Understanding the OBBBA’s FEOC Framework

• the Clean Energy Production Credit (Section 45Y);
• the Clean Electricity Investment Credit (Section 48E);
• the Zero-Emission Nuclear Power Production Credit (Section 45U);
• the Advanced Manufacturing Production Credit (Section 45X);
• the Credit for Carbon Oxide Sequestration (Section 45Q); and
• the Clean Fuel Production Credit (Section 45Z).

The effective date of the limitations varies somewhat by credit and entity (refer to the table at the end of this post for more information). Energy projects will need to begin construction (as that concept is elaborated in Internal Revenue Service (IRS) Notices 2013-29 & 2018-59) prior to January 1, 2026, in order to avoid the impact of these FEOC restrictions. These Notices have since been codified but only with respect to the FEOC rules. Importantly, on July 7, 2025, President Trump issued an Executive Order entitled “Ending Market Subsidies for Unreliable, Foreign Controlled Energy Sources,” directing the Treasury Secretary to strictly enforce the termination provisions concerning both the Clean Electricity Production and Investment tax credits under Sections 45Y and 48E of the Internal Revenue Code and to scrutinize taxpayer activities that are purported to constitute “beginning of construction” under the Notices. It also directs the IRS to issue updated guidance on this topic within 45 days following the Order’s promulgation (see our prior update on the EO).

A FEOC is an organization or entity that is owned by, controlled by, or subject to the jurisdiction of a government or foreign country that is a covered nation. Covered nations include China, Iran, Russia, and North Korea. There are two sub-species of Prohibited Foreign Entities (PFEs) under the FEOC Restrictions: Specified Foreign Entities (SFEs) and Foreign-Influenced Entities (FIEs). SFEs include foreign-controlled entities, such as those organized or incorporated, or having their principal place of business, in a covered nation. The 2021 National Defense Authorization Act contains a listing of SFEs, as do various other congressional acts and pieces of federal agency guidance. If an entity is not an SFE, the determination of whether it qualifies as an FIE (and thus as a PFE) hinges on various factors, including (a) who has the authority to appoint covered officers, equity ownership percentages and (b) who has control over significant amounts of entity debt. Additional guidance on SFEs will be published by the end of 2026 with preliminary guidance from the administration expected sometime this August.

As laid out in this legislation, the FEOC restrictions are twofold: first, FEOCs themselves are prohibited from claiming or transferring any applicable credit; second, domestic entities with certain relationships to FEOCs are prohibited from doing the same. Entities that wrongfully claim a clean energy credit in violation of the FEOC limitations may be subject to credit disallowance or recapture, as well as the possibility of an enhanced restated tax liability that also triggers interest and penalties. The recapture period for credits under Section 48E is 10 years, beginning on the date on which the project is placed in service, and is 100% of the applicable credit. It is triggered if any payments are made to an SFE that exercises effective control and applies to any tax year beginning two years after the enactment of the bill (i.e., 2028). Full recapture for violative payments also applies to credits under Sections 45X and 45Y in each year that an applicable credit is claimed. The specific types of activities or relationships that violate the FEOC limitations apply in the cases of Sections 45Y (the Clean Energy Production Credit), 48E (the Clean Electricity Investment Credit), and 45X (the Advanced Manufacturing Production Credit), and include sourcing (or “Material Assistance”) from, licensing arrangements with, and significant payments to PFEs. This prohibition on significant payments by taxpayers to PFEs has important practical implications for domestic entities that are involved in lending relationships with PFEs. This is because violative disbursements may include non-trivial payments of interest, dividends, rents, or royalties to PFEs, on top of the PFE debt ownership limitations mentioned above and paired with the concept of effective control. Thus, the combined result of these FEOC rules may well be to make foreign commercial lending arrangements with domestic taxpayers that generate IRA credits infeasible. Furthermore, wind and solar credits under Section 48E will be fully denied for any taxable year in which the taxpayer leases the applicable property to a third party, posing significant compliance problems for parties engaging in leasing agreements involving the subject property as well.

Practically speaking, the prohibition on excess Material Assistance, or sourcing, promises to be the most impactful of these. Thankfully, this analysis is black and white. The bill establishes different “Material Assistance Cost Ratios” for each credit (and in some cases, for each eligible component) as set forth below, above which the project or component must remain in order for it to be eligible for the applicable credit. These ratios measure the percentage of the component’s value sourced from entities that are not PFEs (i.e., independent, domestic entities). This means that an organization must have a ratio above the relevant threshold in order to qualify. In short, the ratios compare the total cost of all manufactured products from non-PFEs that are incorporated into the component to the total cost of all manufactured products used in producing the eligible component in order to determine whether it was sufficiently domestically sourced. These thresholds become more stringent (i.e., higher) over time, as depicted in the table below.

For instance, an Eligible Solar Component produced under the Section 45X Advanced Manufacturing Production Credit has a Material Assistance Cost Ratio of 80% in 2029 (gradually stepped up by 10% each year from an initial threshold of 50% in 2026), meaning that at least 80% of the Solar Component’s total cost of manufactured products must be domestically sourced. If the total cost of manufactured products that comprise the Solar Component equals $1,000, and the entity incorporates $375 in manufactured products from a PFE into the Component, then the cost ratio would be calculated as follows: ($1,000 – $375)/$1,000, or 62.5%. This is less than the 80% required threshold for 2029 and would not qualify under the FEOC rules. On the other hand, if the taxpayer only sourced $125 worth of manufactured products from a PFE for the Component, the ratio would be: ($1,000 – $125)/$1,000, or 87.5%. This total exceeds the 80% threshold for 2029 and would satisfy the Material Assistance Cost Ratio established under the bill’s FEOC rules.

FEOC Restrictions Enacted in the Big Beautiful Bill

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