The Foreign Entity of Concern (FEOC) provision in the “One Big Beautiful Bill” (OB3) has the potential to eliminate your solar project’s eligibility for the Investment Tax Credit (ITC) and subsequent Direct Pay tax refund.
But your nonprofit can avoid this risk and save with solar — if you start your solar project now.
🗒️ Note: The information here is current as of September 2, 2025. For the latest updates, please check our Events and Policy pages often, or reach out to us anytime.
What is FEOC?
Having connections to certain foreign entities listed in OB3 as “National Security Threats” — whether through your organization or through a manufacturer of products used in your solar project — can threaten your ITC eligibility. The “Covered Nations” are the People’s Republic of China (including Hong Kong), the Islamic Republic of Iran, the Russian Federation, and the Democratic People’s Republic of Korea (North Korea).
The FEOC requirements are based on a complex series of tests related to the ownership and control of both the taxpayer claiming the ITC and the entity manufacturing products used in the project.
We’ll provide an overview of the FEOC restrictions and considerations here. If you want to dig deeper, you can read the relevant sections of OB3, which amount to about 20 pages: Section 70512 (p.181) covers the Production Tax Credit (PTC) and FEOC rules, and Section 70513 (p.199) covers the ITC.
Beginning of construction
Since the passage of OB3, to ensure your solar project receives the ITC, you must begin construction by certain dates. If your project isn’t expected to be FEOC compliant, the timeframe for beginning construction is even more restricted. In effect, we now have two definitions of “beginning of construction” — one for safe harboring the ITC on or before July 4, 2026, and one for safe harboring from project-level (Material Assistance) FEOC rules on orbefore December 31, 2025.
To safe harbor the ITC:
- To safe harbor the ITC for 4 years, you must begin construction on your solar project on or before July 4, 2026.
- If you begin construction after July 4, 2026, your project must be placed in service by December 31, 2027.
To safe harbor from FEOC project-level (Material Assistance) rules:
- To safe harbor your solar project from the need for project-level (Material Assistance) FEOC compliance, you must begin construction on or before December 31, 2025. Note that taxpayer-level FEOC restrictions will still apply.
How do you show you’ve begun construction? As an industry, we’ve already had 16 years’ worth of historical precedent and guidance about the two pathways for showing that construction has begun on a solar project (see more details here):
- The physical work test, passed by performing work that is of a significant nature and part of your solar project.
- The 5% safe harbor test, passed by paying or incurring 5% of your project’s final cost.
But the executive order that followed OB3 instructed Treasury to change some of these safe harbors to restrict “the use of broad safe harbors unless a substantial portion of a subject facility has been built,” and to implement the “enhanced Foreign Entity of Concern restrictions.”
The Treasury guidance was issued on August 15, 2025; you can read it here and watch our August 18 video explaining it here.
The guidance, which applies only to the definition of Beginning of Construction for wind and solar projects trying to meet the July 4, 2026 deadline, states that:
- The physical work test remains available for all projects.
- The 5% safe harbor test remains available only for solar projects that are 1.5 MW or smaller — most nonprofit solar projects are within this range.
- Once beginning of construction is established, projects have until the end of the 4th year after they begin construction in order to be placed in service, provided construction is continuous during that time.
To learn more about the beginning of construction, see our September 4 webinar here.
Prohibited Foreign Entities (PFEs)
There are two categories of Prohibited Foreign Entities under FEOC: a Specified Foreign Entity and Foreign-Influenced Entity. To add to the complexity, note that the definition of a Specified Foreign Entity includes a Foreign Controlled Entity.
What is a Specified Foreign Entity (SFE)? These are specified in prescriptive lists from other laws that identify “National Security Threats” and/or entities that are deemed foreign adversaries. They include entities that are owned or controlled by a government of a Covered Nation (China, Iran, Russia, North Korea); Chinese Military Companies; entities connected to forced labor in Xinjiang, China; and certain Chinese battery companies.
What is a Foreign-Controlled Entity (FCE)? These can be determined using non-prescriptive lists of “National Security Threats” and/or entities that are deemed foreign adversaries that include a Government or instrumentality of a Covered Nation (China, Iran, Russia, North Korea); a Citizen or National of a Covered Nation (who is not also a US Citizen, National, or Lawful Permanent Resident); an entity incorporated or principal place of business in a Covered Nation; or an entity controlled by one of these.
What is a Foreign-Influenced Entity (FIE)? An SFE that can appoint a covered officer; an SFE that owns 25%+ equity; a group of SFEs that own 40%+ equity; or one or more SFEs that have 15%+ of debt is issued to them.
Is this crystal-clear now? For a deeper explanation, see our FEOC webinar recording and slides. Again, you can avoid these complexities by starting your project now, because projects that meet the Beginning of Construction rules by December 31, 2025 are not subject to FEOC requirements.
FEOC tests
FEOC is not as much about geography, as is the case with domestic content requirements. Instead, it’s about who owns and controls the entity that is claiming the tax credit and who owns and controls the entity that is making the Manufactured Products incorporated into the Qualified Facility.
This can get complicated, as ownership of the entities that manufacture products can change.
To be safe from FEOC requirements, your project must pass a number of tests, two of which are listed below:
- The Taxpayer Identity Test. Who is claiming the ITC? Is it a Prohibited Foreign Entity (PFE)? This test is about ownership and control of your nonprofit.
Most nonprofit organizations are not PFEs, though there may be edge cases depending on who your board members are. It’s important to run this by your legal counsel to ensure your nonprofit is not subject to this restriction.
- The Material Assistance (Project-Level Supply Chain Sourcing) Test: Are the Manufactured Products incorporated into your project made by a PFE? To determine this, you can use the Material Assistance Cost Ratio (MACR), a test that follows this formula:
The percentage of the non-PFE Manufactured Product costs needed to pass the MACR test, called the Threshold Percentage, increases each year:
Threshold Percentages by Year
The higher Threshold Percentage will be difficult to meet for energy storage, but even the lower Threshold Percentage for solar projects will be challenging. One open question needing additional guidance is the question of how far back in the supply chain do you need to look?
Treasury has been directed to issue further guidance on FEOC by the end of 2026. For many projects, that will be too late.
What can you do in the meantime? The law does indicate that until the new Treasury guidance is issued, you can rely on certain safe harbors, including the safe harbor tables in Notice 2025-08, along with certifications from suppliers. That means getting an attestation or some kind of disclosure document for each of the Applicable Project Components indicating which Manufactured Product Components — cells, frame, glass, rails, etc, — are or are not from a PFE. You’ll then have to ensure that the non-PFE components add up to at least the threshold percentage for the appropriate year, as indicated in the table above by utilizing the safe harbor tables in Notice 2025-08.
Over time, we expect greater clarity in this area. For now, it is going to require some work. Again, for more details, see our FEOC webinar recording and slides.
Start now!
How can you avoid this whole FEOC headache? Start your project now!
These are the two safe harbors available now for solar projects:
- ITC: If construction begins on or before July 4, 2026, you can safe harbor the ITC for 4 years.
- FEOC: If construction begins on or before December 31, 2025, you can safe harbor from FEOC project-level (Material Assistance) rules — that is, project-level (Material Assistance) FEOC compliance is not needed for your project.
Although the taxpayer-level FEOC rules will still apply, if you begin construction on your solar project this year, you can avoid the calculations, stress, and uncertainty of FEOC project-level (Material Assistance) rules.
Learn more
For more details on OB3 and its implications, see our July 31 webinar on solar policy — including the slides, recording, Q&A transcript, and follow-up videos and slides — and our August 21 FEOC webinar. For a deeper dive on Beginning of Construction, see our September 4 webinar here.
You can also find more information on solar policy on our Policy page — and don’t hesitate to reach out to us directly with any questions.
Disclaimer: The information presented here is for educational purposes only and should not be construed as tax or legal advice. Please consult your tax advisor or legal professional for personalized guidance.
