The Inflation Reduction Act expanded the Investment Tax Credit to include standalone battery storage systems and extended generous incentives for solar projects. However, recent legislative and regulatory changes are reshaping eligibility requirements. The One Big Beautiful Bill Act introduced new “prohibited foreign entity” (PFE) restrictions that limit access to the ITC and the Section 45X advanced manufacturing credit. These rules, combined with updated guidance from the Internal Revenue Service, mean that any commercial solar or storage project placed in service in 2026 must undergo careful compliance review. Failure to meet the Foreign Entity of Concern (FEOC) requirements can result in disqualification from tax credits, repayment of credits already claimed, and potential financial penalties. Understanding these rules now is essential for protecting your investment.
What Are FEOC and PFE Restrictions?
The term FEOC stands for Foreign Entity of Concern. Under the One Big Beautiful Bill Act, a new category called “prohibited foreign entity” (PFE) was created. Any US company that qualifies as a PFE is barred from claiming federal clean energy tax credits, including the Investment Tax Credit. The restrictions also apply to projects that use equipment or components sourced from entities deemed to be FEOCs. The goal is to reduce reliance on certain foreign supply chains, particularly those linked to China. The rules affect both solar photovoltaic systems and battery energy storage systems, as well as other clean energy technologies. Major law and accounting firms have issued preliminary guidance, but the specifics continue to evolve.
How PFEs and FEOCs Differ
While the terms are sometimes used interchangeably, the IRS has drawn a distinction. A Foreign Entity of Concern is a broader designation that can apply to any entity meeting certain criteria under the Inflation Reduction Act. A prohibited foreign entity is a narrower subset that triggers specific disqualifications under the One Big Beautiful Bill Act. Both designations require project owners to trace the origin of key components and verify that no restricted entity is involved in the manufacturing or supply chain. The IRS recently released Notice 2026-15 to clarify how these rules apply to material assistance and component sourcing.
How FEOC Rules Affect Solar and Battery Storage Projects
Standalone battery energy storage systems (BESS) are explicitly eligible for the Investment Tax Credit under the Inflation Reduction Act. However, the new FEOC restrictions place conditions on that eligibility. By 2025, the ITC is fully phased out for any projects using restricted FEOC components. For projects placed in service in 2026, compliance must be confirmed before the credit is claimed. Solar projects face similar scrutiny, as inverters, modules, and racking systems may contain components manufactured by entities subject to FEOC determinations. The phase-out timeline means that any commercial solar or storage installation that relies on equipment from prohibited foreign sources will lose its tax credit eligibility entirely.
The Role of Notice 2026-15
On February 13, 2026, the IRS issued Notice 2026-15, which provides more detail about how to calculate whether a new power plant, storage project, or solar equipment contains too much Chinese equipment to qualify for federal tax credits. The notice does not cover every detail of FEOC compliance, but it offers preliminary solutions to questions regarding material assistance and provides safe harbor approaches. Taxpayers must maintain documentation to support their compliance position. Until the Treasury issues new safe harbor tables by December 31, 2026, project owners may rely on the tables provided in earlier IRS guidance. This transitional period is critical for facilities that are currently being designed or constructed.
Key Compliance Requirements for 2026
To preserve ITC eligibility for solar and storage investments placed in service in 2026, project owners must meet several compliance obligations. First, every component of the system must be traced to verify that no part was manufactured or supplied by a FEOC or PFE. This includes solar panels, inverters, transformers, battery cells, battery modules, and any power conversion equipment. Second, documentation must be created and retained that demonstrates the origin of each component. Third, if safe harbor provisions are used, the taxpayer must follow the specific requirements outlined in Notice 2026-15. The IRS has indicated that failure to maintain adequate records can lead to disqualification even if the equipment itself is compliant.
Material Assistance Safe Harbors
Notice 2026-15 introduces material assistance safe harbors that can simplify compliance for certain situations. Under these safe harbors, if a component or raw material qualifies under the thresholds provided, the project is presumed to be free of FEOC involvement. However, the safe harbors are not permanent. The Treasury is expected to release updated tables by December 31, 2026. Until then, project owners can rely on the tables published in earlier IRS notices. It is important to work with a qualified tax advisor to confirm which safe harbor applies and to ensure all documentation is in order before the tax return is filed. The stakes are high: noncompliance can result in full credit disallowance and potential penalties.
Steps to Ensure Your Project Qualifies for the ITC
If you are planning a commercial solar installation or battery storage system in 2026, start the compliance process early. Begin by reviewing your equipment procurement contracts and identifying the country of origin for each major component. Work with your installer or system integrator to obtain supply chain documentation, including manufacturer declarations that no FEOC or PFE was involved. Use the safe harbor tables provided in IRS Notice 2026-15 where applicable. Maintain a compliance file that includes all certifications, invoices, and correspondence. Finally, engage a tax professional who specializes in clean energy credits to review your documentation before filing. This proactive approach minimizes the risk of an audit adjustment or credit recapture.
Onsite Utility Services Capital offers comprehensive energy efficiency upgrades, including solar solutions, under an Energy Savings as a Service (ESaaS) model. While the ESaaS model eliminates upfront capital and debt risk, the FEOC compliance burden still falls on the project owner. Onsite Utility Services can help facility managers and building owners assess their current and planned solar investments against the new FEOC requirements. Our team stays current with regulatory changes such as Notice 2026-15 so that your project remains eligible for the full ITC benefit. By combining zero-capex financing with diligent compliance practices, you can reduce operating costs while securing the tax incentives that make renewable energy financially attractive.
Frequently Asked Questions
What is a Foreign Entity of Concern (FEOC)?
A Foreign Entity of Concern is a designation under the Inflation Reduction Act that identifies certain foreign entities that are restricted from involvement in clean energy supply chains. If a solar panel, battery cell, or other component is manufactured by an FEOC, the system may lose eligibility for the Investment Tax Credit and other federal incentives.
What is a Prohibited Foreign Entity (PFE)?
A Prohibited Foreign Entity is a narrower category created by the One Big Beautiful Bill Act. Any US company that meets the PFE definition is completely barred from claiming ITC and 45X credits. The rules also apply to any project that uses equipment from a PFE, even if the project owner is not itself a prohibited entity.
When do the FEOC rules take effect for solar and storage?
The phase-out timeline already began under the Inflation Reduction Act. By 2025, the credit is fully phased out for any projects using restricted FEOC components. For projects placed in service in 2026, full compliance must be demonstrated or the ITC is unavailable. IRS Notice 2026-15 provides transitional guidance until new safe harbor tables are issued.
What happens if my project fails FEOC compliance?
Noncompliance can result in disqualification from the Investment Tax Credit, a requirement to repay any credits already claimed, and potential financial penalties. The IRS expects taxpayers to maintain thorough documentation to prove that no FEOC or PFE components were used. An audit could lead to significant financial exposure for project owners.
How can Onsite Utility Services help with FEOC compliance?
Onsite Utility Services Capital provides turnkey energy efficiency solutions, including solar, under an ESaaS model with zero upfront capital. Our team monitors regulatory developments such as Notice 2026-15 and can help clients evaluate their projects for FEOC risks. We work with facility managers, building owners, and tax professionals to ensure that every solar or storage investment remains eligible for the full ITC benefit.