Half of the Missing Tax Rules Are Out

The Treasury Department published long-awaited guidance for claiming the clean energy tax credits on Thursday, ending the state of limbo in which project developers have languished since the One Big Beautiful Bill Act passed last summer. Well, sort of.

Trump’s tax law put new restrictions on many of the clean energy tax credits, limiting eligibility to projects that could prove they had minimal material inputs or oversight from a handful of countries labeled “foreign entities of concern,” i.e. Russia, North Korea, Iran, and, most problematically, China. The problem was that it was hard to suss out exactly how to follow these rules. The Treasury Department would have to provide clarification, or in the parlance of federal tax law, “guidance.” Without this, developers might unintentionally break the rules, get audited, and then owe the government a bunch of money — a risk that financiers are not keen to take.

Now, developers have, shall we say, partial guidance. The FEOC rules have two main components, and a notice published by the IRS Thursday covers one of them.

The guidance clarifies how to calculate the material assistance limits, which ask for proof that a certain percentage of the material inputs to the project did not come from a FEOC-owned or -influenced company. For a solar farm, for example, that includes the photovoltaic cells, the frame, the glass, the sealant, the circuit boards, etc. These limits apply to the clean electricity investment and production tax credits (48E and 45Y), as well as the clean manufacturing credit (45X), and went into effect on January 1 of this year.

The notice the Trump administration published this week demystifies the material assistance math for some project types, but not others. It says the Treasury will be publishing more on this by the end of the year.

Then there are foreign influence and “effective control” restrictions that have to do with the ownership structure of the project. Those apply to any project attempting to claim a tax credit, including carbon capture (45X), nuclear, (45X), and clean fuels (45Z), that started construction as of January 1, 2025. Even though these rules have been in effect for longer, the Treasury has yet to clarify how to follow them. The notice suggests the department will publish this along with the additional information on material assistance.

To be clear, development did not halt or even really slow as a result of this missing guidance, although that may have been starting to change. Many companies were able to avoid the arduous material assistance calculations by starting construction on their projects last year, before the new restrictions went into effect. They were also allowed to use past IRS guidance, including tables breaking out the various components of a project and their relative weights for determining the amount of domestic content in a project, which they could then apply to determine the amount of non-FEOC-produced materials as a temporary solution.

As for the ownership restrictions, “you just err on the side of caution,” David Burton, a partner at the law firm Norton Rose Fulbright, told me.

I spoke to Burton late last night right after he had gotten through reading the new 95-page IRS notice, and he walked me through some of his initial takeaways.

What are the questions that companies had about FEOC prior to this that this document clears up?

It’s pretty specific on how to calculate whether or not you meet the material assistance percentage restriction. So for instance, if you have a repowered project, there was a question of, do you have to apply material assistance to the new stuff you’re adding? Or do you also have to apply it to the old stuff? And the rules clarify, it’s just the new stuff. If you have a solar project that you’re repowering by replacing the modules but you keep the old inverters, the new modules are subject to material assistance, the old inverters are not. So it clarifies that type of thing.

I think there’s going to be a lot of accountants doing spreadsheet work based on these calculations in the notice and the various elections and choices, trying to find the most advantageous path. I think it’s too early to tell if there’s some opportunities that the industry might benefit from, or some landmines that we weren’t anticipating, because there’s just … the calculations, there’s too many of them, they kind of link together, and it’s very complicated. So we need a little more than a couple hours to go through all that.

What do you mean by elections and choices?

You can use the domestic content safe harbor tables, or you can get a certification from a supplier. The notice says that if a supplier gives you a certification that says it’s not a prohibited foreign entity, and it’s not aware of any prohibited foreign entities in its supply chain, you can rely upon that. Or if it gives you a certification that says, I’m not a prohibited foreign entity, but 20% of the supply chain that feeds into my product is, you can rely upon that.

You’re unlikely to get top-to-bottom certifications that totally answer the question, but it is helpful.

We’ve talked in the past about how far up their supply chain companies will need to look to calculate material assistance. Does it answer those questions?

It does provide guidance on those questions, but really only for the technologies that are covered in the domestic content notices. So for instance, fuel cells or combined heat and power: If you’re not wind, solar, storage or some other technology, it doesn’t provide that much help. But it does clarify for wind, solar, and storage how to do the calculation. It provides some guidance for technologies other than wind, solar, and storage, but it’s still going to be pretty hard, I think.

What is still missing from the guidance? What are the open questions that certain projects might still face?

Foreign influence and foreign control, the notice doesn’t cover. For instance, there’s a rule that if 15% of your debt is held by Chinese banks, you don’t get tax credits. The notice doesn’t tell us how to apply that rule — how that applies if one lender transfers to another lender and syndications of debt, all that kind of stuff. It doesn’t even tell us at what level to apply that test. Do you apply it at the project company? Or at the ultimate parent company at the top of the ownership chain? So it gives us none of that.

How often are you running into that with clients?

Every deal where the project began construction after 2024 has that question. Most of the time it really shouldn’t be an issue, but you have to ask, who owns this entity? Who’s on your board? Who has the right to appoint people to your board? We’re starting to write a lot of memos about this stuff, but there’s not a lot of guidance.

How do you deal with that without guidance?

We have a statutory language, so it’s not like no guidance at all. You just err on the side of caution, and you err on the side of it being overbroad, and then you end up asking the parties involved a lot of due diligence questions. And they’re like, really? We have to answer your 1,000 questions here?

Do you think that, based on this guidance, this is workable for companies? This doesn’t seem to be the sort of backdoor way to kill the tax credits that some people initially feared.

I think it’s workable. I think it’s relatively even-handed. I think they are trying to make them administrable. Not easy, not simple — again, full employment for accountants. But at least you can spreadsheet it. It’s better to have to build a complicated spreadsheet than just be like, well, we don’t really know what the rule is, we’re not sure what the path is here.