February 17 Tax Policy Update

Summary

• Congress recesses for the week as funding lapses for the Department of Homeland Security.
• Tax legislation may move off the back burner when Congress returns.
• Congress passes resolution to overturn DC law decoupling from the OBBBA, but D.C. says Congress missed the deadline.
• Ways & Means Committee hearing on “Foreign Influence in American Nonprofits: Unmasking Threats from Beijing and Beyond.”
• Notice 2026-15: Material Assistance from Prohibited Foreign Entities Under Clean Energy and Advanced Manufacturing Tax Credits.
• Taxpayers scramble to file amended returns after Court of Claims rules Federal Disaster Declaration extended filing deadlines until 2023.

Congress Recesses as DHS Funding Lapses – Will Tax Legislation Move Off the Back Burner?

Congress is in recess until next week as funding for the Department of Homeland Security lapsed on midnight of February 13, resulting in a partial government shutdown. The remainder of the federal government is funded through September 30, 2026, the end of the fiscal year. Ninety percent of DHS’s more than 260,000 employees are deemed essential so they must work without pay during the partial shutdown although they will receive backpay once DHS is funded.

The two political parties still appear to be very far apart on a deal to fund DHS for the fiscal year, or even a short-term continuing resolution. If a deal is reached this week, it would still take several days for the House and Senate to come back into session to pass a funding bill.

With Congress focused on immigration issues and government funding for the first portion of the year, there have not yet been any public signs of progress on tax legislation. Negotiations over the COVID-19 era increased tax credit for Affordable Care Act health insurance premiums appear to have broken down. On February 10, President Trump expressed skepticism about enacting a large budget reconciliation bill this year. However, after DHS funding is resolved, Congress will turn to other issues, including tax. Some congressional Republicans have advocated enacting a budget reconciliation bill this year, which they would try to do before the long August recess. There are also tax provisions with bipartisan support, such as the taxation of digital assets, upon which the tax writing committees will negotiate this year.

Congressional Resolution Blocking D.C. Law to Uncouple from OBBBA Tax Provisions

On February 12, the Senate passed S.J. Res. 102 to block a law enacted by Washington, D.C., Act A26-2014, decoupling the city’s tax law from some provisions in the OBBBA, including 100% bonus depreciation and expensing of research expenditures. The House passed H.J. Res. 142, an identical resolution on February 4. President Trump is expected to sign the provision into law. Under the 1973 Home Rule Act, Congress has 30 business days in which it can enact a resolution (subject to presidential veto) repealing legislation enacted by D.C. The D.C. law went into effect on December 3. However, the 30 days only start running once Congress is notified of the law’s passage. The D.C. City Council issued a notice stating that the 30 days started on December 30 and ended on February 11. However, it appears Congress is taking the position that the 30-day period does not start running until D.C. legislation is published in the Congressional Record, and that the deadline is therefore February 20. It remains to be seen how the dispute over the validity of the resolution will be resolved, although litigation seems likely.

Ways & Means Committee Hearing on “Foreign Influence in American Nonprofits: Unmasking Threats from Beijing and Beyond”

On February 11, the Committee on Ways and Means held a hearing on “Foreign Influence in American Nonprofits: Unmasking Threats from Beijing and Beyond.”

The witnesses were:

• Mr. Scott Walter, President, Capital Research Center;
• Ms. Caitlin Sutherland, Executive Director, Americans for Public Trust;
• Mr. Adam Sohn, Co-founder, NCRI and CEO, Narravance;
• Mr. Bruce Dubinsky, Founder, Dubinsky Consulting; and
• Mr. Robert Weissman, Co-President, Public Citizen.

Republicans focused on foreign contributions to American nonprofits, which they said were mostly being used to fund progressive causes and were effectively bypassing prohibitions on direct contributions to candidates for public office by foreign persons. Democrats focused on foreign contributions to nonprofits associated with President Trump and business transactions involving President Trump’s family and foreign persons.

There was some bipartisan agreement on increasing transparency with regards to nonprofit activities as a general matter. Two issues that frequently came up were more disclosure with regards to donor-advised funds and fiscal sponsorship by 501(c)(3) organizations of entities that do not have tax-exempt status. Witnesses also discussed requiring more disclosure on Form 990, which most tax-exempt organizations are required to file annually with the IRS.

Notice 2026-15: Material Assistance from Prohibited Foreign Entities Under Clean Energy and Advanced Manufacturing Tax Credits

On February 12, 2026, the Department of the Treasury and the IRS released Notice 2026-15 providing guidance for determining whether electricity-producing qualified facilities, energy storage technologies, or eligible components are receiving material assistance from a “prohibited foreign entity” (a “PFE”), which would render them ineligible for tax credits under Sections 45Y, 48E, and 45X (the “Notice”). The Notice announces the government’s intention to issue proposed regulations containing a portion of the rules in the Notice along with more comprehensive guidance with respect to the definition of a PFE and material assistance from a PFE. The One Big Beautiful Bill Act (the “OBBBA”) added new restrictions to these credits to determine eligibility when there is material assistance from a PFE. Read our prior publication on these restrictions here. The Notice details how to use interim safe harbors authorized by the OBBBA and provides example calculations under those safe harbors, as well as comprehensive guidance for taxpayers not using safe harbors. However, the Notice does not provide further guidance on determining whether an entity may be a PFE, including as a result of certain equity and debt ownership by specified foreign entities or making “effective control” payments to such entities.

The Notice also announces Treasury’s and IRS’s intention to propose regulations to prevent entities from evading, circumventing, or abusing the application of restrictions with respect to PFEs, including rules targeting abusive transfers or alterations of rights, property, or both, including transfers or alterations resulting in lapses of restricted foreign ownership or control that are temporary in nature.

In order to determine what percentage of costs are attributable to items that were produced or sourced from PFEs, taxpayers must calculate the material assistance cost ratio (the “MACR”). Taxpayers may rely on the rules in the Notice for (i) any Section 45Y or 48E qualified facility or energy storage technology the construction of which begins after December 31, 2025, until 60 days after publication of forthcoming safe harbor tables; and (ii) any Section 45X eligible components sold in taxable years beginning after July 4, 2025 (the date of the OBBBA’s enactment), generally until the date that forthcoming safe harbor tables are published.

The Notice offers taxpayers two methods for calculating the MACR: the general calculation method or the safe harbor approach.

A. General Calculation Method (Without Safe Harbors)

Under the general calculation method, taxpayers must determine actual “direct costs” (or “direct material costs” for Section 45X) by tracing the direct costs attributable to each manufactured product, manufactured product component, or constituent material incorporated into the qualified facility, energy storage technology, or eligible component.

• With respect to credits under Sections 45Y and 48E, direct costs include the taxpayer’s direct material costs and direct labor costs as defined in Section 1.263A-1(e)(2)(i)(A) and (B), respectively (such amounts, “Direct Costs”). To determine Total Direct Costs, a taxpayer must aggregate all Direct Costs. If a taxpayer acquires a manufactured product, the taxpayer’s Direct Costs attributable to the manufactured product are its acquisition costs with respect to the manufactured product.
• With respect to credits under Section 45X, direct material costs focus on materials that become an integral part of the eligible component or are consumed in the ordinary course of production (the “Direct Material Costs”). To determine Total Direct Material Costs, the taxpayer must aggregate all Direct Material Costs.

Taxpayers must independently determine whether each item is “PFE produced” or “PFE sourced” by applying the definition of PFE under Section 7701(a)(51) to the entity that mined, produced, or manufactured the relevant item, without the ability to rely on supplier certifications. Additionally, the general calculation method requires individually tracking each manufactured product, manufactured product component, or constituent material and its characteristics to the specific facility or component.

B. Safe Harbor Approach

The safe harbor approach provides three interconnected elective safe harbors, as authorized by the OBBBA:

• Identification Safe Harbor: Permits taxpayers to use the 2023-2025 Safe Harbor Tables (referenced in Notice 2025-08) as an exclusive list to identify which manufactured products, manufactured product components, or constituent materials are in scope for purposes of the MACR calculation. This safe harbor applies only where the specific project type, energy storage technology, or eligible component is listed in the tables. Certain items are generally excluded from this safe harbor, including steel and iron products as well as “qualified interconnection property,” as discussed below.
• Cost Percentage Safe Harbor: Allows taxpayers using the Identification Safe Harbor to determine Direct Costs or Direct Material Costs using assigned cost percentages from the tables in lieu of actual cost tracing. While taxpayers still must determine whether each item is PFE produced or PFE sourced, this safe harbor simplifies the cost calculation methodology into a percentage-based MACR calculation rather than requiring detailed cost accounting. However, the Cost Percentage Safe Harbor is not available for “incremental production” facilities.
• The safe harbor also provides tracking relief through a de minimis rule (for Sections 45Y and 48E) that exempts components representing less than 10 percent of Total Direct Costs from project-level tracking, and averaging rules that permit certain taxpayers (energy storage technologies under one MW and Section 45X manufacturers) to calculate average costs and PFE Production Percentages across equivalent facilities or components produced during specified time periods.
• Certification Safe Harbor: Permits taxpayers to rely on supplier certifications signed under penalties of perjury for determinations of PFE status and the MACR. Certifications must include the supplier’s employer identification number, be retained for at least six years, and be attached to first-year credit claim forms. Reliance on supplier certifications is not available where the taxpayer knows or has reason to know that a certification is inaccurate.

C. Special Considerations under the Notice

• Qualified Interconnection Property (Credits under Section 48E only): If qualified interconnection property is included in the Section 48E investment tax credit base, it requires a separate and independent MACR calculation from the qualified facility itself. If qualified interconnection property fails its own MACR calculation, the underlying facility can still qualify for energy credits. However, if the facility’s MACR calculation fails, this disqualifies both the facility credit and any qualified interconnection property credit.
• Steel and Iron: Calculation of the MACR includes only costs related to manufactured products (including manufactured product components). Accordingly, unless identified as a manufactured product or manufactured product component under Section 7701(a)(52)(E)(iii) or (G), any steel or iron components that meet the description of steel or iron in Section 3.02 of Notice 2023-38 and that are incorporated into the taxpayer’s qualified facility or energy storage technology are not relevant in determining the MACR.
• 80/20 Rule: For purposes of the Notice, only the Direct Costs of the new manufactured products and manufactured product components incorporated into a facility that is a qualified facility by virtue of the 80/20 Rule are considered when calculating the Clean Electricity MACR.

Request for Comments and Future Guidance

The Notice requests written comments by March 30, 2026, including general comments regarding PFE and material assistance issues, and also specifically concerning whether further guidance is needed in determining Total Direct Costs, such as anti-circumvention rules and substantiation and documentation requirements. Under the OBBBA, the Secretary is required to issue safe harbor tables (and such other guidance as deemed necessary) no later than December 31, 2026.

Taxpayers Scramble to File Amended Returns After Court Rules Federal Disaster Declarations Extended Filing Deadlines Until 2023

The Federal Court of Claims ruled in Kwong v. USA that the text of Section 7508A(a) and (d), a provision permitting the Secretary to postpone filing and other related deadlines, permitted the extension of deadlines due to the COVID-19 pandemic from 2020 to 2023. (“Although Congress may not have anticipated a disaster declaration lasting more than three years, the statute’s express text nevertheless applies.”) This ruling allows taxpayers to now argue that the IRS charged interest and penalties on tax liabilities that were not yet due during the pandemic, and file amended returns to seek a refund.

Many taxpayers will not have an opportunity to file an amended return, as the statute of limitations typically expires three years after filing or two years after making a payment. For taxpayers with ongoing disputes with the IRS, however, the statute of limitations on those years may be open, allowing taxpayers to file amended returns seeking a refund. Those disputes related to interest calculations could be a focus. For example, a data-storage company, Western Digital, concluded a tax dispute in 2023 originating from 2008 for $53.6 million in taxes. Since interest accrued during the pandemic, Western Digital is now seeking a refund of $20.8 million that accrued during the pandemic.

The statutory rule has since been changed. Congress amended the law in 2021 to ensure the extension of filing deadlines is not open ended, but this change only applies to future disasters.