New FEOC -- for "foreign entity of concern" -- rules will deny technology-neutral tax credits on new power plants and energy storage projects that use too much Chinese equipment and section 45X tax credits on US-made products that use too many Chinese inputs.

They will also deny such tax credits to companies that rely on Chinese investment or that make payments to Chinese-related counterparties under contracts and technology licenses that give the counterparties "effective control" over them or their projects or products.

"Technology-neutral" tax credits are tax credits under sections 45Y and 48E of the US tax code that are an inducement to invest in new power plants with zero or negative lifecycle greenhouse gas emissions and in batteries and other energy storage facilities regardless of emissions.

Section 45X credits are tax credits for manufacturers that are a reward for manufacturing solar, wind or storage equipment or producing critical minerals in the United States.  

The FEOC rules are complicated, but they distill to a three-step analysis. They take effect in tax years beginning after July 4, 2025.

They do not apply to renewable energy and storage projects on which legacy tax credits are claimed under section 45 or 48. Legacy projects had to be under construction for tax purposes by the end of 2024 (except geothermal heat pumps have until the end of 2034).

Power: Step 1

The first step for any power or storage project is to determine whether the project received "material assistance" during construction from a “prohibited foreign entity.” 

This step can be skipped for any project that is under construction for tax purposes by the end of 2025.

Whether a power or storage project benefited from material assistance is determined by using a formula. The IRS is supposed to publish tables by late 2026 to make the calculations easier.

The formula is a fraction.

The denominator is the total labor and materials cost to the project owner of the "manufactured products (including components)" that are brought to the project site for incorporation into the project. Manufactured products are things like solar modules and nacelles that are made in a factory as opposed to steel or iron construction materials like rebar that are structural in function.

The numerator is the cost of the same manufactured products after backing out the labor and materials cost to the owner of any such products that are "mined, produced, or manufactured" by a "prohibited foreign entity."  Thus, the fraction is the percentage of manufactured products used in the project that are not made by prohibited foreign entities.

The fraction must be at least 40% for power projects on which construction starts in 2026, increasing over time to 60% for projects starting construction after 2029. The thresholds are different for storage projects. They are 55% for such projects that start construction in 2026, increasing over time to 75% for storage projects starting construction after 2029.

The bill codifies the tests in the existing IRS notices for determining when construction has started for tax purposes.

Until the IRS publishes tables in late 2026, developers can use the cost percentages in tables the IRS published in January this year for calculating domestic content to claim bonus tax credits. More detail about those tables can be found here.

The domestic content tables work only for solar, onshore wind and battery projects.

Developers of other types of projects will have to use the actual labor and materials costs they pay for the equipment incorporated into their projects. (This requirement is less burdensome than the rules for the domestic content bonus credit, which look to the supplier's costs.)

Developers should also get a certificate from each supplier from whom it purchases manufactured products stating, if true, that the products were not made by prohibited foreign entities and that the supplier does not know or have reason to know of any prohibited foreign entities in the supply chain. The certificate should also confirm the cost charged to the developer for the products that were not made by prohibited foreign entities. The developer cannot rely on any certificate that it knows or has reason to know is inaccurate.

The bill allows developers to omit the costs of manufactured products for which the developer signed a binding purchase order before June 16, 2025 for any project that is under construction by July 31, 2025 and placed in service by the end of 2029. Presumably this is to treat existing Chinese equipment orders as water under the bridge. Any such items would be omitted from both the numerator and denominator of the fraction for developers doing the actual calculations based on costs. The omission is optional. However, since the material assistance provisions do not apply to projects that are under construction by the end of 2025, this relief for existing contracts does not appear to have any meaning.

Prohibited Foreign Entities

Most prohibited foreign entities should be easy to identify. Not all will be. This is where the calculations have the potential to break down.

A “prohibited foreign entity” is an entity with ties to China, Russia, North Korea or Iran.

The ties can be such things as 25% or more ownership by a single Chinese shareholder or 40% by two or more such shareholders or at least 15% of total debt held by Chinese lenders, only counting debt holders at original issuance.

Making payments to companies that are more than 50% Chinese-owned under contracts or other arrangements that give such Chinese-backed companies effective control will also turn an equipment supplier into a prohibited foreign entity. Licensing arrangements with Chinese interests can also turn a supplier into a prohibited foreign entity. For example, a contractual right for a Chinese-backed licensor to receive royalties for more than 10 years will turn the licensee into a prohibited foreign entity.

It is not clear how US developers will be able to spot such arrangements.

Penalties

There are significant penalties for getting the material assistance calculations wrong.

The IRS will have six years after a tax return is filed -- rather than the normal three years -- to challenge whether a project benefited from material assistance.

A 20% penalty will be imposed on any taxpayer that gets the calculation wrong if the taxpayer ends up paying more than 1% less tax than it should have as a result. For corporations, the penalty would apply if the shortfall in tax payments due to a material assistance miscalculation is at least $10 million or more than 1%, whichever is less.

Equipment suppliers who provide false information on certificates will be subject to penalties of 10% of the resulting tax reduction claimed by the customer. However, the tax reduction must be at least 5% of the tax that should have been paid or, if less, $100,000.

The supplier penalty applies to misstatements on certificates given after December 31, 2025. Equipment suppliers should try to provide any certificates in 2025 rather than let them slip into 2026.

Power: Step 2

Separate FEOC restrictions at the taxpayer level take effect in 2026.

Step two is to determine whether the taxpayer proposing to claim or sell tax credits is a "specified foreign entity" or "foreign-influenced entity."  Such entities will not be entitled to tax credits in tax years beginning after July 4, 2025.

Status as such an entity is tested annually. Technology-neutral tax credits cannot be claimed in any year an entity has such status. The testing is done on the last day of each tax year of an entity claiming tax credits, with the exception that status as some types of "specified foreign entities" is checked on the first day of the initial tax year to which the taxpayer-level FEOC restrictions apply.

A “specified foreign entity” is any company that is owned more than 50% by the Chinese, Russian, North Korean or Iranian government, by a citizen or national of one of the four countries (but not if the person is a US citizen, US national or green card holder), or by a company organized or having its principal place of business in one of the four countries, or CATL, Gotion, BYD, EVE Energy Company, Hithium Energy Storage Technology, companies on the OFAC list or companies that make products that benefit from Uyghur forced labor in Xinjiang in western China.

A "foreign-influenced entity" is a term that casts a wider net. A taxpayer hoping to claim tax credits is a foreign-influenced entity if a specified foreign entity has "direct authority" to appoint a board member or an executive-level officer, including the president, CEO, COO, CFO, general counsel or a senior vice president. The label also applies if a single specified foreign entity owns at least 25% of the taxpayer or if two or more such entities own at least 40% or hold at least 15% of the taxpayer's outstanding debt. The debt holders are determined when the debt is originally issued.

Power: Step 3

Step 3 is to scrub contracts and technology licenses with any counterparties that are "specified foreign entities" to ensure that none of them gives such a counterparty "effective control" over the taxpayer or the project.

Any payments by the taxpayer in the previous tax year under such a contract or technology license will make the taxpayer technically a "foreign-influenced entity."  However, the bill will deny a tax credit only on the project to which the contract relates.

Most US companies are unlikely to have ownership ties to Chinese-backed companies. If they have problems, it is more likely to be because of contract payments to Chinese-backed counterparties.

It should be possible in many cases to tell whether contract counterparties have Chinese ties. However, in cases where it is unclear, the bill has a list of provisions to avoid in contracts and technology licenses because they are a sign of effective control over the taxpayer or a project. A license for use of intellectual property may be embedded in an equipment procurement contract.

The IRS is supposed to issue guidance. Until it does, the following provisions should be avoided in contracts with counterparties that may be "specified foreign entities."  For power and storage projects, avoid letting the counterparty have an unrestricted right to do any of the following:

+ determine the amount or timing of electricity output or storage,

+ determine who can buy the electricity,

+ restrict access to itself or its agents to data critical to production or storage of energy, or

+ maintain, repair or operate the equipment on an exclusive basis. This last clause makes long-term services agreements and restrictive warranty arrangements potentially a problem.

For licensing arrangements for use of intellectual property, avoid giving the counterparty the rights to do any of the following:

+ "specify or otherwise direct one or more sources of components, subcomponents, or critical minerals" to be used in the project,

+ direct the operation of the project,

+ limit the taxpayer's use of intellectual property related to operation of the project,

+ receive royalties for more than 10 years, or

+ require the taxpayer to hire the counterparty for more than two years of services.

These appear to be instructions for cleaning up existing licensing arrangements because any new licensing arrangements with specified foreign entities signed on or after July 4, 2025 are automatically treated as giving the counterparty effective control. It is unclear whether this is a drafting error. It is unclear whether the intention was to say the focus is solely on new licenses signed on or after President Trump signed the bill.

Any licensing arrangement that is a "bona fide purchase or sale of intellectual property" can be ignored. It is not a real sale if ownership of the intellectual property will revert to the counterparty after a period of time.

Publicly Traded Companies

The taxpayer-level restrictions will not apply to many publicly traded companies and their 80%-or-more-owned subsidiaries.

However, such companies could be caught by the contract payment rules. Publicly traded companies also lose their shield if a specified foreign entity has authority to appoint a board member or executive officer.

ITC Recapture

The bill has a draconian ITC recapture provision that may make developers think twice about whether to claim technology-neutral investment tax credits rather than production tax credits. It may also make such ITCs hard to sell in the direct transfer market.

If a technology-neutral ITC is claimed on a project, the full ITC would have to be repaid to the US Treasury if the taxpayer makes payments under contracts or technology licenses that give a specified foreign entity effective control over the taxpayer or a project. Any such payment in any of the next 10 years after a project is placed in service would trigger recapture.

This recapture provision would apply to ITCs claimed in tax years starting more than two years after July 4, 2025.

Manufacturing

FEOC restrictions at both the product and taxpayer levels could prevent US manufacturers and mineral producers from claiming section 45X tax credits.

US manufacturers and mineral producers must do a similar three-step analysis: first, determine whether each product or mineral on which section 45X tax credits will be claimed benefits from "material assistance" from prohibited foreign entities. Second, look at the capital and management structures of the manufacturer or mineral producer to determine whether there is too much Chinese involvement. Third, scrub contracts and technology licenses to make sure any such arrangements with counterparties that are "specified foreign entities" do not give the counterparties "effective control" over the manufacturer or mineral producer or its products.

Manufacturing: Step 1

First determine whether the products or minerals on which the manufacturer or mineral producer will claim section 45X tax credits benefit from any "material assistance" from prohibited foreign entities. If yes, then that will prevent tax credits from being claimed on the affected products or minerals in tax years starting after July 4, 2025.

Material assistance for this purpose is calculated as follows.

Set up a fraction. The denominator is the direct materials cost to produce the product or mineral, meaning the amount the manufacturer pays for raw materials and parts used in it. The numerator is the denominator minus the share of the direct materials cost that is for raw materials or parts "mined, produced or manufactured" by prohibited foreign entities.

The fraction must be at least X% to claim a tax credit on the product or mineral. The X% percent varies by product. It represents the cost of the raw materials and parts that are not supplied by prohibited foreign entities.

For solar equipment, X starts at 50% and increases for equipment sold after 2029 to 85%. For wind equipment, it is 85% for equipment sold in 2026 and 90% for equipment sold in 2027. (Section 45X credits cannot be claimed on wind equipment produced and sold after 2027.)  For battery components, it is 60% in 2026 and increases to 85% for such equipment sold after 2029.

For critical minerals, X is 0% until 2030, when it is 25% increasing over time to 50% for critical minerals sold after 2032. The IRS is supposed to issue new critical mineral percentages by late 2027 that will replace the percentages in the statute. The IRS figures will be the same or higher than the percentages in the statute. They cannot be lower.

The IRS is supposed to issue tables by the end of 2026 that will make the calculations simpler.

Manufacturers and mineral producers should get certificates from suppliers of raw materials and parts confirming, if true, that the suppliers are not prohibited foreign entities and do not know or have reason to know of any such entities in their supply chains and also confirming the amount paid by the manufacturer or mineral producer for raw materials or parts whose cost can be included in the numerator (i.e., inputs that were not produced or manufactured by prohibited foreign entities). The taxpayer and suppliers must keep these certificates in their files for at least six years.

At its option, a manufacturer or mineral producer can ignore the cost of any inputs that it purchases under binding purchase orders that were in place before June 16, 2025 and used in products or minerals that are sold by the end of 2026.

The IRS has been given more time and the ability to impose greater penalties on manufacturers, minerals producers and suppliers of raw materials and parts for errors in material assistance calculations and certificates. See the discussion earlier under the heading "Penalties."

Manufacturing: Step 2

Step two is to determine whether the manufacturer or mineral producer is a "specified foreign entity" or "foreign-influenced entity."  These terms are defined under the heading "Power: Step 2."

If the manufacturer or mineral producer is such an entity in a tax year, then it may not claim section 45X tax credits that year.

Manufacturing: Step 3

The last step is to scrub contracts and technology licenses with counterparties that may be "specified foreign entities" to ensure that the contracts do not provide such counterparties with "effective control" over the manufacturer or mineral producer or its products or minerals on which section 45X tax credits will be claimed.

A counterparty has effective control if it has "specific authority over key aspects" of production of the 45X products or minerals. The IRS is supposed to issue guidance. Until guidance is issued, the following provisions should be avoided in contracts with counterparties that may be "specified foreign entities."  For manufacturers and mineral producers, avoid letting the counterparty have an unrestricted right to do any of the following:

+ determine the quantity of or when 45X products or minerals are produced,

+ determine who can buy the products or minerals,

+ restrict access to itself or its agents to critical data from the factory, mine or mineral processing facility, or

+ maintain, repair or operate any equipment at the factory, mine or mineral processing facility on an exclusive basis. This last clause makes long-term services agreements and restrictive warranty arrangements potentially a problem.

For licensing arrangements for use of intellectual property, avoid giving the counterparty the rights to do any of the following:

+ "specify or otherwise direct one or more sources of components, subcomponents, or critical minerals" to be used in the product or minerals,

+ direct the operation of the production line, mine or processing facility,

+ limit the manufacturer's or mineral producer's use of intellectual property related to the product or mineral,

+ receive royalties for more than 10 years, or

+ require the taxpayer to hire the counterparty for more than two years of "services."

It is also a problem to enter into a licensing arrangement that does not provide the manufacturer or mineral producer with all the "technical data, information, or know-how" necessary to enable it to make the product or mineral without further involvement from the counterparty or other specified foreign entity.

These appear to be instructions for cleaning up existing licensing arrangements because any new licensing arrangements with specified foreign entities signed on or after July 4, 2025 are automatically treated as giving the counterparty effective control. It is unclear whether this is a drafting error. It is unclear whether the intention was to say the focus is solely on new licenses signed on or after President Trump signed the bill. 

Any licensing arrangement that is a "bona fide purchase or sale of intellectual property" can be ignored. It is not a real sale if ownership of the intellectual property will revert to the counterparty after a period of time.