Summary: New rules under the One Big Beautiful Bill Act (OBBBA) change how businesses evaluate clean energy tax credits. In addition to meeting traditional project performance and qualifying expenditure requirements, companies must now consider the origin of project materials throughout their supply chains. For organizations accustomed to using clean energy incentives to offset project costs and improve returns, sourcing decisions have become a new and critical eligibility consideration.
For years, clean energy tax incentives have helped businesses offset the cost of investing in renewable energy projects, advanced manufacturing, battery production, hydrogen technologies, and other strategic initiatives. Eligibility for clean energy credits has largely depended on factors such as whether a project met the statutory requirements of the applicable credit, generated qualifying investment or production activity (e.g., building eligible energy property, producing clean electricity, or manufacturing qualifying components), and was properly documented and substantiated.
As a result, companies evaluating these opportunities often focus on project economics, technical and engineering requirements, and qualifying expenditures or production metrics to determine project eligibility and the calculation of the anticipated tax benefit. However, another factor is predominantly more likely to determine whether a project qualifies for these tax credits: where critical components, materials, and technologies come from.
Recent changes under the One Big Beautiful Bill Act (OBBBA) introduce new Foreign Entity of Concern (FEOC) restrictions that significantly affect major clean energy tax credits. These rules are intended to prevent entities connected to certain foreign adversaries, including China, Russia, Iran, and North Korea, from benefitting from U.S. clean energy incentives. The legislation also includes “material assistance” rules that can deny credits when too much of a project’s supply chain relies on specified foreign adversaries.
By adding a new dimension to eligibility that examines who supplied the materials, components, and technologies that made the project possible, supply chain sourcing now plays an important role as well. Businesses pursuing clean energy credits must spend more time and resources assessing the origin of project material, components, and suppliers.
A change in perspective: supply chain visibility as a tax issue
Historically, companies pursuing clean energy incentives focused primarily on whether a project satisfied the requirements of the applicable credit and generated sufficient qualifying investment or production activity to support the expected tax benefit. While documentation and substantiation remained important, relatively little attention was paid to where materials, components, and technologies originated. The FEOC rules change that equation by making supply chain sourcing a critical factor in determining credit eligibility.
Under the new framework, eligibility depends not only on what a company builds or manufactures, but also on ownership structures, financing arrangements, supplier relationships, sourcing decisions, and contractual agreements throughout the supply chain. For many businesses, this means tax, procurement, legal, manufacturing, supply chain, and finance teams must work together earlier in the project lifecycle. Decisions that may have seemed operational before now directly affect the qualification of federal clean energy tax incentives.
Why supply chains matter
The FEOC provisions are designed to strengthen domestic energy production and reduce reliance on countries viewed as posing strategic risks to U.S. economic and national security interests. The rules target entities that are owned, controlled, or significantly influenced by organizations linked to certain foreign governments.
This reflects a broader policy shift already visible across multiple industries. Federal incentives are becoming more intertwined with domestic production, domestic content requirements, critical mineral sourcing, and supply chain resiliency. The clean energy sector is no exception. As companies expand manufacturing operations, invest in clean energy facilities, or develop energy storage technologies, policymakers want incentive dollars to support supply chains that align with these objectives.
Consequently, a project that appears eligible based on its technology or investment alone may still face qualification challenges if its supply chain does not satisfy the applicable sourcing requirements.
The hidden risk in material assistance
One of the most important concepts introduced by the OBBBA is the material assistance rule, in which a project must demonstrate that a sufficient percentage of its direct costs are not attributable to foreign adversaries. This is measured using the Material Assistance Cost Ratio (MACR), which calculates the percentage of qualifying costs that are not attributable to prohibited foreign entities.
| MACR = ((T – P) / T) x 100% |
|---|
| T = Total direct cost of all manufactured products or components |
| P = Total direct cost of all manufactured products or components from a prohibited foreign entity |
Simply put, the calculation measures how much of a project’s direct costs come from acceptable sources versus prohibited foreign entities. For certain credits, including those available through Sections 45X, 45Y, and 48E, projects can lose eligibility if too much of its materials or components originate from foreign adversaries. The credit may also be denied if the percentage of costs attributable to acceptable sources falls below the required threshold. Because clean energy incentives can represent a significant portion of a project’s financial return, losing eligibility due to sourcing issues may materially affect project economics.
While companies may know the identity of their primary suppliers, they often have less visibility into second- and third-tier sourcing relationships. Those deeper supply chain connections may now have tax consequences, presenting additional challenges to businesses pursuing clean energy incentives.
The reason companies may be unprepared
Modern manufacturing and energy supply chains are global by nature. Components frequently move through multiple countries and providers before arriving at their final destination. For instance, developers may source inverters from one supplier, battery components from another, and raw materials from several additional vendors.
As a result, some organizations may struggle to answer fundamental questions such as:
- Where are critical components manufactured?
- Who ultimately owns or controls the supplier?
- What percentage of project costs originate from potentially restricted sources?
- Do supplier contracts provide sufficient sourcing transparency?
- Can suppliers substantiate their certifications if challenged?
These questions were not historically part of many companies’ tax credit planning processes, though they may be essential now. Waiting until tax return preparation to investigate sourcing details can create significant challenges, given procurement decisions have often been finalized, contracts executed, and equipment installed.
Businesses that intend to pursue clean energy tax credits should evaluate sourcing considerations early in the project lifecycle to help ensure supply chain decisions do not inadvertently jeopardize eligibility for available incentives.
Clean energy credits may require new due diligence
As sourcing becomes more important, organizations should consider building credit eligibility reviews into existing procurement and vendor management processes. That does not mean every company needs to become a supply chain forensic investigator, however, companies expecting significant clean energy incentives should establish reasonable procedures to evaluate sourcing risks before major purchasing decisions are made.
The earlier these reviews occur, the greater the flexibility to address potential issues. For example, identifying a problematic supplier during project planning provides the opportunity to explore alternative sourcing options. Discovering the same issue after construction begins could be considerably more costly.
Best practices for protecting credit eligibility
1. Map your supply chain early
- Many businesses understand their direct vendor relationships but have limited visibility beyond the first tier. Companies planning significant clean energy investments should consider mapping critical components and materials before contracts are finalized.
- The goal is not necessarily to achieve perfect visibility, but rather to identify areas where sourcing concentration or ownership concerns may exist. Understanding where key products originate can help organizations identify risks before they affect project economics.
2. Strengthen supplier documentation requirements
The new rules place more emphasis on documentation and certifications. Many companies already retain supplier certifications but should evaluate how supplier information is collected, maintained, and periodically refreshed to ensure all documentation is updated and meets new requirements.
Questions worth considering include:
- Are sourcing certifications obtained consistently?
- Is supporting documentation retained?
- Who is responsible for validating supplier representations?
- Are there procedures for updating information if supply chains change?
A proactive documentation strategy can make future compliance efforts significantly easier.
3. Bring tax into procurement conversations earlier
Procurement, operations, and engineering teams often make purchasing decisions based on cost, availability, performance, and delivery timelines. While those considerations remain important, companies pursuing clean energy incentives should also evaluate whether sourcing decisions could affect anticipated tax benefits.
A component that appears less expensive initially may become more costly if it jeopardizes eligibility for a substantial tax credit. Cross functional collaboration can help ensure procurement decisions align with broader financial objectives.
4. Monitor regulatory developments
The FEOC framework remains an evolving area as Treasury guidance, safe harbor provisions, certifications, and compliance procedures continue to develop over time. Companies with long project timelines should monitor these developments regularly and stay informed to adapt sourcing strategies before they become compliance challenges.
Final thoughts: Credits are earned longed before the tax return is filed
Many businesses think of tax credits as the final step in a project. In reality, clean energy credit eligibility is increasingly being determined throughout the project’s lifecycle. Supplier selection, component sourcing, ownership structures, financing agreements, and contractual relationships can all influence whether a project ultimately qualifies for the incentives it expects to receive.
The new FEOC and material assistance rules reinforce the reality that tax planning can no longer operate independently from supply chain planning. Organizations that treat credit eligibility as an enterprise-wide consideration, rather than a year-end tax exercise, will be more likely to successfully maximize clean energy incentives. Enlist the help of an experienced tax credit advisor to help evaluate sourcing risks, address compliance considerations, and plan proactively to preserve valuable tax benefits.
