Approval Path for §48E Solar Credits Under the OBBBA Foreign-Entity Rules

The PFE/FEOC regime added by OBBBA reaches six credits but applies in full force only to the tech-neutral clean-electricity credits (§§ 45Y, 48E) and the §45X manufacturing credit. Legacy credits under former §45/§48 — available where construction began for tax purposes by the end of 2024 — carry no PFE restriction at all. A post-2024 facility claiming the §48E ITC is subject to the regime; no legacy exception applies.

Two failure modes should be kept distinct: the taxpayer-level bar (the claimant cannot be a PFE; Step 2) and the facility-level bar (no material assistance from a PFE; Steps 4–6). The issue presented by Chinese-produced modules is the second, not the first.

A Prohibited Foreign Entity (PFE) is either a Specified Foreign Entity or a Foreign-Influenced Entity. A PFE cannot claim the credit, and under §6418 the credit cannot be transferred to a Specified Foreign Entity.

• Specified Foreign Entity (SFE) — five mechanical categories: a statutory foreign entity of concern; a Chinese military company; a listed Uyghur-sanctions entity; a listed prohibited battery entity; and a “foreign-controlled entity” (a covered-nation government, or an entity that is a citizen of, incorporated in, or controlled by a covered nation — China, Russia, North Korea, Iran).
• Foreign-Influenced Entity (FIE) — formal control: an SFE can appoint a covered officer; a single SFE owns ≥25%; SFEs together own ≥40%; or ≥15% of the entity’s debt is held by SFEs.
• FIE — effective control: a payment to an SFE under an arrangement giving the SFE control over the facility, storage, or production (see Step 6).

A domestically owned developer selling to a U.S. purchaser ordinarily satisfies this step. It must still be confirmed for both the owner and the credit purchaser, because the §6418 transfer bar runs to the transferee as well.

The facility-level material-assistance test applies only to a §48E facility whose construction begins after December 31, 2025. BOC is determined under rules similar to Notices 2013-29 and 2018-59 as in effect January 1, 2025 — i.e., the physical-work test (physical work of a significant nature) or the 5% safe harbor (paying or incurring 5% of total cost), with continuous progress thereafter.

A facility “includes material assistance from a PFE” if its material assistance cost ratio is below the threshold for the BOC year. The MACR measures the share of direct cost not attributable to PFE-produced products and components:

For a qualified facility or storage technology, direct costs include labor and materials; for §45X eligible components the ratio uses materials only. Illustration: if total direct cost is $100 and $20 is PFE-produced, the MACR is 80%. The test is applied per facility, and a ratio below the threshold by any amount denies the entire credit for that facility.

The test looks to who produced the component, not who sold it; an American reseller of Chinese-made modules does not change their PFE-produced status. Thresholds: a solar facility beginning construction in 2026 requires ≥40%; storage requires ≥55% (see the reference table).

Notice 2026-15 (issued Feb. 12, 2026) is the operative guidance. It allows three approaches:

• Direct-cost method — actual direct costs, no safe harbor.
• Identification Safe Harbor — direct-cost method using the Notice’s identification rules.
• Cost-Percentage Safe Harbor — apply the assigned cost percentages from the Notice 2025-08 domestic-content tables, with a binary PFE / non-PFE determination per listed item (mixed-source items weighted pro rata).

Two mechanics matter for a rooftop or onsite solar installation: a 10% de minimis rule lets same-type products be assigned across facilities placed in service in the same year without facility-specific tracking when under 10% of direct cost; and qualified interconnection property must independently satisfy the rules (and cannot use the Identification or Cost-Percentage safe harbors), but its failure disqualifies only the interconnection property, not the facility.

Independent of the MACR, the owner becomes a Foreign-Influenced Entity — and the facility loses the credit — if, in the prior year, it made a payment to an SFE under an arrangement giving the SFE effective control. Pending Treasury guidance, effective control includes an SFE’s unrestricted contractual right to dictate production quantity or timing, who may buy the output, access to the site or data, or exclusive O&M.

For IP licenses specifically, effective control is presumed where the foreign counterparty retains rights to: specify component sources; direct operations; limit the licensee’s use of the IP; receive royalties beyond year 10; require services longer than two years; withhold the technical know-how needed to produce without the counterparty; or where the agreement was entered into or modified on/after July 4, 2025. Notice 2026-15 signals Treasury will treat a post-7/4/2025 IP-license payment to an SFE as conferring effective control.

A taxpayer may rely on a supplier’s certification that a product or component was not produced by a PFE, in lieu of its own determination, absent knowledge or reason to know to the contrary (§7701(a)(52)(D)(iii)). Under the Notice, the certification must come from the supplier the taxpayer purchased from; state that the property was not PFE-produced and that the supplier does not know (or have reason to know) of any PFE in the prior production chain; include the supplier’s EIN (or foreign equivalent); be signed under penalties of perjury; and be retained by both parties for at least six years. PFE status is determined at the producer level; a reseller’s certification as to its own status does not suffice.

• Six-year assessment period (§6501(o)). A deficiency attributable to an error in the §7701(a)(52) determination may be assessed within six years; MACR documentation should be retained accordingly.
• §6662(m) accuracy penalty. The 20% accuracy-related penalty applies; for a disallowance of a §45X/45Y/48E credit by reason of overstating the MACR, the substantial-understatement threshold is reduced to the greater of 1% of the required tax or $5,000 (from the usual 10%).
• §6695B supplier penalty. Where a supplier knowingly (or with reason to know) provides a false certification that causes credit disallowance and an understatement exceeding the lesser of 5% of the required tax or $100,000, the penalty is the greater of 10% of the underpayment attributable to the falsity or $5,000 — subject to a reasonable-cause exception (§6695B(c)) and a six-year assessment period (§6696(d)(1)). Applies to certifications provided after December 31, 2025.

The penalty architecture is part of why opining counsel and suppliers are cautious: liability can attach to both the taxpayer and the certifying supplier.

OBBBA added a FEOC-specific recapture for the §48E credit: a payment to a PFE made after the facility is placed in service, within a 10-year period, triggers 100% recapture — broader and longer than the ordinary five-year ITC vesting recapture. This reaches post-closing arrangements (O&M, licensing, service contracts) with any PFE. For calendar-year taxpayers the recapture rule first applies to credit years beginning in 2028; the monitoring obligation is forward-looking and should be addressed in drafting now.

The immediate issue is that the credit purchaser’s counsel will not opine on the solar credit. This is not a single issue but three, and the appropriate response differs by category. Major firms have generally become able to analyze PFE status, so a blanket refusal warrants identifying which of the following is the operative basis.

• (a) The MACR fails. If Chinese-produced modules place the facility below the 40% threshold and the shortfall cannot be cured, no opinion can establish eligibility. Resolution: procurement — shift sufficient module, inverter, racking, and labor cost to non-PFE sources to meet the threshold. The calculation should be performed before the credit is treated as unavailable.
• (b) The producer’s entity status is uncertain. Even a U.S. manufacturer must satisfy the SFE/FIE tests independently of panel origin — Chinese ownership, board-appointment rights, qualifying debt, or an effective-control IP license (Step 6). Resolution: targeted diligence on the manufacturer’s ownership, debt, and licensing arrangements.
• (c) Firm policy. Some firms will not issue a “should” or even “more likely than not” opinion on any FEOC-exposed 2026 facility while the PFE definition remains unresolved — Notice 2026-15 expressly left it open. Resolution: the standard monetization measures — producer-level certifications, sponsor representations and warranties, and a strict indemnity backed by a creditworthy seller or parent guarantee. Tax-credit insurance is not presently a backstop for this risk (see Step 10).

Separately confirm the monetization structure: a §6418 transfer and a tax-equity partnership fail differently. A partnership flip structure does not cure a MACR shortfall — the facility-level bar applies regardless of who owns the credit — so structure cannot substitute for either a sufficient ratio or contractual risk allocation.

Short answer: generally no. As of the second quarter of 2026, the tax-credit insurance market is not, as a general matter, covering the §48E PFE / FEOC risk. The reasons reported by leading underwriters and tax-insurance counsel are structural:

• Binary, total-loss exposure. PFE is a threshold question — a facility is in or out — so a failure is a total loss rather than the partial loss tax insurers are accustomed to pricing. That alone makes it a difficult underwriting risk.
• Coverage is gated on a strong opinion the deal does not have. Underwriters will engage only on the strength of developer’s-counsel work product: a should-level opinion (or at minimum a strong more-likely-than-not) that lays out the facts, supply chain, and equipment and concludes the project qualifies. Insurers report they have not yet seen work product of sufficient strength — a chicken-and-egg problem. Where no such opinion is available (Step 9), the precondition for any coverage is absent.
• Change-in-law risk aggregates. A qualification call is project-specific, but if the forthcoming PFE guidance lands adversely it could impair every policy at once — a single correlated loss. Some underwriters will therefore write no PFE policy until the guidance is finalized.

The market exception is narrow: for very clean fact patterns supported by strong work product, limited material-assistance coverage has reportedly been underwritten since Notice 2026-15, while effective-control and foreign-influence coverage generally remains unavailable. Each still depends on the underlying opinion.