One Big, Beautiful Bill Act for US energy storage: navigating ‘foreign entity of concern’ rules

The One Big, Beautiful Bill Act includes new restrictions on technology-neutral tax credits, including project-based tax credits and the “45X” manufacturing tax credit which can be claimed by energy storage industry manufacturers and developers. The law seeks to limit content from foreign entities of concern (FEOC), a definition which primarily affects products shipped from China.

The act denies technology-neutral tax credits including the 48E investment tax credit and the 45Y production tax credit to projects that are in violation of FEOC rules. And 45X manufacturing tax credits are denied to US production sites that exceed allowed thresholds of Chinese material inputs.

An executive order from the US president this week reaffirmed “prompt action” on FEOC enforcement.

The FEOC restrictions take effect in the tax years beginning after July 4, 2025.

“The FEOC rules are complicated but they distill to a three-step analysis,” said Keith Martin, partner at Norton Rose Fulbright.

Martin proposed a three-step process for both project developers and manufacturers seeking to attain FEOC compliance.

Step 1

First, project owners should determine if the project received “material assistance” during construction from a “prohibited foreign entity,” which will be explained in detail below.

The Internal Revenue Service (IRS) is expected to publish tables in late 2026 to make calculation for what qualifies as “material assistance.”

Norton Rose Fulbright said the determination is a fraction, in which the denominator is the total labor and materials cost to the project owner of the “manufactured products (including components)” that are brought to the project site for incorporation into the project. “Manufactured products” include components like solar modules but do not include structural elements like steel or rebar.

The numerator is the cost of the manufactured products, after removing the labor and materials costs from a “prohibited foreign entity.”

“Thus, the fraction is the percentage of manufactured products used in the project that are not made by prohibited foreign entities,” said Martin.

The fraction must be at least 40% for power projects on which construction starts in 2026, increasing over time, to 60%, for projects starting construction after 2029.

The thresholds are different for storage projects. They are 55% for such projects that start construction in 2026, increasing over time, to 75% for storage projects starting construction after 2029.

“There are significant penalties for getting the material assistance calculations wrong,” said Martin.

A 20% penalty will be imposed on any taxpayer that gets the calculation wrong if the taxpayer ends up paying more than 1% less tax than it should have as a result.

Step 2

For project developers, Martin said the second step is to determine whether the taxpayer claiming or selling tax credits is “specified foreign entity” (SFE) or “foreign-influenced entity.”

Prohibited foreign entities under FEOC include companies that have direct or indirect interest of 50% or more from SFEs which include China, Russia, Iran, and North Korea.

The IRS also applies FEOC restrictions to “foreign-influenced entities” which are entities “influenced” by SFEs. Influence is determined by an entity’s right to assign a board member or executive officer, by showing at least 25% ownership from an SFE, collective ownership of at least 40% from multiple SFEs, or an SFE holding at least 15% of debt in the entity.

Step 3

As a third step, Norton Rose Fulbright recommends scrubbing contracts related to technology licensing with any counterparties that are SFEs, to ensure that none of them gives such a counterparty “effective control” over the taxpayer or the project.

Any payments by the taxpayer in the previous tax year under such a contract or technology license will make the taxpayer technically a “foreign-influenced entity,” said the report.

The report from Norton Rose Fulbright outlines considerations for publicly traded companies, the “draconian” risk of investment tax credit recapture, and specialized considerations for energy storage project developers.

pv magazine USA will publish a second report outlining how to be FEOC compliant for 45X manufacturing tax credits.

From pv magazine USA.