Last week, we outlined the July 4 construction deadline bearing down on solar and wind developers. That piece covered the timeline crunch. This one covers the compliance mechanics that could disqualify your project even if you break ground on time.
The Foreign Entity of Concern rules aren't new. They took effect January 1. But the details are more complex than most operators realize, and the consequences are all-or-nothing. Miss the thresholds, lose the credit. Not a reduction. The entire credit.
A recent Crux survey found that only 38% of clean energy firms describe themselves as "fully prepared" for 2026 FEOC compliance. That means most of the industry is either scrambling or hoping Treasury guidance solves their problems.
Neither is a strategy.
Here's what you actually need to know to protect your tax credit eligibility and your project economics.
The FEOC Framework: What Counts and What Doesn't
Defining the Prohibited Universe
Under the One Big Beautiful Bill Act, projects claiming credits under IRC Sections 45Y (production tax credit), 45X (advanced manufacturing), or 48E (investment tax credit) can't receive "material assistance" from a Prohibited Foreign Entity and remain credit-eligible.
A Prohibited Foreign Entity (PFE) is any company that meets one of three tests:
Test 1: Jurisdiction. The entity is incorporated in, headquartered in, or performs the relevant manufacturing activities in a covered nation. The covered nations are China, Russia, Iran, and North Korea.
Test 2: Ownership. The entity has 25% or more of its board seats, voting rights, or equity interest held, individually or in aggregate, by a covered nation's government, subnational governments, or certain current or former senior foreign political figures from that nation.
Test 3: Control. The entity is otherwise "owned by, controlled by, or subject to the jurisdiction or direction of" a covered nation's government.
That 25% ownership threshold deserves attention. It's not just about state-owned enterprises. A privately held Chinese manufacturer with minority government investment, common in the battery and solar sectors, could trigger PFE status. Joint ventures and complex holding structures make this harder to assess than it first appears.
The Material Assistance Thresholds
The law doesn't ban all PFE content. It sets percentage thresholds that vary by project type and escalate over time.
For solar and wind projects beginning construction in 2026, at least 40% of manufactured product costs must come from non-PFE sources. That threshold rises 5 percentage points annually:
| Construction Year | Minimum Non-PFE Content |
|---|---|
| 2026 | 40% |
| 2027 | 45% |
| 2028 | 50% |
| 2029 | 55% |
| 2030+ | 60% |
For battery storage projects, the thresholds are stricter. The 2026 minimum is 55%, rising to 75% by 2030:
| Construction Year | Minimum Non-PFE Content |
|---|---|
| 2026 | 55% |
| 2027 | 60% |
| 2028 | 65% |
| 2029 | 70% |
| 2030+ | 75% |
Inverters have their own schedule, starting at 50% in 2026 and reaching 70% by 2030.
The calculation is based on the ratio of PFE-sourced costs to total "applicable direct costs" of manufactured products. Treasury is directed to publish safe harbor tables by December 31, 2026, establishing standardized cost calculations. Until then, you're working with the interim tables from IRS Notice 2025-08 and supplier certifications.
The Hidden Traps: Debt, Services, and the 10-Year Tail
The 15% Debt Restriction
Here's a provision that catches developers off guard: the OBBBA restricts projects from receiving more than 15% of their original debt financing from Chinese-controlled lenders.
If your project financing includes participation from a Chinese bank, even as part of a syndicate, you need to calculate that lender's share of total debt. Exceed 15%, and you've created a material assistance problem that has nothing to do with your equipment supply chain.
For projects with complex capital stacks involving international lenders, this requires diligence that goes beyond traditional project finance analysis.
The 10-Year Recapture Provision
The compliance burden doesn't end when your project comes online. Under the OBBBA's recapture provisions, the IRS can claw back the full tax credit if you make payments to a Prohibited Foreign Entity during the 10-year recapture period for:
- Replacement parts or components
- Maintenance and repair services
- Software licensing or updates
- Warranty service
This means your O&M contracts, warranty agreements, and long-term service arrangements all need FEOC compliance review. A 2031 inverter replacement sourced from a PFE manufacturer could trigger recapture of a credit you claimed in 2027.
For tax equity investors, this creates a decade-long compliance monitoring requirement that will show up in deal documentation. Expect enhanced representations, ongoing certification covenants, and indemnification provisions covering FEOC recapture risk.
The Extended Audit Window
Standard IRS audit periods are three years from filing. The OBBBA extends this to six years for deficiencies related to FEOC material assistance calculations.
That's six years of document retention, supplier certification tracking, and audit defense preparation. If your 2026 project claims credits in 2027, you need to maintain FEOC compliance records through 2033.
Supply Chain Traceability: How Deep Does It Go?
One of the most uncertain aspects of FEOC compliance is supply chain depth. The statute refers to manufactured products, components, and subcomponents. How far down do you trace?
If you're buying solar panels from a US-based manufacturer, but that manufacturer sources cells from a Chinese company, does the cell supplier's PFE status matter? What about the polysilicon that went into the cells?
The honest answer: we don't know yet. Treasury guidance expected in Q1 2026 should clarify traceability requirements. Industry observers expect a "taxpayer-friendly" approach that doesn't require tracing to raw materials, but the statutory language is broad enough to support deeper requirements.
The conservative approach: Map your supply chain at least two tiers deep: your direct suppliers and their major component sources. Request ownership certifications at each level. Document what you know and what you reasonably investigated.
The practical challenge: More than 80% of global solar panel manufacturing capacity is in China. Many components that appear to come from Southeast Asian or European suppliers ultimately incorporate Chinese-manufactured subcomponents. True supply chain transparency requires more than checking the label on the shipping container.
What This Means for Project Economics
The Cost Premium for Compliance
FEOC-compliant supply chains are more expensive than unrestricted procurement. US-manufactured panels, Korean batteries, and European inverters command premiums over Chinese alternatives.
Early estimates suggest a 10-25% cost increase for fully compliant equipment, depending on the technology and availability. For a utility-scale solar project, that can translate to millions of dollars in additional capital cost.
The question for developers: does the project still make financial sense after paying the compliance premium?
For most projects, the answer is yes. Losing a 30% ITC is worse than paying 15% more for equipment. But the tighter margins are real, and they affect which projects move forward.
Stranded Asset Risk
Projects that procured non-compliant equipment before the rules took effect face difficult choices. If you have Chinese batteries in a warehouse waiting for installation on a 2026 project, you may need to resell them for non-credit projects or take a loss.
The industry press has started using the term "stranded assets" for FEOC-incompatible equipment. Expect a secondary market to develop for projects that don't need tax credits: behind-the-meter installations, international projects, or buyers who've exhausted credit capacity.
Board and Investor Questions You'll Face
If you're presenting a clean energy project to your board or investors in 2026, FEOC compliance will come up. Be ready for these questions:
"What's our FEOC exposure?" Your answer should include a supply chain map showing PFE content by cost category, the calculated material assistance ratio, and the margin of safety against the threshold.
"Who are our critical suppliers, and are they PFE-clean?" You need ownership analysis on your major equipment vendors. A supplier certification isn't enough if you can't explain the ownership structure underlying it.
"What happens if the rules change or guidance is stricter than expected?" Have a contingency plan. Can you switch suppliers mid-project? What's the timeline and cost?
"How does recapture risk affect our exit timeline?" If you're planning to sell the project, buyers will discount for FEOC recapture risk. The 10-year tail creates ongoing compliance obligations that affect asset value.
How This Shows Up in Deal Documents
FEOC compliance is already hitting transaction terms. Here's whats happening:
Supply Agreements: Equipment vendors are being asked to provide FEOC compliance representations, ownership certifications, and indemnification for credit loss if their representations prove false.
EPC Contracts: Owners are requiring EPC contractors to source only FEOC-compliant equipment, with contractual remedies if non-compliant equipment is installed.
Tax Equity Documents: Investors are demanding detailed FEOC compliance exhibits, ongoing certification requirements, and enhanced recapture indemnification that extends through the full 10-year period.
M&A Purchase Agreements: Buyers of operating projects are requiring FEOC representations and extended indemnification periods tied to the 6-year audit window.
If you're negotiating any of these documents in 2026, FEOC provisions are no longer nice-to-haves. They're standard requirements.
Practical Takeaways
Actions your team can assign this week:
1. Conduct a full supply chain audit for every 2026 project. Identify every equipment supplier and request ownership certifications. Flag any supplier with potential FEOC exposure for deeper analysis.
2. Calculate your Material Assistance Cost Ratio using IRS Notice 2025-08 safe harbor tables. Know your margin against the applicable threshold (40% for solar, 55% for storage).
3. Review financing documents for Chinese lender participation. If any debt exceeds 15% from PFE sources, restructure before closing.
4. Audit your O&M and warranty contracts for recapture risk. Ensure you have contractual rights to source replacement parts from non-PFE suppliers for 10 years post-installation.
5. Establish a document retention protocol for FEOC compliance. You'll need to defend your calculations for six years post-filing. Contemporaneous records matter.
6. Brief your tax equity partners on FEOC compliance status. Get ahead of diligence requests with proactive disclosure.
7. Build FEOC provisions into new contracts now. Don't wait for Treasury guidance to establish compliance expectations with suppliers and contractors.
8. Set up monitoring for Treasury guidance expected Q1 2026. The formal rulemaking will clarify ambiguities and may affect your compliance approach.
What We're Watching
Q1 2026: Treasury expected to release detailed FEOC rulemaking, including supply chain traceability depth and enforcement posture.
July 4, 2026: Construction deadline for wind and solar projects seeking the traditional four-year continuity safe harbor. FEOC compliance must be in place before construction begins.
December 31, 2026: Treasury deadline to publish official safe harbor tables. Until then, IRS Notice 2025-08 tables apply.
2027 and beyond: First IRS audits of 2026 projects claiming credits will test how aggressively the agency enforces FEOC thresholds. Early enforcement posture will signal compliance risk for later projects.
The FEOC rules represent the most significant compliance burden clean energy has faced since the IRA passed. The thresholds are achievable, but they require supply chain discipline that the industry hasn't previously needed.
The developers who build FEOC compliance into their procurement processes now will capture credits smoothly. The ones who treat it as a paperwork exercise will find themselves explaining to investors why the credit they modeled isn't coming.
Compliance isn't just about checking boxes. It's about protecting project economics in a more restrictive regulatory environment. The supply chain choices you make this quarter will determine your tax position for the next decade.