Material Assistance – Newly Issued IRS Guidance

Key Takeaways

• Notice 2026-15 provides meaningful insight into how taxpayers claiming sections 45Y, 48E and 45X credits can comply with the material assistance rules.
• In general, the material assistance rules require taxpayers to substantiate that they did not receive material assistance from "prohibited foreign entities." The rules do this through establishing the calculation of a material assistance cost ratio.
• The notice provides detailed steps for how to calculate the material assistance cost ratio for facilities and energy storage systems (for sections 45Y and 48E credits) and eligible components (for Section 45X credits). This includes definitions of what is a direct cost and what is a constituent material.
• Most importantly, the notice contains a number of safe harbors that will generally help taxpayers comply with the material assistance rules.
• Taxpayers can generally rely on the guidance until the IRS issues a notice of proposed rulemaking.

Introduction

On Feb. 12, the IRS released Notice 2026-15, which provides guidance on how the new material assistance rules under Section 7701(a)(52) of the Internal Revenue Code of 1986, as amended (Code), apply to renewable energy developers and manufacturers.

As background, the One Big Beautiful Bill Act (OBBBA) was signed into law last July and significantly modified the ability to claim tax credits through the enactment of "prohibited foreign entity" rules and "material assistance" rules. These rules are sometimes referred to as the FEOC – which stands for foreign entity of concern – rules.

Notice 2026-15 pertains to the material assistance rules, which generally prevent taxpayers from claiming Section 45Y clean electricity production credits, Section 48E clean electricity investment credits and Section 45X advanced manufacturing production credits if a prohibited foreign entity materially assisted with the construction or manufacturing of the facility, storage system or eligible component giving rise to the relevant tax credit.

This alert provides a summary of Notice 2026-15 and several key takeaways and impressions regarding its provisions.

Background

As noted above, Notice 2026-15 is limited to the material assistance provisions, which generally became effective on Jan. 1. Additional guidance relating to the prohibited foreign entity rules is forthcoming, but it is not currently known when any guidance will be issued.

The material assistance rules limit the constituent materials (defined below) and equipment supplied by prohibited foreign entities that a manufacturer (for purposes of Section 45X) or developer (for purposes of sections 45Y and 48E) can source from prohibited foreign entities. The goal is to reduce the reliance on constituent materials and equipment manufactured by manufacturers with significant ownership or capital in – or commercial ties to – China. In general, a developer or manufacturer must calculate a "material assistance cost ratio" for a facility, storage system or eligible component, which means the percentage of constituent materials or equipment supplied by prohibited foreign entities. The percentage limit varies by year and the type of project or eligible component. Notice 2026-15 provides guidance on how to calculate the material assistance cost ratio as well as several safe harbors that taxpayers may rely on for purposes of identifying manufactured product components, determining material cost amounts and determining whether a supplier is a prohibited foreign entity.

Observation: Notice 2026-15 is robust. It spans 95 pages, and there are several limitations in the safe harbors. While they are generally favorable, taxpayers will need to carefully plan how to use the safe harbors to achieve compliance with the material assistance rules.

Taxpayers may rely on the rules and procedures set forth in Notice 2026-15. Taxpayers can also submit comments to the IRS regarding Notice 2026-15, with the soft deadline being March 30. The IRS will eventually issue a notice of proposed rulemaking based on Notice 2026-15 and any comments it receives.

Observation: Many taxpayers are grappling with how to apply the prohibited foreign entity rules and are in need of guidance with respect to terms and requirements left open by Congress. Notice 2026-15 unfortunately does not provide guidance relating to the prohibited foreign entity rules. Taxpayers nevertheless need to ensure that, in addition to not receiving material assistance from a prohibited foreign entity, they are not in their own right a prohibited foreign entity.

Key Concepts

Qualified Facilities – 45Y/48E and Calculating the Clean Electricity Material Assistance Cost Ratio

Notice 2026-15 outlines the steps a taxpayer that wishes to claim a credit under sections 45Y or 48E must take to calculate the applicable material assistance cost ratio (MACR) for facilities and energy storage systems. MACR must be calculated separately for each qualified facility or energy storage system. The following outlines the steps that a taxpayer should undertake to calculate the MACR for a facility or energy storage system.

Step 1: Identify the manufactured products (MPs) and MPCs for the qualified facility or energy storage system.

A taxpayer's identification of the MPs and MPCs must be consistent with the meaning of the phrase "manufactured products (including components)" identified in Notice 2023-38. The level of detail needed in the identification must be substantially similar to the level of detail provided in notices 2023-38, 2024-41 and 2025-08 (2023-2025 Safe Harbor Tables). Applicable projects that are identified in those notices (i.e., solar, wind, hydropower and battery storage) can be used by a taxpayer in connection with the Identification Safe Harbor described below.

Observation: What constitutes an MP and MPC forms a significant aspect of how a taxpayer calculates MACR. Taxpayers that have dealt with the domestic content rules will have familiarity with these rules. However, technologies not listed in the 2023-2025 Safe Harbor Tables (e.g., renewable natural gas, geothermal) will have to interpret these rules to determine what constitutes an MP and MPC.

Step 2: Track the direct costs of the MPs and MPCs for the qualified facility or energy storage system.

Taxpayers must individually track certain characteristics of each MP or MPC incorporated into a qualified facility or energy storage system. These characteristics are (1) the direct costs of each MP or MPC and (2) whether the MP or MPC was produced by a prohibited foreign entity. Notice 2026-15 provides for a de minimis assignment-based tracking, which allows taxpayers to assign MPs or MPCs of the same type to qualified facilities or energy storage systems placed in service during the same taxable year without having to individually track the costs of each MP or MPC if the total direct costs for such MPs and MPCs are less than 10 percent of the total direct costs of each qualified facility or energy storage system.

Observation: If a taxpayer is eligible for and elects to rely on the Identification Safe Harbor and Cost Percentage Safe Harbor (defined below), the taxpayer only needs to track whether the MP or MPC was produced by a prohibited foreign entity. These safe harbors, however, are generally limited to the types of technologies listed in the 2023-2025 Safe Harbor Tables, which are solar, wind, hydropower and battery storage.

Step 3: Determine direct costs attributable to the identified MPs and MPCs.

Taxpayers must look at Treasury Regulations sections 1.263A-1(e)(2)(i)(A) and (B) for the definitions of direct material costs and direct labor costs, respectively, when determining the direct costs attributable to MPs and MPCs identified in Step 1 that are produced by the taxpayer. For MPs or MPCs that the taxpayer purchases, it is anticipated that the purchase price is considered the direct cost of the MP or MPC.

Step 4: Determine direct costs attributable to the identified MPs and MPCs produced by prohibited foreign entity.

Taxpayers must determine the direct cost of each MP and MPC produced by a prohibited foreign entity. MPs or MPCs will be considered to be produced by prohibited foreign entities if the entity that mined, produced or manufactured such MPs or MPCs is considered a prohibited foreign entity for such entity's taxable year that encompasses the date the taxpayer paid or incurred the direct costs associated with such MPs or MPCs.

Observation: As discussed below, taxpayers may elect to use the Certification Safe Harbor to aid in the determination of whether MPs or MPCs are produced by a prohibited foreign entity. In addition, there are special rules regarding MPs that contain MPCs produced by a prohibited foreign entity, and vice versa.

Once a taxpayer has gone through all of the steps above, the taxpayer must aggregate all the direct costs and prohibited foreign entity direct costs. The following formula is then used to calculate the MACR:

(Total Direct Costs – Total Prohibited Foreign Entity Direct Costs)
Total Direct Costs

If the resulting percentage is less than the applicable threshold percentage, then the qualified facility or energy storage system includes material assistance from a prohibited foreign entity.

Eligible Components – 45X and Calculating the Eligible Component Material Assistance Cost Ratio

Notice 2026-15 further provides a framework for calculating MACR for eligible components produced for purposes of Section 45X. Unlike the facility-level analysis applicable to sections 45Y and 48E, the Section 45X framework focuses on the costs attributable to the specific eligible component being produced and sold.

The ratio is calculated using the following formula:

(Total Direct Material Costs – Prohibited Foreign Entity Direct Material Costs)
Total Direct Material Costs

If the MACR falls below the applicable threshold percentage, the eligible component is considered to include material assistance from a prohibited foreign entity.

To calculate the MACR for eligible components, taxpayers must follow these steps, unless relying on one of the safe harbors described elsewhere in Notice 2026-15 (e.g., Identification, Cost Percentage or Certification safe harbors):

Step 1: Taxpayers must identify the "constituent materials" that are directly incorporated into the eligible component. This identification can be done on an individual basis or, alternatively, by relying on the Identification Safe Harbor (if the eligible component is listed in the Notice 2026-15's tables).

Observation: For Section 45X, the Identification Safe Harbor is generally limited to inverters, solar modules and battery modules used in distributed battery energy storage systems or grid-scale battery energy storage systems.

Step 2: Except where averaging is permitted, taxpayers must track each constituent material individually, including (i) its direct material costs (as determined in Step 3), and (ii) whether it was mined, produced or manufactured by a prohibited foreign entity. For averaging, taxpayers may group similar types of constituent materials incorporated into the same type of eligible component over a specified period (not exceeding the taxable year), calculating weighted averages based on quantity and costs.

Observation: The ability to rely on an average cost method will be an important tool for manufacturers that do not rely on the Certification Safe Harbor.

Step 3: Direct material costs are the costs paid or incurred by the taxpayer for constituent materials and include the purchase price, freight-in and tariffs. Taxpayers aggregate these to determine total direct material costs. If using averaging, costs are prorated based on the quantity of each constituent material over the specified period. Costs from resellers are traced back to the original miner, producer or manufacturer.

Step 4: For each constituent material, a taxpayer must determine whether the entity that mined, produced or manufactured the constituent material is a prohibited foreign entity. Direct material costs attributable to a prohibited foreign entity are then determined based on the status of the entity that mined, produced or manufactured the constituent material.

Observation: Taxpayers may rely on supplier certifications under the Certification Safe Harbor for this determination.

Step 5: Direct material costs from prohibited foreign entities are then subtracted from total direct material costs, and this number is then divided by total direct material costs. If the resulting ratio is below the applicable threshold, the eligible component satisfies the material assistance requirement.

Observation: These steps introduce significant complexity for Section 45X manufacturers, requiring detailed supply chain tracing and cost determinations. While averaging provides some flexibility, taxpayers should maintain robust records to substantiate calculations. There are also special rules for contract manufacturing arrangements.

Identification Safe Harbor – Application for Qualified Facilities or Energy Storage Systems

As noted above, Notice 2026-15 contains several safe harbors that are intended to assist taxpayers with complying with the material assistance rules. The first of these safe harbors is the Identification Safe Harbor, which allows taxpayers claiming Section 45Y or Section 48E credits to use the 2023-2025 Safe Harbor Tables to identify the types of MPs or MPCs used in a qualified facility or energy storage system. If a taxpayer elects to utilize this safe harbor, the MPs and MPCs listed in the 2023-2025 Safe Harbor Tables are considered the exclusive and exhaustive list of MPs and MPCs. Any MPs or MPCs not listed in the 2023-2025 Safe Harbor Tables are disregarded.

Identification Safe Harbor – Application for Eligible Components

The Identification Safe Harbor for eligible components and Section 45X credits allows taxpayers to use the 2023-2025 Safe Harbor Tables to identify the types of constituent materials in an eligible component as long as the eligible component is "listed" in the 2023-2025 Safe Harbor Tables. For purposes of Notice 2026-15, an eligible component will be considered as listed for the 2023-2025 Safe Harbor Tables if it is included in the table provided in Section 4.01(3)(d) of the notice, which is generally limited to inverters, solar modules and battery modules used in distributed battery energy storage systems or grid-scale battery energy storage systems. If a taxpayer elects to utilize this safe harbor, the MPCs listed in the 2023-2025 Safe Harbor Tables are considered the exclusive and exhaustive list of constituent materials.

Cost Percentage Safe Harbor – Application to Qualified Facilities or Energy Storage Systems

The Cost Percentage Safe Harbor in Section 4.02 of Notice 2026-15 allows a taxpayer using the Identification Safe Harbor to determine its direct costs by using the assigned cost percentage for the applicable MPs and MPCs shown in the 2023-2025 Safe Harbor Tables.

Under this safe harbor, a taxpayer would use the following steps to calculate its MACR for qualified facilities or energy storage systems:

1. Identify the MPs and MPCs using the Identification Safe Harbor.
2. Track whether each MP or MPC was produced by a prohibited foreign entity.
3. Aggregate the assigned cost percentage for each listed MP and MPC to determine the total percentage for direct costs.
4. Aggregate the assigned cost percentage for each listed MP and MPC produced by a prohibited foreign entity.
5. Calculate the MACR by subtracting the percentage in Step 4 from the percentage in Step 3 and dividing the result by the percentage in Step 3.

Cost Percentage Safe Harbor – Application to Eligible Components

The Cost Percentage Safe Harbor allows a taxpayer using the Identification Safe Harbor to determine its direct material costs by using the assigned cost percentage for the applicable MPC shown in the 2023-2025 Safe Harbor Tables. Under this safe harbor, a taxpayer would use the following steps to calculate the MACR for an eligible component:

1. Identify the constituent materials using the Identification Safe Harbor.
2. Track whether each constituent material was sourced by a prohibited foreign entity.
3. Aggregate the assigned cost percentage for each listed MPC included in the eligible component.
4. Aggregate the assigned cost percentage for each listed MPC sourced from a prohibited foreign entity and included in the eligible component.
5. Calculate the MACR for eligible components by subtracting the percentage in Step 4 from the percentage in Step 3 and dividing the result by the percentage in Step 3.

Observation: The Cost Percentage Safe Harbor for eligible components is limited to the types of eligible components listed in Section 4.01(3)(d) of Notice 2026-15.

Certification Safe Harbor – Purpose and Function

The Certification Safe Harbor described in Section 4.03 of Notice 2026-15 allows taxpayers to rely on certifications from direct suppliers rather than independently determining whether materials and products were produced or sourced from a prohibited foreign entity. The safe harbor is intended to simplify compliance by shifting part of the verification burden to suppliers and reducing the need for taxpayers to separately determine prohibited foreign entity status.

This safe harbor applies to material assistance cost ratio calculations under sections 45Y and 48E of the Code and eligible component material assistance cost ratio calculations under Section 45X of the Code.

To use the safe harbor, a taxpayer requests certifications from its direct supplier for each MP, MPC, or constituent material. A valid certification must:

• Be in writing, including electronic format, and signed under penalties of perjury by an authorized representative of the supplier
• Specify the direct costs attributable to items that were not produced or sourced from a prohibited foreign entity, or certify that all items are non-prohibited foreign entity produced or sourced
• Clearly identify the supplier and the specific items covered by the certification
• State that the supplier exercised reasonable due diligence in determining prohibited foreign entity status

Taxpayers may rely on certifications in good faith when the certification is accurate. However, if a certification is inaccurate due to supplier error or other issues, the taxpayer may face credit disallowance, penalties under Section 6695B of the Code or accuracy-related penalties under Section 6662 of the Code.

Observation: The Certification Safe Harbor reduces compliance burdens for taxpayers with complex supply chains, but it requires reliable supplier cooperation and appropriate due diligence to confirm certification accuracy. Because reliance is limited to certifications from direct suppliers, taxpayers should address certification requirements in procurement documentation early in the contracting process.

Definition of Constituent Materials

For purposes of applying the Certification Safe Harbor and calculating the material assistance cost ratio, certifications may cover MPs, MPCs, or constituent materials included in the relevant qualified facility, energy storage technology or eligible component.

"Constituent materials" generally refer to materials that are directly incorporated into an MP or eligible component and become part of the finished item during the production process. Materials that are not incorporated into the final product, such as tools or production supplies, are not treated as constituent materials for these purposes.

Observation: The definition narrows the scope of certifications to materials directly incorporated into the finished product, which may simplify tracing requirements. However, taxpayers should carefully evaluate how the definition applies in complex manufacturing chains where the line between constituent materials and other inputs may be less clear.

IRS Requests for Comments

Notice 2026-15 requests written public comments on the material assistance framework and related prohibited foreign entity rules. Comments are requested by March 30.

The Treasury Department and the IRS specifically request comments on general implementation issues as well as targeted areas where additional guidance may be needed, including:

• Whether additional guidance is needed to clarify how taxpayers should determine "total direct costs" attributable to MPs and components incorporated into a qualified facility or energy storage technology
• If guidance for total direct costs is needed, then what standard should apply for qualified facilities and energy storage technologies under sections 45Y and 48E of the Code, including whether a direct cost framework based on direct materials and direct labor appropriately captures the relevant costs
• What rules are necessary to prevent circumvention of the prohibited foreign entity and material assistance rules consistent with the purposes of the OBBBA
• What additional substantiation and documentation requirements, beyond those required under Section 6001 of the Code, should apply to support compliance with anti-circumvention rules, including demonstrating that beginning of construction has occurred for purposes of the prohibited foreign entity and material assistance rules

Notice 2026-15 indicates that Treasury and the IRS intend to issue more comprehensive proposed regulations and additional guidance addressing prohibited foreign entity definitions, material assistance rules and related safe harbor tables.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.