New Post

Slug: irs-energy-credit-prohibited-foreign-entities-notice-2026-15
Date: February 17, 2026
Source: https://tax.thomsonreuters.com/news/irs-issues-interim-guidance-on-prohibited-foreign-entities-for-energy-credits/

The IRS just told clean energy investors: if your equipment has Chinese fingerprints on it, you don't get the credit.

That's the short version of Notice 2026-15, released February 12, 2026. The longer version involves a new cost ratio calculation, three safe harbors, and a compliance headache that's landing on CPAs right now during tax season.

Here's what's happening — and what your clients need to do about it.

Why the IRS Is Cracking Down on Energy Credits

The One Big Beautiful Bill (OBBBA), passed in summer 2025, added new rules to three of the most valuable clean energy tax credits: IRC §45Y (Clean Electricity Production Credit), IRC §48E (Clean Electricity Investment Credit), and IRC §45X (Advanced Manufacturing Production Credit).

The rule: if a qualifying facility, energy storage technology, or eligible component includes "material assistance from a prohibited foreign entity" (PFE), it's ineligible for those credits.

Translation: if Chinese companies — or companies with significant Chinese ownership or control — supplied materials or components that went into your client's solar farm, wind turbine, or battery storage system, that installation may not qualify for federal tax credits.

The IRS is now telling everyone exactly how to figure that out.

What Is a "Prohibited Foreign Entity"?

The OBBBA amended IRC §7701 to define PFEs. A PFE is generally a "specified foreign entity" or "foreign-influenced entity" — which in practice means entities with certain ownership structures tied to countries of concern (think China, Russia, Iran, North Korea).

If a supplier is majority-owned by a foreign government, has foreign nationals in key operational roles, or has specific contractual arrangements with foreign state entities, they likely qualify as a PFE.

The Test: Material Assistance Cost Ratio (MACR)

Here's where it gets technical. Notice 2026-15 requires taxpayers to calculate a Material Assistance Cost Ratio (MACR) for any facility or eligible component.

For facilities and energy storage technologies: - Identify all manufactured products (MPs) and manufactured product components (MPCs) in the facility - Track direct costs for all MPs and MPCs - Determine what portion of those costs are attributable to PFE-produced items - Subtract PFE costs from total costs, divide by total costs

If the ratio falls below the applicable threshold, the facility is ineligible for the credit.

For eligible components (like solar cells, wind blades, battery modules): - Same logic, but focused on direct material costs of constituent elements, materials, or subcomponents

Three Safe Harbors — Use Them

The IRS isn't trying to make this impossible. Notice 2026-15 provides three safe harbors CPAs can use to simplify the MACR calculation:

1. Identification Safe Harbor: Use the 2023–2025 Safe Harbor Tables (from prior IRS notices) to identify MPs, MPCs, and constituent materials for listed facilities.

2. Cost Percentage Safe Harbor: Use pre-assigned cost percentages from the same tables to determine direct costs and PFE direct costs — no custom cost-tracking required.

3. Certification Safe Harbor: Rely on certifications from direct suppliers about whether their materials are PFE-produced and the associated costs. These certifications must be signed under penalty of perjury and retained for at least six years.

Note: the Cost Percentage Safe Harbor doesn't apply to all facility types, so check before using it.

What CPAs Should Do Right Now

If you have clients who claimed or plan to claim §45Y, §48E, or §45X credits, you need to ask some questions:

• Where is their equipment from? Solar panels, inverters, battery cells, and wind components sourced from Chinese manufacturers are the primary risk area.

• Do they have supplier documentation? The Certification Safe Harbor requires signed statements. Now is the time to request them.

• Are they tracking costs at the component level? If not, the Cost Percentage Safe Harbor tables are your friend.

• Is this a 2025 return issue or 2026 forward? The notice is interim guidance, but it applies now. More finalized guidance is expected — but don't wait.

The IRS isn't playing games here. Clean energy credits are worth tens of thousands (sometimes millions) of dollars per installation. Getting this wrong isn't a minor penalty — it's credit disallowance plus accuracy penalties.

The Bottom Line

The federal government is trying to decouple American clean energy from Chinese supply chains. The mechanism they chose is the tax code. CPAs are now the enforcement mechanism.

If your clients have clean energy assets — solar installations, battery storage, EV charging infrastructure, wind — this guidance applies to them. Start asking supply chain questions now, before those returns are filed.

Source: IRS Notice 2026-15, IR 2026-23 (February 12, 2026)