The Notice purportedly previews proposed regulations. Prior notices under the Inflation Reduction Act, including those related to the domestic content and energy community adders, also purported to preview proposed regulations, but the Treasury and the IRS have not released any to date. Thus, the Notice may be the last word on the material assistance rules. However, the Notice includes a request for comments.
A taxpayer may rely on the Notice retroactively and until on or before the date that is 60 days after (i) the publication of proposed regulations or (ii) safe harbor tables are published.
Key takeaways
The Notice provides three primary points of guidance:
- It outlines rules that address “material assistance” from a Prohibited Foreign Entity (PFE), which the Treasury Department and IRS intend to include in proposed regulations.
- It introduces Interim Safe Harbor guidance under §§ 45X, 45Y, and 48E2 to determine the material assistance cost ratio (MACR), which ultimately establishes whether or not there was material assistance from a PFE.
- It confirms that the intellectual property “effective control” rules are read properly as a disjunctive list (and therefore apply to applicable contracts, agreements or other arrangements entered into or modified on or after July 4, 2025) and promises to provide prohibited foreign entity anti-abuse rules authorized under § 7701(a)(51)(D) and (K).
The highlights of the Notice are described in more detail below.
Background
Generally, if an electricity-generating qualified facility, energy storage technology (EST), or eligible component has received “material assistance from a prohibited foreign entity,” it is disqualified from the clean energy credits under §§ 45Y (Clean Electricity Production Credit), 48E (Clean Electricity Investment Credit), and 45X (Advanced Manufacturing Production Credit). These restrictions were enacted by the One Big Beautiful Bill Act (OBBBA) as of July 4, 2025.
A taxpayer receives “material assistance from a prohibited foreign entity” if the MACR is less than the specified statutory threshold percentages that correlate to the years in which construction began. Put another way, the MACR represents the cost percentage that is not attributable to PFEs. Thus, the MACR must exceed the statutory thresholds in order to qualify for the clean energy credits.
A taxpayer may elect to exclude from the MACR the cost of certain manufactured products, eligible components, or costs of materials incorporated therein that were acquired by, or manufactured or assembled by or for, the taxpayer pursuant to a binding written contract entered into prior to June 16, 2025. These items must be either:
(i) placed in service before January 1, 2030 (or January 1, 2028 for certain applicable wind and solar facilities) in a facility of which construction began prior to August 1, 2025, or
(ii) for the costs not attributable to manufactured products, used in a product sold before January 1, 2030 (or January 1, 2027 for eligible components under § 45X).
The statutory thresholds for qualified facilities, ESTs, and eligible components vary annually. For qualified facilities and ESTs, which threshold applies depends on when the facility or EST begins construction. For calendar year 2026, the thresholds are: 40% for qualified facilities; 55% for ESTs; and for eligible components, the threshold varies based on component type.
There is a six-year statute of limitations for a MACRs error. Thus, a taxpayer must retain its documentation supporting each MACR determination for a minimum of six years.
The Notice gives scant guidance on the prohibited foreign entity rules
Although the Notice provides helpful information in defining material assistance, the Notice is striking for what it omits. It does not provide any gloss on the definition of a prohibited foreign entity and does not provide further guidance on certain matters that are auxiliary to defining material assistance, such as details related to the certificate or the related penalties under § 6695B.
The Notice confirms that, for purposes of when construction begins for purposes of the prohibited foreign entity rules under § 7701(a)(51) and the material assistance rules under § 7701(a)(52), Notice 2025-42 does not apply.3
The Notice otherwise recites the statutory language that the principles of Notice 2013-29 and Notice 2018-59 (as well as any subsequently issued guidance clarifying, modifying, or updating either such Notice), as in effect on January 1, 2025, apply for both prohibited foreign entity and material assistance purposes. The Notice does not indicate whether the Treasury and the IRS will adjust beginning of construction tests for purposes of the prohibited foreign entity or material assistance rules.
The Notice clarifies one point of uncertainty in respect of effective control. The effective control rules for intellectual property are presented as a seven-item disjunctive list (meaning that if any factor is satisfied, then the effective control provisions could be triggered, denying credits).
Whereas the first six items of the list describe rights to a licensor that could represent control (e.g., “contractual right retained by the contractual counterparty to direct the operation of any qualified facility, any energy storage technology, or any production unit that produces an eligible component”), the seventh item is that any applicable “contract agreement, or other arrangement was entered into (or modified) on or after the date of enactment of this paragraph.” Many taxpayers questioned whether that seventh item was meant to modify the prior six, or whether it should be read in accordance with its terms. The Notice clarifies that it should be read as a separate factor from the other six.
The Notice also promises that the Treasury and the IRS will provide an anti-abuse rule authorized by § 7701(a)(51)(D) and (K), which allow for guidance to prevent circumventing the foreign-influenced entity rules and guidance to prevent the circumvention of the prohibited foreign entity rules, as applicable. It specifies that the rules will address 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.
- Observation: Although the Notice does not state any intent to publish guidance enforcing the anti-abuse rule in § 7701(a)(52)(D)(v), which authorizes anti-abuse rules to prevent abuse through stockpiling materials or otherwise not in fact beginning construction, it does request comments on this provision.
Qualified facility or energy storage technology’s MACR
The following equation demonstrates how to calculate the MACR for a qualified facility or EST:
Clean Electricity MACR = (Total MP Direct Costs-PFE MP Direct Costs)/Total MP Direct Costs
A qualified facility’s or EST’s MACR hinges on the direct costs of the manufactured products (MPs) incorporated into the qualified facility or EST. MP costs include the costs of manufactured product components (MPCs) incorporated therein. A MP and a MPC are defined consistently with the domestic content guidance.4
A taxpayer may use the safe harbor tables provided in the various domestic content notices to identify MPs and MPCs and determine their relative cost percentages.5 If a taxpayer does not use the existing safe harbor tables, the taxpayer must identify the MPs and MPCs with a substantially similar level of detail to that in the tables.
A taxpayer not using the domestic content guidance must determine its direct costs. For a taxpayer that acquires an MP or MPC by purchase, the direct cost is the acquisition cost. The direct costs of a taxpayer that produces the MP or MPC are the taxpayer’s direct material and direct labor costs under Treas. Reg. § 1.263A-1(e)(2)(i)(A) and (B). The costs of incorporating the MP into the qualified facility or EST are not included in the computation.
- Observation: The Notice does not define “acquisition cost.” It could be that “acquisition cost” means the costs covered by Treas. Reg. § 1.263(a)-2, which determines what costs a taxpayer must capitalize into personal property it acquires or produces, and for which other provisions of the Code do not prescribe a specific treatment (such as § 263A). If the definition of “acquisition cost” is consistent with the guidance under Treas. Reg. § 1.263(a)-2, “acquisition cost” would include auxiliary costs, such as shipping costs. The Notice requests comments on defining total direct costs, so there may be clarification in future guidance.
If a taxpayer acquires an MP that is not PFE-produced, but includes MPCs that are PFE-produced, the taxpayer must reduce its non-PFE acquisition cost by the portion of the acquisition cost that is attributable to the PFE-produced MPCs. The reverse is also true.
Facilities or ESTs with divided ownership compute their MACR by ignoring the divided ownership.
- Observation: Subtracting prohibited foreign entity costs may require that the supplier provide certain information as to its costs. Taxpayers unable to rely on the domestic content safe harbor tables may have difficulties obtaining this information from suppliers, regardless of whether the Certification Safe Harbor (described in more detail subsequently) is used.
Whether an MP or MPC is PFE produced will depend on the PFE status of the relevant entity as of the taxable year in which the taxpayer paid or incurred the cost under the taxpayer’s method of accounting. The determination is based on the taxable year of the entity that mined, produced, or manufactured the MP or MPC (or, if such entity does not have a taxable year, the applicable calendar year).
Because a taxpayer must compute a MACR for each qualified facility or EST that it places in service, a taxpayer must generally track individual MPs and MPCs that are incorporated into each qualified facility or EST. The Notice provides a de minimis rule permitting more flexible tracking for MPs or MPCs (i) of the same type, (ii) that a taxpayer incorporates into qualified facilities or ESTs placed in service in the same taxable year, and (iii) which comprise less than 10% of the cost of all MPs in each such qualified facility or EST.
The Notice also provides a special elective rule for tracking the costs in respect of ESTs that have a capacity of less than 1MWac and for which a taxpayer does not use the assigned cost percentages from the domestic content guidance. The rule applies to ESTs that are of the same type and that a taxpayer placed in service within a specified period of time (which can vary between a day and a taxable year).
A taxpayer determines if ESTs are of the same type using any reasonable method, such as whether ESTs share a production line. A taxpayer may average the direct costs of MPs and MPCs of the same type that are incorporated into such ESTs. The taxpayer determines the percentage of such MPs or MPCs that are attributable to a prohibited foreign entity and multiplies that by the average cost to determine the deemed prohibited foreign entity direct costs of the applicable MP or MPC.
- Observation: It is unclear why the Notice provides only ESTs with a capacity of less than 1 MWac this type of safe harbor.
The Notice contains special rules governing the 80/20 rule and interconnection property.
An eligible component’s MACR
For the § 45X Credit (Advanced Manufacturing Production Credit), the taxpayer must calculate an eligible component MACR for each eligible component sold during the taxable year.
Eligible Component MACR = (Total Direct Material Costs-PFE Direct Material Costs)/Total Direct Material Costs
The § 45X MACR considers “direct material costs” within the meaning of Treas. Reg. § 1.263A-1(e)(2)(i)(A), which provides that “direct material costs” include “the cost of those materials that become an integral part of specific property produced and those materials that are consumed in the ordinary course of production and that can be identified or associated with particular units or groups of units of property produced. For example, a cost described in Treas. Reg. § 1.162–3, relating to the cost of a material or supply, may be a direct material cost.” The Notice clarifies that these costs generally include freight-in and tariffs. A taxpayer must track each of these costs and determine whether they are attributable to a prohibited foreign entity.
In the case of a contract manufacturing arrangement, generally the direct material costs for purposes of computing the MACR are those incurred by the party that performs the substantial transformation activities. If that party did not incur any or all direct material costs, then the direct material costs include the direct material costs to the taxpayer claiming the § 45X credit.
- Observation: Presumably this rule applies to the direct material costs incurred by each producer in a contract manufacturing arrangement, as well as the taxpayer claiming the § 45X credit. See Treas. Reg. § 1.45X-1(c)(3)(v)(C) (providing an example of multiple producers in a contract manufacturing arrangement).
Whether a direct material cost is attributable to a prohibited foreign entity generally depends on the PFE status of the direct supplier as of the taxable year in which the taxpayer paid or incurred the cost under the taxpayer’s method of accounting. The determination is based on the taxable year of the supplier (or, if such entity does not have a taxable year, the applicable calendar year).
There is a special rule for resellers. The Notice directs taxpayers to ignore resellers and determine both the direct material costs and the prohibited foreign entity status of the direct supplier to the reseller.
- Observation: The reseller requirement may essentially foreclose reselling, or at the very least, force taxpayers and resellers to the certification safe harbor.
For (i) eligible components of the same type and (ii) constituent materials of the same type, a taxpayer may average the costs of these materials for production of the eligible material that occurs within a specified period (which can vary from a day to a taxable year). It can then compute a deemed PFE direct material cost for these materials by multiplying the percentage of such materials that are PFE-sourced by the average of cost the materials.
Safe harbors: interaction with the domestic content guidance (Notice 2025-08 and certain tables in the prior notices)
The Notice provides two safe harbors founded upon the domestic content guidance:
- A safe harbor that allows a taxpayer to identify MPs and MPCs, and by analogy, eligible component direct material costs, using the tables in the domestic content guidance (this is the “Identification Safe Harbor”)
- A safe harbor that allows a taxpayer to use the assigned cost percentages in the domestic content guidance to determine the MP and MPC costs, in the case of a qualified facility or EST, and the direct material costs, in the case of an eligible component (the “Cost Percentage Safe Harbor”)
For qualified facilities or ESTs to utilize the Identification Safe Harbor, they must: (i) be listed as an “Applicable Project” in the most recent domestic content guidance, and the tables that are included in prior notices as provided therein, and (ii) use the listed MPs and MPCs for each applicable project therein as the exclusive and exhaustive list. Any MPs or MPCs contained in the qualified facility or EST that are not listed are disregarded. MPs or MPCs that are listed and not utilized are disregarded.
- Observation: The analysis using the Identification Safe Harbor for a qualified facility or EST is the same as a domestic content analysis relying on the tables in Notice 2025-08 to determine MPs and MPCs for an applicable project. This is the treatment that the material assistance statute led taxpayers to expect.
For eligible components, the Notice provides a list of eligible components for which a taxpayer may use the tables in Notice 2025-08. The only eligible components the Notice lists as available for the Identification Safe Harbor are:
(i) each type of inverter described in § 45X(c)(2)
(ii) solar modules
(iii) battery modules using battery cells, as described in § 45X(c)(5)(B)(iii) and satisfying the applicable definition in Notice 2025-08 (thus, a battery module otherwise qualifying as an eligible component without cells cannot use the Identification Safe Harbor).
If the Notice 2025-08 tables list an eligible component more than once, the taxpayer must use the table that most closely reflects the reasonably anticipated use of the eligible component. Like for qualified facilities and ESTs, if an MPC is listed but unutilized, then it is disregarded, and materials incorporated in the eligible component but not listed are disregarded.
- Observation: If an eligible component, qualified facility, or EST has significant PFE costs attributable to MPCs not listed in the domestic content guidance, using the Identification Safe Harbor may be a significant advantage.
The Cost Percentage Safe Harbor follows from the Identification Safe Harbor: if a taxpayer uses the Identification Safe Harbor to identify MPs and MPCs, then the taxpayer may use the assigned cost percentages provided in the domestic content guidance to determine relative costs.
A taxpayer may use the Identification Safe Harbor without using the Cost Percentage Safe Harbor—that is, a taxpayer may use the domestic content guidance to identify the MPs and MPCs of a qualified facility, EST, or eligible component for purposes of determining which costs to track, but need not use the assigned cost percentages. However, a taxpayer may not use the Cost Percentage Safe Harbor without using the Identification Safe Harbor (i.e., a taxpayer may only rely on assigned cost percentages if using the domestic content guidance in full).
Safe harbors: supplier certification
In accordance with the material assistance statute, the Notice allows a supplier to certify to the taxpayer as to the non-PFE MP, MPC, or direct material costs (the “Certification Safe Harbor”). The form of the certification in the Notice repeats the statute. The Certification Safe Harbor may be used singly, or in conjunction with one or both of the Identification and the Cost Percentage Safe Harbors.
- Observation: The Notice and the statute require a supplier to certify that “the supplier does not know (or have reason to know) that any prior supplier in the chain of production of the property is a prohibited foreign entity.” It had been unclear how deeply a supplier needed to understand its supply chain. The Notice does not clarify this requirement, but given the other guidance on computing MP, MPC, and direct material costs, presumably the supplier does not need to inquire more deeply than a taxpayer not relying on the certification would need to.
- Observation: Presumably, a reseller would provide the certificate for the Certification Safe Harbor.
A taxpayer may not use the Certification Safe Harbor if the taxpayer knows or has reason to know that the certification is inaccurate, and such a taxpayer must treat all applicable costs as attributable to a prohibited foreign entity.
The Notice does not provide guidance on the supplier certification penalties under § 6695B.
Safe harbors: substantiation and certification
Taxpayers who use any of the safe harbors must provide the IRS with a statement identifying the specific safe harbor, including, if applicable, the specific safe harbor tables from the domestic content guidance applied and the application of the safe harbor (i.e., to identify MPs and MPCs, to determine direct costs, etc.). Such statement must be attached to the applicable form on which the taxpayer claims a §§ 45Y, 48E, or 45X credit filed with the annual return for the first taxable year in which a credit is claimed.
Footnotes
1. See here for our prior article describing the statutory provisions implanting these rules.
2. All section references are to the Internal Revenue Code of 1986, as amended.
3. See here for our prior analysis on Notice 2025-42, which provides a limited beginning of construction test that applies for determining when a wind or solar project begins construction for purposes of the wind and solar cut-off date.
4. See Section 3.01(2) of Notice 2023-38.
5. See our prior discussion of the first domestic content safe harbor here.
