Feb 17, 2026
Foreign Entity of Concern (FEOC)
DEFINITIONS
▪ Under §48E, BESS is treated as an ‘Energy Storage
Technology’ or EST
▪ An EST is defined (by reference to §48 (c) (6) as property that:
o Receives, stores, and delivers energy for conversion to
electricity
o Has a nameplate capacity ≥ 5 kWh
o Is not primarily used for transportation
o Includes thermal energy storage properties
▪ BESS qualifies for §48E Clean Electricity Investment Tax
Credits if:
o It is placed in service after December 31, 2024
o Construction begins after statutory termination dates
o It does not include material assistance from a Prohibited
Foreign Entity (PFE) if construction begins after
December 31, 2025
o Determination is based on supplier's tax year at time of
cost payments
MATERIAL ASSISTANCE COST RATIO
For BESS, eligibility depends on definitions under
§7701 (a) (52):
o Total direct costs include direct material, direct labor costs
of Manufactured Products (MPs) and components
incorporated into the EST
o PFE direct costs are the portion attributable to
MPs or Manufactured Product Components
(MPCs) that are mined, manufactured, and produced by a PFE
o If MACR is below the applicable threshold, the EST
includes material assistance from a PFE and is ineligible
The threshold percentages are as follows:
o 55% in 2026
o 60% in 2027
o 65% in 2028
o 70% in 2029
o 75% in 2030 and beyond
TECHNICAL COST COMPONENTS
For MACR, only MPs and MPCs are included, some
examples are:
Battery modules
Battery packs
Battery cells
Inverters
Power conversion systems
Control systems
Thermal management systems
â–ª Steel and iron-based structural components are
excluded from MACR unless identified as MPs or MPCs
â–ª Main power transformers can be ignored
â–ª However, it is important to note that asset owners must
focus only on a discrete number of MPs and MPCs for
MACR calculations
TRACKING METHODOLOGIES
â–ª Notice 2026-15 establishes three tracking
methodologies:
o Individual component tracking, where each MP or MPCs tracked to specific BESS units
o De-minimis assignment (10% rule), where each MP or MPCs representing < 10% of total direct costs may be assigned across facilities
o Averaging for small BESS (<1 MWAC)
Must be of same type
< 1 MWAC
Placed in service same taxable year
Taxpayers may average direct costs and PFE production percentage. This is especially relevant for Distributed Generation (DG) BESS portfolios.
APPLICABLE SAFE HARBORS
â–ª Two interim safe harbors apply as of the date of
the notice:
o Identified safe harbor - Use 2023-2025 Safe Harbor Tables (Notice 2025-08) to identify and qualify and quantify MPs/MPCs
o Cost percentage safe harbor - Use assigned cost percentages instead of actual cost tracking (only if using identification safe harbor)
â–ª It is important to note that safe harbor is:
o Not allowed for incremental production rule projects
o Excluding used property under 80/20 rule from MACR calculations
â–ª Per Notice 2025-08, a grid-scale BESS is one with a nameplate capacity greater than 1 MWh, whereas distributed BESS shall have a nameplate capacity less than or equal to 1 MWh
QUALIFIED INTERCONNECTION PROPERTY
â–ª If BESS includes qualified interconnection property:
o Separate MACR must be calculated
o If interconnection property fails MACR, BESS ITC can still be claimed but interconnection costs are excluded from qualified investment
▪ Qualified interconnection property could include network upgrade costs paid to the interconnecting utility – the IRS has recommended separate MACR calculations for these network upgrades
â–ª It is imperative to work in concert with the utilities to determine cost and sourcing of equipment to accurately quantify and qualify an interconnection specific MACR.
THE RISK OF NOT BEING DILIGENT
â–ª If MACR is overstated, then:
o 20% accuracy penalty applies
o 1% understatement threshold instead of 10%
o 6-year statute of limitations of MACR- related deficiencies
o Supplier misstatements subject to §6695B penalties
â–ª That said, there is both economic and reputational risk of not being diligent about strategic sourcing
â–ª The onus of traceability is solely on the developer's shoulders and goes beyond traditional checklists and CAPEX focused decision making.
TECHNICAL IMPLICATIONS
â–ª Supply chain strategy
o Track origin of battery cells and modules carefully
o Avoid PFE-produced battery cells unless MACR remains above threshold
â–ª Portfolio structuring
o Consider < 1 MW averaging rule for distributed projects
o Use the safe harbor cost tables where advantageous
â–ª Contracting
o Ensure supplier certifications, but be diligent about reviewing these in detail due to potential penalties
at play
o Avoid licensing arrangements that could trigger ‘effective control’ by PFEs
â–ª Financial modeling
o Build MACR analysis into tax equity underwriting
o Model threshold compliance by construction year
FUTURE GUIDANCE
â–ª The IRS is still working on FEOC, so the current notice is one of many expected in the coming months
â–ª FEOC also bans tax credits from being claimed on any project or product over a Specified Foreign Entity
(SFE) has been effective control by contract
o Congress wrote into the statute 13 contract clauses that are leading signs of effective control to ensure non-circumvention
o Granting the rights to use Intellectual Property (IP) belonging to an SFE, or modifying an existing contract, on or after July 4, 2025, is automatically considered to give the SFE effective control and as
such automatic disqualification from a tax-credit perspective
â–ª FEOC explicitly bars any company that is a PFE from claiming federal tax credits
â–ª The IRS is seeking comments on the current notice up until March 30, 2026