phases in over several years, getting tighter over time.

For Section 48E and 45Y qualified facilities (which includes solar), the phase-in schedule is:

• 2026: 40% minimum non-PFE cost ratio
• 2027: 45%
• 2028: 50%
• 2029: 55%
• 2030 and beyond: 60%

It is worth noting that the thresholds are different for other credit types. Energy storage technology under Section 48E starts at 55% in 2026 and ramps to 75% after 2029. The Section 45X manufacturing credit has its own separate schedule with higher thresholds for solar components. If you are advising on anything other than a standard solar generation project, make sure you are looking at the right table.

The “beginning of construction” date determines which year’s threshold applies. And critically, projects that began construction before January 1, 2026 are exempt from the material assistance test entirely (though the entity-level SFE and FIE bars still apply to years beginning after July 4, 2025).

What Treasury Has Told Us So Far

On February 12, 2026, Treasury and the IRS released Notice 2026-15, providing interim guidance on the material assistance cost ratio. This was welcome but limited. The Notice addresses how to calculate the MACR, but it explicitly defers guidance on PFE identification, “effective control” definitions, anti-circumvention rules, and detailed ownership and debt tracing mechanics.

The Notice provides three safe harbors that practitioners can rely on:

First, an Identification Safe Harbor that allows taxpayers to use the existing domestic content tables from Notices 2023-38, 2024-41, and 2025-08 as the exclusive list of Manufactured Products and Manufactured Product Components for MACR purposes.

Second, a Cost Percentage Safe Harbor that lets taxpayers use assigned cost percentages from those same tables instead of tracing actual costs.

Third, a Certification Safe Harbor that permits reliance on supplier certifications signed under penalty of perjury (which must include the supplier’s EIN or foreign identifier and must be retained for six years).

One of the most practically significant clarifications in Notice 2026-15: for Section 48E and 45Y projects, the MACR look-through extends only two levels deep, from Manufactured Products to Manufactured Product Components. Subcomponents and upstream raw materials (such as polysilicon or wafers feeding into solar cells) do not have to be independently PFE-traced at the project level. This is a meaningful simplification, though it does not eliminate the compliance burden entirely.

Taxpayers may rely on Notice 2026-15 until 60 days after forthcoming proposed regulations are published in the Federal Register, which are not forthcoming as of the time of this writing.

What We Don’t Know

There is a lot we don’t know, and truthfully we might not know before the 48E credit sunsets. There is no sense mincing words. Congress and the IRS have done a terrible job here, leaving major issues unaddressed while expecting taxpayers to comply with rules that are still half-written. The most significant open questions include:

Effective control. The statute lists 13 categories of contractual rights that are deemed to confer “effective control” by an SFE over a facility, but many of these are vaguely worded. Notice 2026-15 addressed only IP licensing (ruling that license modifications on or after July 4, 2025 with an SFE will be treated as conferring effective control). Everything else is unresolved.

Public company compliance. Even with the publicly traded entity carve-out, it is operationally very difficult for a public issuer to fully verify whether the 25% or 40% SFE ownership thresholds are crossed through beneficial ownership chains, particularly when the SFE definition reaches citizenship and residency.

Anti-circumvention and stockpiling. The OBBBA directs Treasury to issue rules preventing pre-2026 stockpiling of PFE components to avoid the material assistance test. No such rules have been issued yet.

Ownership attribution mechanics. Treasury has not yet specified whether Section 318 constructive ownership rules apply, or whether it will import concepts from other regimes (like the DOE’s 2023 interpretive rule on FEOCs). Until proposed regulations are published, mechanical tracing through tiered entity structures remains unsettled.

Retroactive PFE designation. If a supplier is later added to one of the statutory blacklists, does that retroactively taint prior-year MACR calculations? Notice 2026-15 indicated PFE status is tested by reference to the year of production, but the rule is incomplete.

Comprehensive proposed regulations are not expected imminently. Industry observers expect Treasury to open a formal rulemaking process for FEOC sometime in 2026, with a final rules timeline that could stretch into 2027 or beyond.

Practical Implications for Advisors

If you are advising clients on solar tax equity investments, here is what matters right now:

Verify your developer’s supply chain representations, and do not accept them at face value. “Assembled in the USA” does not mean FEOC-compliant. China accounts for roughly 93% of global polysilicon production, 98% of wafer production, and 92% of cell production. U.S. module assembly capacity is substantial, but the upstream supply chain that feeds it remains heavily dependent on Chinese inputs. A module assembled by a U.S. manufacturer using Chinese-made cells will have the cell component flagged as PFE-sourced, and depending on its cost share, that alone could push the project below the MACR threshold.

Ensure your deal documents include robust FEOC representations, warranties, and indemnities. This is no longer optional. Both the developer and the investor need contractual protection covering PFE status at the entity level and material assistance compliance at the project level. Supplier certifications under the Notice 2026-15 safe harbor should be required as deliverables.

Be aware of the new Section 6695B penalties for false supplier certifications. The OBBBA created penalties for incorrect certifications: the greater of 10% of the underpayment or $5,000, with a six-year assessment window. There is also a “reason to know” standard, meaning that reliance on a facially deficient or implausible certification may not protect the taxpayer. This creates real diligence obligations on both sides of a tax equity transaction.

Recognize that FEOC-compliant panels may cost more and have longer lead times. The non-PFE supply chain for solar is thin. There are companies making truly FEOC-clean products. But supply is limited relative to demand, and pricing will likely continue to reflect that imbalance. Developers who committed to FEOC-compliant procurement early have a meaningful advantage. Those who waited may face constraints.

The Bottom Line

The Prohibited Foreign Entity rules are a very consequential change to the solar tax credit landscape. The good news is that the 2026 thresholds are workable for well-structured projects, and the Notice 2026-15 safe harbors provide a reasonable compliance pathway that closely mirrors the existing domestic content framework. The bad news is that key definitional questions remain open and the thresholds get tighter every year.

For advisors, the takeaway is simple: do not assume your clients’ projects are compliant. Ask the questions, verify the supply chain, and make sure the deal documents protect everyone involved.

A Final Word

Taking a step back, it is not at all clear why Congress and the IRS decided to address this issue in such a convoluted way. The PFE definitions trace through dozens of cross-referenced statutes, each with their own terminology and scope. The guidance issued so far leaves enormous gaps in areas that come up constantly in real transactions. Even attempting to synthesize all of this into a readable article was, frankly, mind-numbing. The practitioners on the ground are doing their best with incomplete tools, and the taxpayers trying to comply deserve better. If anyone in Congress ever reads this: please do better in the future.

This article is for informational purposes only and does not constitute legal or tax advice. The Prohibited Foreign Entity rules under the OBBBA are subject to ongoing regulatory development, and the guidance discussed here (including Notice 2026-15) is interim in nature. Readers should consult qualified tax counsel before making decisions based on this information. Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code.