Material Assistance and the Foreign Entity Rules
Projects whose construction, reconstruction or erection began after December 31, 2025 have to clear a new sourcing test before the credit is available. The rule denies the credit to a facility or storage system that includes material assistance from a prohibited foreign entity, and material assistance is measured by a cost ratio rather than by a yes or no question about any single part. The IRS issued interim guidance and safe harbors on February 12, 2026 in Notice 2026-15.
For a nonprofit or municipal owner, this is a due diligence obligation that lands squarely on the organization claiming the credit, and the consequence of getting it wrong now includes a penalty that an entity with no tax liability still has to pay.
How the material assistance cost ratio works
The ratio is narrower than the project budget. It compares the total direct costs attributable to all manufactured products, including components, that are incorporated into the facility or storage system on completion, less the portion of those costs attributable to products mined, produced or manufactured by a prohibited foreign entity, against that same total. Installation labor, land, permitting and interconnection studies sit outside the fraction. The project passes if the ratio meets or exceeds a threshold percentage, and the threshold climbs by the year construction begins.
| Construction begins in | Facility threshold | Storage threshold |
|---|---|---|
| 2026 | 40% | 55% |
| 2027 | 45% | 60% |
| 2028 | 50% | 65% |
| 2029 | 55% | 70% |
| After 2029 | 60% | 75% |
Storage carries the higher bar at every step.
Notice 2026-15 provides three interim safe harbors: an identification safe harbor for naming the manufactured products and components in a listed project type, a cost percentage safe harbor that uses the 2023 to 2025 tables in place of building the ratio from supplier cost data, and a certification safe harbor resting on a supplier statement signed under penalties of perjury. A taxpayer relying on a safe harbor has to attach a statement to Form 3468 identifying the specific safe harbor used and how it was applied, filed with the return for the first year the credit is claimed.
Why this rule uses a different construction start date
The statute fixes beginning of construction for the foreign entity rules to the guidance in effect on January 1, 2025, which means the older notices and their physical work test and five percent safe harbor.
So a project can have two beginning of construction analyses running side by side: one for the credit termination deadline, and this one, frozen. Notice 2026-15 says it outright: Notice 2025-42 wasn’t intended to address beginning of construction for the prohibited foreign entity rules, and is inapplicable for that purpose. A change to the first doesn’t move the second. Any project that started in 2026 needs its construction start documented under the frozen standard, on its own, in the file.
Why the penalty matters more for a tax-exempt owner
The 2025 tax law extended the excessive payment rules to this exact disallowance, for tax years beginning after July 4, 2025. Section 6417(d)(6)(D) picks up a disallowance described in Section 6662(m)(2), which is the disallowance of a Section 45X, 45Y or 48E credit by reason of overstating the material assistance cost ratio. An excessive payment means repaying the amount plus 20% of it, imposed for the year the IRS makes the determination, whether or not the organization is otherwise subject to income tax. The 20% is waived only if the organization shows reasonable cause.
A developer that loses a credit absorbs it against other tax. A school district that receives a payment, spends it on the project, and then faces repayment plus 20% has a budget problem with no offsetting item. That asymmetry is the reason supplier documentation belongs in the construction contract rather than in the return file.
What to ask your EPC for, and when
Ask before equipment is ordered, because after delivery the answer is whatever the supply chain happens to be.
At bidSourcing representations
Ask each bidder to state, by component, where manufacturing occurs and whether any supplier is within the prohibited categories.
At contractDocumentation obligations
Require cost and origin documentation in the form the safe harbor or the ratio calculation needs, with audit access surviving completion.
At procurementChange control
Require written notice and owner consent before any substitution of a supplier or component.
At closeoutThe file
Collect the final component list, origin documentation, and the support for whichever safe harbor the return will use.
How material assistance differs from domestic content
Three separate regimes now run on the same project and they use different numbers. Domestic content is a bonus and, for larger projects claiming direct pay, a condition of the payment, measured against a Section 48E adjusted percentage that runs 40% for construction beginning before June 16, 2025, 45% from that date through the end of 2025, 50% for 2026 starts and 55% for starts after 2026. Material assistance is this test, with its own thresholds. The steel and iron rule inside domestic content is a pass or fail sourcing test with no percentage at all.
The percentages aren’t interchangeable. They answer different questions and they’re documented separately.
Notice 2026-15 is interim. Its stated reliance periods run until shortly after proposed regulations and the safe harbor tables are published. It can be relied on now, and it's written to be superseded. A project that files on a safe harbor should keep the underlying documentation regardless, because the statement attached to the return is a representation, not a shield.
Updated September 2026. Notice 2026-15 is still the operative guidance here. The proposed regulations and the safe harbor tables it points to have not displaced it, so the thresholds and the attachment requirement above are current.
What to line up before the order goes in
If a project began construction in 2026, make sure two separate construction start files exist and that the supplier documentation request has gone out in writing. If a project is still in bidding, get sourcing representations into the bid documents now, while the bids are still open.
Buying equipment this year? GreenFile Advisory helps tax-exempt owners assemble the sourcing documentation the return depends on, and files the return that relies on it. Tell us where the project stands.
Have a project and a deadline?
GreenFile Advisory handles the filing side of Section 6417 direct pay: eligibility confirmation, IRS pre-filing registration, and the Form 990-T with the elective pay election. Filing and compliance only, so we are not competing with your installer or your financing.
This article is general information, not tax advice, and it reflects IRS guidance as of February 18, 2026. Deadlines and eligibility depend on your organization's tax year and entity type. Please confirm your own facts with a qualified tax professional before relying on anything here.