FEOC and Your Supply Chain: A Practical Checklist for Screening Components Before You Buy a Credit

If you’re buying transferable tax credits in 2026, you can’t afford to treat FEOC as somebody else’s problem. The supply chain behind the project you’re acquiring credits from is now directly tied to whether those credits survive an IRS examination. A project that looks clean on paper but used PFE-sourced components below the threshold can lose its entire credit, not a portion of it, and that disallowance lands on the buyer.

Most corporate tax teams didn’t have to think about this a year ago. Now FEOC screening is a gating step in every diligence process involving Section 48E, Section 45Y, or Section 45X credits from projects beginning construction in 2026 or later.

Understand the Test Before You Run It

FEOC compliance is measured through the Material Assistance Cost Ratio. The formula itself is straightforward: take total direct manufacturing costs, subtract the portion attributable to Prohibited Foreign Entity sources, and divide by total direct manufacturing costs. The higher the ratio, the less PFE-dependent the project is.

The thresholds are where it gets specific. For Section 48E and Section 45Y clean electricity qualified facilities, the MACR threshold in 2026 is 40%, rising five points annually through 2030. Energy storage projects face a steeper 55% threshold. For Section 45X manufacturing credits, solar components must clear 50%, battery components 60%, and wind components 85%.

If the applicable MACR requirement is not satisfied, the project or eligible component may become ineligible for the relevant credit. Not reduced. Gone.

The Screening Questions That Matter at Component Level

Here’s what catches a lot of buyers off guard about FEOC diligence. A supplier that isn’t itself a PFE can still contribute disqualifying content if its sub-suppliers are PFEs. Material assistance is measured at the component level, not just the manufacturer level. That distinction matters enormously.

When you’re screening a project’s supply chain before purchasing credits, these are the questions your diligence team should be running:

• Is the seller or any entity in the project’s ownership chain a PFE? This covers both Specified Foreign Entities and Foreign-Influenced Entities connected to China, Russia, Iran, or North Korea. Check equity ownership, effective control through licensing or technology agreements, and certain debt arrangements. IP licensing with an SFE entered after July 4, 2025, can trigger FIE classification even without equity involvement.
• Has the seller provided component-level MACR documentation? A blanket compliance statement isn’t defensible. Request a bill of materials broken out to the component level showing which manufactured product components came from PFE versus non-PFE sources, with cost attribution for each.
• Are supplier certifications signed under penalties of perjury and retained for the statutory period? IRS Notice 2026-15 requires certifications to be signed under penalties of  perjury and maintained for at least six years. Generic letters from suppliers without component-level detail don’t meet the standard.
• Was the MACR calculated at the correct level? The test applies at the facility level. Interconnection property requires its own separate MACR calculation. If interconnection fails, credits on that spend are lost. If the facility itself fails, the entire credit including interconnection is disallowed.
• Does the project qualify for the pre-June 16, 2025 contract exception? Certain components acquired under binding written contracts entered into before June 16, 2025, may be excluded from the MACR calculation if the applicable statutory conditions and deadlines are satisfied.  That exception materially changes the FEOC risk profile for projects with early procurement timelines.

What Reasonable Reliance Actually Means

IRS Notice 2026-15 established a reasonable reliance standard for supplier certifications. Taxpayers may rely on certifications unless they know or have reason to know the certification is inaccurate.

That sounds like a safe harbor, and in many ways it is. But “reason to know” is doing real work in that sentence. If you’re buying credits from a project that uses battery cells from a manufacturer with well-documented PFE connections, relying on a generic certification that says “non-PFE” isn’t going to hold up under examination.

FEOC diligence requires buyers to exercise independent judgment, not just collect paperwork. If the supply chain has obvious red flags, the fact that a certification exists in the file doesn’t protect you.

The buyers who are doing this right are cross-referencing supplier certifications against publicly available FEOC information, checking manufacturing origins at the component level (not just the brand level), and documenting their own diligence process so it holds up years later when an IRS examination or a tax credit insurance claim might depend on it.

Don’t Assume Insurance Covers the Gap

One common mistake in FEOC diligence is assuming that tax credit insurance will backstop a compliance failure. Some policies do cover FEOC risk. Many don’t. Policy language varies meaningfully on this point, and underwriters are increasingly asking for the same component-level documentation that buyers should be collecting independently.

For corporate buyers purchasing credits through a clean energy tax credit marketplace, confirming whether the seller’s insurance policy explicitly covers FEOC disallowance is a separate diligence step. Don’t assume. Ask for the policy language. Read the exclusions.

If the insurance doesn’t cover FEOC risk, your only protection is the indemnity from the seller and the quality of your own diligence. That’s a very different risk position than most buyers are used to from ITC transactions where recapture was the primary concern.

Conclusion

FEOC screening has become the most consequential diligence step in the transferable credit market for post-2025 projects. The supply chain behind every component in a project now determines whether the credit exists at all, and the buyer carries exposure if the documentation doesn’t hold up.

The practical checklist is shorter than it looks. Verify PFE status at the entity and component level. Get MACR documentation that goes deeper than a blanket statement. Confirm certifications meet the Notice 2026-15 standard. Check whether insurance actually covers FEOC risk. And don’t confuse reasonable reliance with no reliance.

The buyers doing this work upfront are closing faster and at better pricing. The ones skipping it are carrying risk they haven’t fully priced in.

In a market where one sourcing issue can zero out an entire credit, that’s not a risk worth taking.