Six months ago, most corporate tax teams buying transferable credits didn’t spend a single minute on supplier-level diligence. They evaluated the project, the developer’s creditworthiness, the bonus adder documentation, and the indemnity structure. The supply chain behind the hardware wasn’t their problem.
That changed when the FEOC restrictions in the One Big Beautiful Bill Act took effect.
Since July 4, 2025, the new Prohibited Foreign Entity rules have expanded what was once a narrow electric vehicle restriction into a sweeping compliance regime covering six clean energy tax credit categories. For corporate buyers wiring funds for §48E, §45Y, or §45X credits, FEOC diligence isn’t a side exercise anymore. It’s a gating condition. Get it wrong, and the credit you just paid for could be disallowed entirely.
What the FEOC Rules Actually Require
The OBBBA created two new categories of restricted entities: Specified Foreign Entities and Foreign-Influenced Entities. Together, these form the broader Prohibited Foreign Entity classification. PFEs connected to China, Russia, North Korea, or Iran are barred from claiming §45Y, §48E, §45X, §45U, §45Z, and §45Q credits, and credits cannot be transferred to a PFE under Section 6418.
That’s the entity-level restriction. It applies to calendar-year taxpayers starting January 1, 2026.
The project-level restriction is where supply chain diligence enters the picture. For §45Y, §48E, and §45X credits, taxpayers may not receive “material assistance” from a PFE through manufactured products or components incorporated into the project. Material assistance is measured through the Material Assistance Cost Ratio. For clean electricity credits, that FEOC threshold starts at 40% in 2026, rising five percentage points annually until 2030. Energy storage faces more stringent thresholds given China’s dominance in the battery supply chain.
Projects claiming legacy §45 or §48 credits are not subject to any PFE restrictions. And §45Y/§48E projects that began construction before January 1, 2026, are exempt from the material assistance test.
The Supplier Questions That Didn’t Exist a Year Ago
Before wiring funds on any post-2025 credit, corporate buyers are now requesting documentation that wasn’t part of the standard diligence package twelve months ago.
First: was any manufactured product or eligible component produced by a Prohibited Foreign Entity? That question cascades into sub-questions about panel sourcing, inverter manufacturing, battery cell production, and transformer fabrication. Every major component needs a clear chain of custody.
Second: supplier certifications. Under the OBBBA, suppliers can issue certifications verifying that their products weren’t produced by a PFE and establishing total direct costs for the MACR calculation. Suppliers who issue false certifications face IRS penalties. But reliance on a certification doesn’t eliminate the buyer’s obligation to exercise reasonable diligence.
Third, and more complex: does any intellectual property licensing agreement connected to the project involve a Specified Foreign Entity? According to IRS Notice 2026-15, released February 2026, any IP licensing agreement entered into with an SFE after July 4, 2025, could cause the taxpayer to be classified as a Foreign-Influenced Entity, disqualifying the project from claiming the credit.
That IP question is catching developers off guard. Licensing arrangements that were perfectly routine before the OBBBA are now potential disqualifiers.
What Buyers Are Using to Verify Compliance
Treasury must publish FEOC-specific safe harbor tables by December 31, 2026. In the meantime, buyers and sellers are navigating compliance using interim tools.
IRS Notice 2025-08 provides the domestic content safe harbor tables that taxpayers can currently use to identify manufactured products and assign cost percentages for the MACR calculation. IRS Notice 2026-15 built on that framework with methodologies for determining whether a project received material assistance from a PFE.
Practically, buyers are running the MACR calculation before closing. Projects that clear the 40% FEOC threshold with documentation are proceeding. Projects in the gray zone are getting priced accordingly or paused until the developer sources compliant alternatives.
The battery storage segment is feeling this most acutely. China-dominated supply chains for lithium-ion cells mean many storage projects face tighter margins than solar or wind equivalents. Developers who diversified supply chains early are in a materially stronger position.
The Existing Contract Exception Savvy Buyers Lean On
One OBBBA provision that experienced buyers are actively leveraging is the existing contract exception.
Components acquired under a contract finalized before June 16, 2025, can be exempted from the MACR calculation, provided the component is placed into service before January 1, 2030, in a facility that began construction before August 1, 2025.
For corporate buyers evaluating credits through a clean energy tax credit marketplace, the distinction between a project with pre-June 16 contracts and one without can materially change the FEOC risk profile. Credits from projects with documented contract exceptions require less supplier-level diligence and price tighter as a result.
In a market where diligence speed affects closing timelines and pricing, the existing contract exception is quietly becoming one of the most valuable structural features a seller can demonstrate.
Conclusion
FEOC diligence has added a new layer to every transferable credit transaction involving post-2025 §48E, §45Y, and §45X credits. The questions corporate buyers ask before wiring funds now extend into supply chain sourcing, IP licensing structures, and MACR threshold compliance in ways that didn’t exist a year ago.
The rules are complex. Treasury guidance is still rolling out. Suppliers are adjusting to certification requirements. Developers are restructuring procurement to clear FEOC thresholds. And corporate buyers are learning that the credit itself is only as clean as the supply chain behind it.
For buyers building a durable tax credit acquisition strategy, FEOC diligence isn’t overhead. It’s a pricing variable. The participants who build it into their underwriting process from the start are closing faster, at better pricing, and with materially lower regulatory exposure.
Everyone else is still asking the wrong questions.
