US Treasury and IRS release interim PFE guidance for 45X and 48E tax credit eligibility

The US Department of the Treasury and the Internal Revenue Service (IRS) have released interim guidance on how Prohibited Foreign Entity (PFE) "material assistance" will be treated and calculated under the section 45X production tax credit (PTC) and section 48E investment tax credit (ITC).

The notice, issued following the adoption of the One Big Beautiful Bill Act (OBBBA) in July 2025, aims to answer a central question for the US battery and storage industry: how much PFE content is compatible with claiming federal tax credits. PFEs are defined as companies with excessive Chinese ownership, debt, or involvement in management. Under OBBBA, their role in US supply chains is now a key determinant of tax credit eligibility.

Although the core statutory language was already in OBBBA, the notice operationalises it by turning both 45X and 48E into explicit cost-based supply chain tests tied to origin and control of equipment and components.

Interim safe harbour for PFE "material assistance" and supplier certification

The notice establishes interim safe harbour rules for determining whether a project, facility, or eligible component under sections 45X and 48E includes "material assistance" from a PFE. Taxpayers must calculate a "material assistance cost ratio" (MACR), which measures the percentage of a project or product's cost attributable to equipment, parts, and materials supplied by PFEs. The higher the share of PFE-sourced content, the greater the risk of failing to meet the MACR thresholds set by statute.

The guidance also introduces a conditional certification safe harbour. A taxpayer may rely on a supplier certification regarding PFE status unless the taxpayer knows, or has reason to know, that it is inaccurate. If the taxpayer does know, or should know, that property is PFE-produced or PFE-sourced, all associated direct costs must be treated as PFE-produced or PFE-sourced for MACR purposes.

As for supply chain due diligence, the MACR and certification safe harbour rules require in principle, just the mapping of direct equipment or material suppliers and as a result, no automatic duty to conduct a full supply chain due diligence and for mineral-level tracing, as long as there are no red flags or a vertically integrated taxpayer, which bears more tracing responsibility.

"Effective control" and IP arrangements

Pending more detailed regulation, the notice already defines "effective control" as the unrestricted contractual right of a counterparty to determine key operational levers of a facility. This includes, for example, the right to dictate the quantity or timing of production; and/or the amount or timing of electricity production or storage activities.

The definition explicitly extends to licensing agreements for the provision of intellectual property (IP) with respect to a qualified facility that are entered into or modified on or after 4 July 2025. This means that PFE-linked IP, licensing, or royalty structures that give a foreign counterparty practical control over operations or sourcing can affect whether a facility or component is treated as having PFE "material assistance," even where physical manufacturing is conducted in the US.

Implications for the §45X PTC – Battery Components & Critical Minerals

Under section 45X, battery producers can claim up to $45/kWh in tax credits, split between $35/kWh for cells and $10/kWh for modules. For 45X, the MACR is calculated at the eligible component level and is based on the direct material costs of the component being produced. For cell and module manufacturers, this effectively pulls bill-of-materials sourcing, upstream input origin, and licensing structures into tax credit qualification.

The minimum required share of non-PFE material assistance in battery components is set at 60% in 2026. This threshold then increases by 5 percentage points per year, reaching 85% in 2030. Over time, it will become progressively harder to qualify for 45X while relying on PFE-supplied materials and parts.

Exposure under 45X is not limited to where a component is physically produced. It also extends to who controls the production platform. A US facility that depends on licensed IP, royalty structures, or contractual rights that give a specified foreign entity meaningful operational or sourcing influence could face 45X eligibility risk, even if all manufacturing takes place domestically and equipment is located in the US.

Implications for the §48E ITC – Energy Storage and Battery Projects

Section 48E covers energy storage technologies, including standalone battery energy storage systems (BESS). For the 48E ITC, the MACR is assessed at the project level. It is based on the direct costs of manufactured products that are incorporated into the facility or energy storage system. In practice:

• Civil works, foundations, and most construction materials do not materially dilute the MACR denominator; and

• Structural steel and iron are excluded from the MACR calculation, concentrating the test on the core equipment stack.

This means batteries, power conversion systems, and other manufactured equipment dominate the MACR calculation and therefore determine whether a project passes the PFE thresholds.

For example, if a storage project uses PFE-produced cells that represent 50% of the manufactured product's direct cost, and the applicable minimum non-PFE share for 2026 is 55%, the project would fail the test and not qualify for 48E under the PFE rules.

Under OBBBA, the new PFE regime applies only to projects that begin construction after 31 December 2025. As a result, 2026 becomes a structural pivot year for sourcing strategies, especially for storage projects that currently rely heavily on Chinese LFP cells or other China-linked equipment.

In practical terms, 48E has become an equipment supply chain compliance test:

• Developers must interrogate detailed cost breakdowns and supplier certifications, not just engineering, procurement, and construction (EPC) pricing.

• System integrators must re-evaluate cell origin, power electronics sourcing, and licensing exposure.

• Investors are likely to underwrite 48E eligibility risk alongside conventional revenue and offtake assumptions.

Next steps and forthcoming regulations

The notice confirms that Treasury and the IRS intend to issue comprehensive proposed regulations and further guidance on: the definition of a PFE; and the detailed operation of the material assistance rules. This is expected to take the form of additional notices and proposed regulations that will build on the interim safe-harbour framework. Stakeholders are invited to submit general comments and responses to a list of specific questions by 30 March 2026.