FEOC Compliance in Tax Credit Transfers: A Buyer’s Due Diligence Checklist for 2026

In 2026, one question now sits at the top of every transferable energy credit deal: did this project receive material assistance from a prohibited foreign entity? If the answer is wrong, the credits go to zero — not reduced, eliminated.

The Foreign Entity of Concern (FEOC) rules introduced by the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, have reshaped diligence for every Section 45Y, 48E, 45X, 45Q, 45U, and 45Z credit transferred under Section 6418. IRS Notice 2026-15, released February 12, 2026, established the operational framework. Below is what every buyer needs to verify before signing a transfer agreement.

Why FEOC Diligence Is Different

Two features make FEOC unlike any prior tax credit compliance regime:

• All-or-nothing eligibility. Missing a domestic content threshold under the prior IRA framework cost a 10% bonus. Missing the Material Assistance Cost Ratio (MACR) threshold under the OBBBA disqualifies the entire credit.
• Six-year statute of limitations. The IRS has twice the normal window to assess additional tax on material assistance violations — meaning buyers carry exposure long after closing.

The 2026 FEOC Buyer’s Checklist

1. Confirm the Beginning-of-Construction (BOC) Date

FEOC requirements turn on when construction began:

• Before July 4, 2025: Generally outside the FEOC regime.
• July 4 – December 31, 2025: Entity-level rules apply; material assistance rules generally do not.
• On or after January 1, 2026: Full FEOC framework, including MACR.

The 5% safe harbor is no longer available for new projects. Only the physical work test establishes BOC. Ask for dated documentation: physical work evidence, engineering contracts, equipment delivery records, and a BOC memo from tax counsel.

2. Identify Whether the Seller or Project Is a PFE (Prohibited Foreign Entity)

A prohibited foreign entity (PFE) is either a specified foreign entity or a foreign-influenced entity, primarily connected to China, Russia, Iran, or North Korea. Red flags include direct or indirect equity ownership, effective control through licensing or technology agreements, and certain debt arrangements.

Require a written FEOC representation covering ownership to the ultimate parent, copies of licensing and services agreements, and a sworn statement that transfer proceeds will not flow to a specified foreign entity.

3. Verify the Material Assistance Cost Ratio (MACR)

The MACR is the percentage of total direct manufacturing costs not attributable to a PFE. The higher the MACR, the cleaner the project. Thresholds rise each year:

Notice 2026-15 allows taxpayers to calculate the MACR under general rules or to elect one of three interim safe harbors. There is no IRS-issued form for this calculation.

4. Collect Supplier Certifications

MACR compliance relies on supplier certifications signed under penalties of perjury. Verify that certifications come from each tier-one supplier, name the specific components, follow the Notice 2026-15 format, and are backed by audit-ready records. A meaningful number of 2026 deals have stalled when a manufacturer refused to sign — surface that risk early.

5. Build FEOC Protections Into the Transfer Agreement

Pre-OBBBA agreement language is no longer sufficient. The transfer agreement should include:

• Explicit FEOC representations covering ownership, control, MACR compliance, and supplier certification accuracy.
• Expanded indemnification calibrated to the six-year statute of limitations.
• Documentation covenants requiring the seller to maintain BOC evidence, MACR calculations, and supplier records for the full statute period.
• Termination rights if post-signing diligence reveals a material FEOC issue.

Confirm separately whether tax credit insurance will cover FEOC risk and on what terms — policy language varies meaningfully on this point.

Where Buyers Are Getting It Wrong

• Assuming pre-2026 BOC exempts a project entirely. Entity-level ownership and control rules still apply.
• Accepting boilerplate supplier letters. Generic language without component-level detail is not defensible.
• Ignoring effective control. Licensing and technology agreements can establish PFE (Prohibited Foreign Entity) control even without equity ownership.
• Treating insurance as a substitute for diligence. Underwriters demand the same documentation buyers should be collecting.

How Fallbrook Approaches FEOC Diligence

Fallbrook has spent more than two decades structuring tax credit transactions. The FEOC framework is new, but the discipline — knowing the project, knowing the counterparty, and reviewing every document — is not.

On every transferable energy credit transaction we facilitate, we pre-screen energy sponsors and projects in various ways, including initial diligence on FEOC compliance and various project safe harbors to ensure that the projects qualify for the credits they claim.

FEOC and Prevailing Wage & Apprenticeship (“PWA”) compliance are central diligence items in transferable energy credit deals today. Buyers who treat it as infrastructure will continue to access the credits they need at the pricing they expect.

Talk to Fallbrook About Your 2026 Tax Credit Strategy

To learn more email: team@fallbrookfinancial.com, with the subject line, “Meet with Justin!”

Sources & Further Reading

This article draws on primary IRS and Treasury guidance and on analysis published by leading tax and energy law firms.

Primary Guidance

• IRS Notice 2026-15 (February 12, 2026) — Interim guidance on material assistance from a prohibited foreign entity and the MACR framework. https://www.irs.gov/pub/irs-drop/n-26-15.pdf
• One Big Beautiful Bill Act (OBBBA), Pub. L. 119-21 — Signed July 4, 2025. https://www.congress.gov/bill/119th-congress/house-bill/1
• Internal Revenue Code §§ 45Q, 45U, 45X, 45Y, 45Z, 48E, 6418, 7701(a)(52), and 6662(m). https://www.law.cornell.edu/uscode/text/26

Law Firm and Advisory Analysis

• Morgan Lewis: “Meeting the MACR: IRS’s Interim Guidance Addresses OBBBA’s Material Assistance FEOC Limitation” (February 19, 2026). https://www.morganlewis.com/pubs/2026/02/meeting-the-macr-irss-interim-guidance-addresses-obbbas-material-assistance-feoc-limitation
• Mayer Brown: “IRS Issues Interim Guidance on ‘Material Assistance’ from a Prohibited Foreign Entity” (February 25, 2026). https://www.mayerbrown.com/en/insights/publications/2026/02/irs-issues-interim-guidance-on-material-assistance-from-a-prohibited-foreign-entity
• Bracewell LLP: “FEOC Rules for Clean Energy Tax Credits” (January 16, 2026). https://www.bracewell.com/resources/feoc-material-assistance-rules-clean-energy-tax-credits/
• A&O Shearman: “IRS Guidance on Prohibited Foreign Entity Material Assistance” (March 3, 2026). https://www.aoshearman.com/en/insights/irs-publishes-guidance-for-the-purposes-of-determining-material-assistance
• Steptoe: “Treasury Issues Initial Guidance to Determine Material Assistance” (February 19, 2026). https://www.steptoe.com/en/news-publications/treasury-issues-initial-guidance-to-determine-material-assistance-to-implement-the-obbbas-foreign-entity-of-concern-provisions.html
• Baker Tilly: “Treasury Releases Interim FEOC MACR Safe Harbor Guidance” (February 24, 2026). https://www.bakertilly.com/insights/treasury-releases-interim-feoc-macr-safe-harbor-guidance
• BDO: “How the OBBBA Transforms the Energy Tax Credit Transfer Market” (December 1, 2025). https://www.bdo.com/insights/tax/how-the-obbba-transforms-the-energy-tax-credit-transfer-market
• Novogradac: “Managing the Interim FEOC Guidance: IRS Notice 2026-15” (February 19, 2026). https://www.novoco.com/notes-from-novogradac/managing-the-interim-feoc-guidance-irs-notice-2026-15-addresses-material-assistance-for-sections-45y-48e-and-45x-deferring-on-broader-pfe-status-guidance
• Thomson Reuters Institute: “The One Big Beautiful Bill Act: Changing the Landscape for US Clean Energy” (August 11, 2025). https://www.thomsonreuters.com/en-us/posts/sustainability/one-big-beautiful-bill-act-clean-energy/

Trade Press

• Utility Dive: “Treasury Issues FEOC Guidance, Clarifies Material Assistance Cost Ratio” (February 13, 2026). https://www.utilitydive.com/news/treasury-issues-feoc-guidance-clarifies-material-assistance-cost-ratio/812213/

Disclaimer: This article reflects guidance available as of June 2026, including IRS Notice 2026-15 and the One Big Beautiful Bill Act. Treasury and the IRS are expected to issue further FEOC-related guidance throughout 2026. Nothing in this article constitutes legal or tax advice. Buyers should consult qualified tax counsel before entering into any credit transfer.