By: Josh Howes, CEO
Executive Summary
The Clean Electricity Investment Tax Credit under Section 48E of the Internal Revenue Code (IRC) represents a pivotal incentive for advancing zero-emission electricity generation and energy storage technologies in the United States. However, the recently enacted One Big Beautiful Bill Act (OBBBA), signed into law on July 7, 2025, introduces significant restrictions through Foreign Entity of Concern (FEOC) rules—also known as prohibited foreign entity or specified foreign entity restrictions. These measures aim to safeguard domestic energy security by limiting influence from entities tied to covered nations, primarily China, Russia, North Korea, and Iran.
This white paper synthesizes the key elements of these FEOC rules as they apply to Section 48E, including restrictions, definitions, applicability, exceptions, and phase-in provisions. It highlights the material assistance thresholds, which phase in over time and differ between power generation projects and energy storage technologies. While these rules provide a framework for compliance, several gray areas remain, such as precise methods for proving adherence to requirements and interpretations of “effective control” and ownership attribution. Walker Blue anticipates additional guidance from the U.S. Department of the Treasury to clarify these ambiguities, which will be crucial for project developers, investors, and stakeholders in the clean energy sector.
As a leader in sustainable energy solutions, Walker Blue is committed to helping clients navigate these evolving regulations to maximize tax credit eligibility while ensuring compliance and promoting domestic innovation.
Introduction
Section 48E, established under the Inflation Reduction Act (IRA) and effective for projects placed in service after December 31, 2024, offers a technology-neutral investment tax credit (ITC) equal to 6% of qualified investments in facilities generating electricity with zero or negative greenhouse gas emissions, or in energy storage technologies. This base rate increases to 30% if prevailing wage and apprenticeship (PWA) requirements are met.
The OBBBA amends these provisions by imposing FEOC restrictions to prevent undue foreign influence, particularly from entities associated with adversarial nations. These rules build on similar restrictions in other IRA credits (e.g., Sections 30D and 45X) but extend them to clean electricity investments. The primary goals are to enhance national security, reduce reliance on foreign supply chains, and promote domestic manufacturing.
While the framework is clear in intent, practical implementation awaits further Treasury guidance on compliance verification and edge cases.
Overview of FEOC Restrictions
The FEOC rules disallow the Section 48E ITC under specific conditions related to ownership, control, or material involvement by prohibited foreign entities. Key triggers include:
- Taxpayer Status: The credit is unavailable if the taxpayer is a Specified Foreign Entity (SFE) or Foreign-Influenced Entity (FIE).
- Material Assistance: The credit is denied if the qualified facility or energy storage technology receives “material assistance” from a prohibited foreign entity during construction, based on cost thresholds for components mined, produced, or manufactured by such entities.
- Effective Control: Disallowance occurs if contracts or arrangements grant “effective control” over the facility to an SFE, including payments that convey operational or intellectual property influence.
- Recapture Rule: A 100% recapture applies if an “applicable payment” is made to an SFE within 10 years post-placement in service, for taxable years beginning more than two years after OBBBA enactment (July 4, 2025).
These restrictions apply to credits claimed in taxable years beginning after July 4, 2025, with material assistance rules kicking in for projects beginning construction after December 31, 2025.
Key Definitions
Understanding the FEOC rules requires familiarity with core terms, drawn from OBBBA amendments to IRC Sections 48E and 7701(a).
| Term | Definition |
| Prohibited Foreign Entity | Includes SFEs and FIEs; entities with significant ties to “covered nations” (China, Russia, North Korea, Iran), such as governments, citizens/nationals (excluding U.S. persons), or controlled entities. Incorporates lists from the National Defense Authorization Act (e.g., Chinese military companies, entities using forced labor), OFAC-sanctioned parties, and specific firms like CATL, BYD, and Gotion. |
| Specified Foreign Entity (SFE) | Governments/agencies of covered nations; their citizens/nationals; entities organized in or principally based in covered nations; or entities controlled (>50% equity, per IRC §318 attribution) by the above. Determined annually as of the taxable year’s end. |
| Foreign-Influenced Entity (FIE) | Entities where an SFE can appoint board/executive officers; owns ≥25% equity (or multiple SFEs ≥40%); holds ≥15% debt; or received an “effective control” payment from an SFE in the prior year. Annual determination. |
| Material Assistance | Exceeds thresholds if the percentage of total direct costs for manufactured products/components from prohibited foreign entities is too high. Taxpayers can rely on supplier certifications, with penalties for inaccuracies. |
| Effective Control | Contracts/licenses allowing an SFE to influence operations (e.g., output timing, offtake, data access, sourcing, IP use). Includes long-term royalties (>10 years) or post-enactment IP licenses; bona fide IP sales are exempt. |
Applicability and Phase-In Provisions
FEOC status is determined annually, with special rules for publicly traded companies (exempt from some FIE restrictions unless an SFE appoints officers; reliance on public disclosures permitted, except for exchanges in covered nations).
Material assistance thresholds represent the minimum non-FEOC percentage of total direct costs and phase in annually by 5 percentage points. These apply based on the calendar year construction begins, for projects post-December 31, 2025.
For Qualified Facilities (Power Generation Projects)
| Calendar Year Construction Begins | Minimum Non-FEOC Threshold |
| 2026 | 40% |
| 2027 | 45% |
| 2028 | 50% |
| 2029 | 55% |
| 2030 and after | 60% |
For Energy Storage Technology
| Calendar Year Construction Begins | Minimum Non-FEOC Threshold |
| 2026 | 55% |
| 2027 | 60% |
| 2028 | 65% |
| 2029 | 70% |
| 2030 and after | 75% |
Grandfathering exempts projects beginning construction before January 1, 2026, from material assistance rules. Legacy credits under Sections 45 or 48 (pre-2025) are unaffected if construction began by 2024. Costs from pre-June 16, 2025, binding orders may be excluded for projects under construction by July 31, 2026. Domestic content rules align and apply from June 16, 2025.
Exceptions
- Pre-enactment projects are generally grandfathered, but post-enactment payments may trigger recapture.
- Publicly traded entities and ≥80%-owned subsidiaries are exempt from certain FIE rules absent SFE appointment authority.
Gray Areas and Awaited Treasury Guidance
While OBBBA provides a foundational structure, several ambiguities persist. For instance, the exact methodologies for calculating and proving compliance with material assistance thresholds—such as detailed cost attribution, supplier certification standards, and audit procedures—remain undefined. Interpretations of “effective control” in contracts, debt holding thresholds, and ownership attribution under IRC §318 may vary, potentially leading to inconsistent application. Additionally, the interaction with domestic content bonuses and recapture triggers requires clarification to avoid unintended denials of credits.
Walker Blue is closely monitoring developments and expects the Treasury Department to issue proposed regulations or interpretive guidance in the coming months to address these gray areas. Until then, stakeholders should consult legal and tax advisors, document supply chains meticulously, and consider safe harbors like pre-enactment commitments.
How Walker Blue Can Help with FEOC Compliance
At Walker Blue, we specialize in assisting clients with FEOC compliance to ensure seamless eligibility for Section 48E tax credits. Our services will include providing an in-depth analysis of all materials and equipment used in your projects, determining their production origins, calculating the material assistance FEOC percentages, and supplying comprehensive documentation to prove compliance. Once additional guidance from the Treasury is issued, we will also be able to help prove compliance with Prohibited Foreign Entity (PFE) guidelines and provide the necessary annual reporting.
Conclusion
The FEOC rules under OBBBA represent a strategic shift toward securing U.S. clean energy infrastructure against foreign influence, but they introduce complexities that could impact project viability. By prioritizing domestic sourcing and ownership, these provisions align with broader national security goals while preserving incentives for sustainable innovation. Walker Blue recommends proactive planning, including supply chain audits and partnership reviews, to ensure eligibility for Section 48E credits. As Treasury guidance emerges, we will update our clients on opportunities and compliance strategies to drive the clean energy transition forward.
For more information, contact Walker Blue at info@blueenergygroup.com.
