New PFE Restrictions in Energy-Related Credits
The One, Big, Beautiful Bill added provisions that disqualify claims for many energy tax credits if the taxpayer, project, or components receive “material assistance” from a Prohibited Foreign Entity (PFE). Key affected credits include:
- Clean electricity production credits under § 45Y
- Investment tax credits under § 48E
- Advanced manufacturing credits under § 45X (irs.gov)
What counts as PFE and material assistance?
- A PFE is defined by law (section 7701(a)(52))—entities that are from certain foreign countries or under control or influence. Details are complex, and interim guidance helps define application. (irs.gov)
- The Material Assistance Cost Ratio (MACR) compares the cost of materials or services from PFEs relative to overall cost. If the MACR exceeds certain thresholds, the credit may be disallowed. Interim safe-harbor MACR tables are provided until final rules are issued. (irs.gov)
Timing matters: Construction and usage dates
- For § 45Y / § 48E qualified facility or energy storage tech construction beginning after December 31, 2025, the interim rules attach. Taxpayers may rely on the safe-harbors until 60 days after the final safe-harbor tables are published. (irs.gov)
- For § 45X eligible components sold in taxable years beginning after July 4, 2025, similar rules apply. (irs.gov)
Safe harbor rules and examples
- Example: A solar facility begins construction AftDec 31, 2025; 10% of material cost is sourced from a PFE. Safe-harbor MACR threshold (interim) may allow this usage. If instead 60% cost from PFEs, credit could be lost under interim guidance.
- If eligible component is sold by a company where component manufacture is partly sourced abroad—cost allocation and sourcing records become critical.
Actionable steps for compliance
- Map all suppliers and inputs for your project—identify any entities that could be PFEs, and trace where materials and services come from.
- Compute projected MACRs under interim safe harbor tables; adjust sourcing if needed to stay below disqualification thresholds.
- Ensure contracts, supply agreements clearly specify origin, manufacturing, and whether any assistance or part comes from PFEs.
- Monitor forthcoming proposed and final regulations; keep an eye on IRS resource guides and file comments if relevant.