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Recent IRS guidance, Notice 2026-15, clarifies how to calculate the "material assistance cost ratio" or "MACR" for clean energy component manufacturers seeking to claim the Section 45X advanced manufacturing production tax credit ("45X").
We addressed Notice 2026-15 (the "MACR guidance") in a previous alert as it applied to the Section 48E investment tax credit ("ITC") and Section 45Y production tax credit ("PTC"), key federal tax credits for qualified clean energy facilities (e.g., solar, wind, hydroelectric, geothermal, and more) and energy storage projects (batteries, thermal storage, and hydrogen storage).
This article addresses the MACR guidance specifically as it applies to 45X, which establishes a production tax credit for several clean energy facility components and other materials manufactured or produced in the United States and sold by the taxpayer to unrelated parties. Creditable components, equipment, and materials include solar, wind, and battery components, inverters, electrode active materials, offshore wind vessels, and several critical minerals. For a complete list, and more background on 45X, see our previous post.
Introduction
The recently enacted, so-called "One Big Beautiful Bill Act" ("OBBBA") imposed prohibited foreign entity ("PFE") restrictions (colloquially known as the FEOC (foreign entity of concern) restrictions) on several tax credits, including 45X. As with other tax credits, such as the ITC and PTC, 45X precludes taxpayers from credit eligibility if they are deemed to be PFEs themselves or receive "material assistance" from PFEs.
The MACR guidance primarily addresses "material assistance." Material assistance refers to a set of requirements and percentage thresholds the OBBBA sets for incorporating non-PFE components and materials into 45X goods. Falling below the OBBBA thresholds (i.e., incorporating PFE components or materials into 45X goods) can result in serious consequences, including loss of the 45X credits.
The OBBBA refers to the percentage of non-PFE costs as the "material assistance cost ratio" or "MACR." The MACR guidance addresses how to calculate the "Eligible Component" MACR for 45X goods. "Eligible Components" refer to creditable 45X goods identified in the statute.
As mentioned in our previous alert, the MACR guidance is largely silent on other PFE requirements in the OBBBA, including what it means to be a PFE in the first place as well as the 10-year recapture rules. The MACR guidance leaves those other PFE requirements to be potentially addressed in future proposed regulations.
IRS is soliciting comments on the MACR guidance by March 30, 2026. Thoughtful stakeholder engagement will be critical to developing workable PFE rules for 45X and the other credits to which the PFE restrictions apply.
Calculating the Eligible Component MACR in Five Steps
At its core, calculating the Eligible Component MACR (the percentage of non-PFE costs in 45X eligible components) requires the taxpayer to determine its total direct materials costs and the amount of those costs that are attributable to PFEs and do the following calculation:
Step 1: Identify "Constituent Materials"
Taxpayers must identify each specific Constituent Material in the 45X eligible component they are producing and selling. Constituent Materials are defined as the "[c]onstituent elements, materials, or subcomponents of the [45X] eligible component that are considered direct materials costs under" a particular section of the Tax Code, Section 1.263A-1(e)(2)(i)(A).
Those terms—constituent elements, materials, or subcomponents—are not further defined in the MACR guidance, which could complicate how taxpayers will go about identifying them.
For certain 45X eligible components, however, taxpayers will be able to rely on the Identification Safe Harbor, one of three interim safe harbors established by the MACR guidance. The Identification Safe Harbor for 45X, as for the ITC and PTC, allows the taxpayer to use certain tables IRS previously published in guidance on the domestic content adder requirements in IRS Notices 2023-38, 2024-41, and 2025-08, which the MACR guidance refers to as the "2023-2025 Safe Harbor Tables."
Importantly, the MACR guidance specifies that only certain 45X eligible components may be treated as "Listed eligible components" in the 2023-2025 Safe Harbor Tables. 45X eligible components that are not treated as "Listed eligible components" cannot use the Identification Safe Harbor or the 2023-2025 Safe Harbor Tables for purposes of calculating the Eligible Component MACR.
The "Listed eligible components" are as follows:
| Eligible Component | Applicable Project Component (Listed eligible component) |
| Central inverters § 45X(c)(2)(B) | Inverter |
| Commercial inverters § 45X(c)(2)(C) | Inverter |
| Distributed wind inverters § 45X(c)(2)(D) | Inverter |
| Microinverters § 45X(c)(2)(E) | Inverter |
| Residential inverters § 45X(c)(2)(F) | Inverter |
| Utility inverters § 45X(c)(2)(G) | Inverter |
| Solar module § 45X(c)(3)(B)(v) | PV module |
| Battery modules using battery cells § 45X(c)(5)(B)(iii) (as described in section 4.01(3)(c)(ii) of this notice) [that are "directly incorporated" into distributed or grid-scale battery energy storage systems] | Battery pack/module |
If a taxpayer is producing any of the above "Listed eligible components," they may use the columns in the 2023-2025 Safe Harbor Tables for "Manufactured Product Components" to identify the "Constituent Materials" of eligible components for purposes of calculating the Eligible Component MACR. For example, the table excerpted below from Notice 2025-08 for the PV Module lists "Manufactured Product Components" (i.e., Constituent Materials) in the right-hand column:
| APC | MPC |
| PV module | Cells |
| Frame/Backrail | |
| Front Glass | |
| Encapsulant | |
| Backsheet/Backglass | |
| Junction Box | |
| Edge Seals | |
| Pottants | |
| Bus Ribbons | |
| Bypass Diodes | |
| Production |
Step 2: Track Constituent Materials
Taxpayers must track each Constituent Material and its characteristics—its direct material costs and whether it was "PFE Sourced"—to the specific 45X eligible component into which it was incorporated. PFE Sourced is defined in the MACR guidance as being "supplied by a PFE," though elsewhere the MACR guidance suggests that it also means "mined, produced or manufactured by a PFE."
Taxpayers producing Listed eligible components identified in the chart above may also rely on the Cost Percentage Safe Harbor, the second of the three interim safe harbors established in the MACR guidance, in lieu of tracking each Constituent Material's direct material costs.
The Cost Percentage Safe Harbor allows taxpayers producing Listed eligible components to rely on the cost percentages established in the 2023-2025 Safe Harbor Tables. If using the Cost Percentage Safe Harbor, taxpayers must rely on the applicable 2023-2025 Safe Harbor Tables as the exclusive and exhaustive list of Constituent Materials. Materials that aren't listed in the Safe Harbor Tables can be disregarded, as can listed Constituent Materials that the taxpayer does not in fact incorporate into the taxpayer's 45X eligible component.
Taxpayers electing to rely on the Cost Percentage Safe Harbor still need to track whether Constituent Materials are PFE Sourced.
The MACR guidance also provides an averaging method for tracking Constituent Materials, which allows taxpayers to calculate the average Direct Material Costs and PFE Production Percentage of a given type of Constituent Material incorporated in the same type of eligible component produced during a specified period.
Step 3: Determine Direct Material Costs
Taxpayers must determine the direct material costs of each Constituent Material tracked to the eligible component. Taxpayers relying on the Cost Percentage Safe Harbor do not need to determine actual direct material costs, and will instead use the assigned cost percentages for each Constituent Material in the 2023-2025 Safe Harbor Tables.
The MACR guidance also addresses contract manufacturing arrangements under Section 1.45X-1(c)(3)(iii), which allow parties to determine by agreement which party in the manufacturing arrangement may claim the 45X credit. In the case of an eligible component produced pursuant to a contract manufacturing arrangement, direct material costs are those paid or incurred by the party that performs the actual production activities that bring about a substantial transformation resulting in the eligible component. If the party performing the production activities did not incur any or all direct material costs, then direct material costs also include those costs to the taxpayer claiming the Section 45X credit.
Step 4: Determine PFE Direct Material Costs
Taxpayers must determine which of their Constituent Material direct material costs are attributable to PFE Sourced Constituent Materials (i.e., "PFE Direct Material Costs").
Here, taxpayers may rely on the Certification Safe Harbor, the third and final interim safe harbor established by the MACR guidance.
Importantly, unlike the Cost Percentage Safe Harbor, the Certification Safe Harbor is available to all 45X taxpayers, regardless of whether they are producing Listed eligible components.
To use the Certification Safe Harbor for PFE attribution, taxpayers may obtain certifications from their direct suppliers that meet several requirements.
- They must include the direct supplier's employer identification number or similar identification number issued by a foreign government.
- They must be signed under penalties of perjury.
- They must be retained by the supplier, as well as the taxpayer, for no less than 6 years and be provided to the Treasury Secretary (or the Secretary's delegate) upon request.
- They must also be from the supplier from which the taxpayer
purchased an eligible component or Constituent Material and state
that
- such property was not produced or manufactured by a PFE and that the supplier does not know (or have reason to know) that any prior supplier in the chain of production of that property is a PFE,
- for purposes of § 45X, the total direct material costs for each component, constituent element, material, or subcomponent that were not produced or manufactured by a PFE, or
- for purposes of § 45Y or § 48E, the total direct costs attributable to all Manufactured Products that were not produced or manufactured by a PFE.
The final bullet in the list above mirrors the statutory requirements for certifications in the OBBBA. The MACR guidance also states that, for 45X, the certification must either (1) include the total direct material costs paid or incurred by the taxpayer for eligible components or Constituent Materials that were not PFE Sourced, or (2) state that an eligible component or Constituent Material was not PFE Sourced.
As with the ITC/PTC certifications under the Certification Safe Harbor, taxpayers cannot rely on certifications that they know or have reason to know are inaccurate. The MACR guidance does not elaborate further on the "reason to know" standard, suggesting some level of inquiry and diligence by the taxpayer will be prudent if the taxpayer is relying on the Certification Safe Harbor.
Step 5: Calculate the Eligible Component MACR
After determining costs in Steps 3 and 4, the final step is to calculate the Eligible Component MACR as follows:
A separate Eligible Component MACR must be calculated for each eligible component sold during the taxable year, though multiple eligible components may share the same MACR if they share Constituent Materials from the same entity or are included in the same averaging calculation.
Conclusion
As we described in our previous alert, the MACR guidance does not address several key questions about the PFE requirements, including how to determine whether certain entities are PFEs in the first place. According to the MACR guidance, those issues and others will be addressed in future proposed regulations.
Written comments on the MACR guidance are due by March 30, 2026. As we noted in our prior alert, stakeholders who fail to raise specific concerns now may find that Treasury and the IRS proceed with regulations that prove unworkable or unduly burdensome. Industry participation in the ongoing development of the PFE rules, including the MACR guidance and forthcoming proposed regulations, will be critical.
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.
