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Sustainability now: Energy tax credits and the FEOC rule · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_01: Hello, and welcome to PWC's Accounting Podcast.
• 0:11
  SPEAKER_01: I'm Heather Horn.
• 0:12
  SPEAKER_01: Thanks for joining us today as we jump into current topics in accounting and reporting.
• 0:17
  SPEAKER_01: For today's discussion, I'm pleased to welcome guest host, Diana Stoltzfiss, a partner in PWC's National Office and a podcast regular.
• 0:27
  SPEAKER_01: I'll hand it over to Diana for more details on today's episode.
• 0:35
  SPEAKER_02: Over the past year, one of the most significant developments in the energy tax base has been the introduction of the prohibited foreign entity rules, often referred to as the foreign entity of concern or fiak rules.
• 0:48
  SPEAKER_02: These rules originated from the One Big Beautiful Bill Act, sometimes referred to as OB3.
• 0:54
  SPEAKER_02: These rules are designed to limit the involvement of certain foreign entities in the U.S.
• 0:59
  SPEAKER_02: energy supply chain, particularly where national security concerns are implicated.
• 1:04
  SPEAKER_02: But while the policy goal is clear, the rules themselves are complex and still evolving.
• 1:09
  SPEAKER_02: So today I'm joined by Jennifer Bernardini, a managing director in PWC's Washington national tax practice, to walk through how the Fiat rules work, what we know from recent guidance, and what taxpayers should be thinking about as they begin to apply these rules in practice.
• 1:26
  SPEAKER_02: So, Jennifer, thank you so much for joining me today.
• 1:29
  SPEAKER_02: Well, I thought, Jennifer, before we get into the details, maybe we could just start out with a high-level overview of what are the Fiat rules and what are they trying to accomplish.
• 1:39
  SPEAKER_03: So the FIAC rules are the result of Congress seeking to prevent entities with significant ties to certain covered nations, being China, Russia, Iran, and North Korea, from investing in U.S.
• 1:51
  SPEAKER_03: energy and related projects.
• 1:52
  SPEAKER_03: The goal is to prevent these entities or entities controlled or owned by these countries from exercising effective control or financially benefiting from such projects.
• 2:03
  SPEAKER_03: This is especially important in terms of energy security and domestic security having sort of a vulnerability to those entities needing to provide certain things for our energy supply chain.
• 2:16
  SPEAKER_03: So for the past decade or more, this has been particularly troubling with China, as they are Chinese suppliers are particularly important to the renewable energy supply chain.
• 2:27
  SPEAKER_03: So while these rules were enacted by the congressional majority in OB3, we've seen both parties embrace these rules and they are likely to stay for the foreseeable future.
• 2:36
  SPEAKER_02: Okay.
• 2:37
  SPEAKER_02: Well, maybe we can take a step back and think about kind of the where the market is today.
• 2:43
  SPEAKER_02: And what are some of the misconceptions that you're hearing about these rules?
• 2:47
  SPEAKER_03: So one of the biggest misconceptions is that these rules really only impact renewable energy credits, particularly for wind and solar facilities, when in fact the uh fiak restrictions apply to most energy tax credits.
• 3:02
  SPEAKER_03: Um this has impacts far beyond what many folks even consider as being in energy generation.
• 3:09
  SPEAKER_03: It applies to hydrogen and biofuel production, carbon capture and sequestration.
• 3:15
  SPEAKER_03: It applies to the production and manufacturing of components used in wind and solar facilities, the production and refining of critical minerals, and the construction of nuclear, hydropower, geothermal, other electricity generating projects and energy storage projects.
• 3:32
  SPEAKER_03: So in 2022, the Inflation Reduction Act was passed, and IRA created a energy tax mechanism to monetize energy tax credits by selling them on an open market.
• 3:48
  SPEAKER_03: And this has significantly changed the landscape for who's involved with the energy tax credits.
• 3:53
  SPEAKER_03: So recent industry reports have noted that among the Fortune 1,000s specifically, in 2025, more than 25% were active as tax credit buyers or tax equity investors.
• 4:05
  SPEAKER_03: This has become a popular method for corporations to decrease effective tax rates, and it's especially popular for companies involved in construction, energy, retail, finance services, healthcare, telecom, and others.
• 4:17
  SPEAKER_03: So there's a robust energy tax credit insurance market that underwrites these transactions, and those folks are also grappling with the impact of fiak rules.
• 4:25
  SPEAKER_03: So while the energy tax credits provide a significant boost to the obvious players, they also are part of the development of data centers because those projects generally develop their own generation assets and are seeking to claim credits for those as well.
• 4:40
  SPEAKER_03: So in summary, the fiak rules are now the most significant obstacle to a taxpayer claiming energy credits, but the taxpayers involved are much broader than anyone really imagined.
• 4:50
  SPEAKER_02: Yeah.
• 4:50
  SPEAKER_02: I mean, it seems really far-ranging that it impacts almost any company really that's interacting with the energy ecosystem.
• 4:57
  SPEAKER_02: And I, you know, as you highlighted, this includes from manufacturing components and then all the way to what, you know, highlighting data centers, which I think you wouldn't typically think of as, you know, the being impacted by these rules.
• 5:10
  SPEAKER_02: Yeah.
• 5:10
  SPEAKER_02: So is that the right way to think about it?
• 5:12
  SPEAKER_03: I think it really is.
• 5:13
  SPEAKER_03: And I think that um everyone in the market is kind of reckoning with it.
• 5:17
  SPEAKER_03: And the nice part about it is it's really being bringing people together from different finance, manufacturing, energy production, utilities, data centers, all sorts of folks are sort of at the table trying to work through these rules together.
• 5:30
  SPEAKER_02: Yeah.
• 5:30
  SPEAKER_02: And I mean, we're gonna get into the details of what these rules are and you know some of the challenges that you face.
• 5:35
  SPEAKER_02: But I think to your point, like that that it really takes everybody working together to get the information and data to make sure that you're complying with these new rules.
• 5:45
  SPEAKER_02: Right.
• 5:46
  SPEAKER_02: So I mean, maybe, maybe then to get into that, maybe we can get into how the rules actually work.
• 5:51
  SPEAKER_02: So do you want to start out by by how the Fiat rules work?
• 5:54
  SPEAKER_03: Sure.
• 5:54
  SPEAKER_03: And at a high level, um, they impose restrictions at two levels.
• 5:57
  SPEAKER_03: One is on the taxpayer that claims an energy credit, either directly or through a credit transfer.
• 6:03
  SPEAKER_03: And on the second, yeah, they it imposes restrictions on the energy project or components manufactured for which a credit is available.
• 6:10
  SPEAKER_02: Okay, well, maybe we'll just take each one of these in turn.
• 6:13
  SPEAKER_02: So we'll start with the taxpayer level rules.
• 6:17
  SPEAKER_02: So, what determines whether a taxpayer is eligible to claim a credit?
• 6:21
  SPEAKER_03: So a taxpayer is eligible to claim the credit generally, because they they wouldn't be subject to the PAV rules unless they are one of specific types of entities.
• 6:32
  SPEAKER_03: So a taxpayer that's a prohibited foreign entity is unable to claim energy tax credit.
• 6:38
  SPEAKER_03: But within that definition of prohibited foreign entity, there are two subcomponents.
• 6:42
  SPEAKER_03: The the PFE is either a specified foreign entity or a foreign influenced entity.
• 6:47
  SPEAKER_03: And I can unpack those a little bit more.
• 6:49
  SPEAKER_02: Okay.
• 6:49
  SPEAKER_02: It seems like there's a lot of very specific terms here that it's important to understand all these terms.
• 6:54
  SPEAKER_02: So maybe we'll walk through them.
• 6:55
  SPEAKER_02: So starting with a specified foreign entity.
• 6:58
  SPEAKER_02: Right.
• 6:59
  SPEAKER_03: So I'm just going to give sort of a high-level overview of these rules because they get very, very complicated quickly.
• 7:05
  SPEAKER_03: But a specified foreign entity is an entity owned or controlled by a covered nation or their citizens, or by an entity that's on a specifically US federal published list, such as Chinese military entities, entities that use Uyghur forced labor, sort of a specific list of bad actors that the US government has identified.
• 7:27
  SPEAKER_03: So as I mentioned before, the covered nations are China, Russia, Iran, and North Korea.
• 7:33
  SPEAKER_03: And to address whether you know an entity is a specified foreign entity, it requires an analysis of their ownership structure.
• 7:40
  SPEAKER_03: There is an exception for publicly traded entities, but these rules are effective for tax years beginning after July 4th of 2025.
• 7:48
  SPEAKER_02: So everyone is already doing we've already arrived.
• 7:52
  SPEAKER_02: Okay.
• 7:53
  SPEAKER_02: And so then the other entity type of entity you mentioned that's also, you know, prohibited from taking these is the foreign-influenced entity.
• 8:01
  SPEAKER_02: So can you walk us through that?
• 8:03
  SPEAKER_03: Sure.
• 8:03
  SPEAKER_03: A foreign-influenced entity is an entity which during the tax year has certain types of relationships with a specified foreign entity.
• 8:11
  SPEAKER_03: Um and some of them are that the specified foreign entity would have authority to appoint officers of the entity, would own at least 25% of the entity.
• 8:20
  SPEAKER_03: There's an aggregate rule for more than one SFE.
• 8:23
  SPEAKER_03: So if if more than one owns in the aggregate 40%, that would make an entity a foreign influenced entity.
• 8:29
  SPEAKER_03: There's also a very important test of that if at least 15% of the debt of the taxpayer has been issued in aggregate to one or more specified foreign entity, that would make the taxpayer, the US taxpayer, a foreign influenced entity.
• 8:43
  SPEAKER_03: This is a test that it's particularly tripped up the tax equity market and anyone really seeking to invest in these areas, banking, private equity, this rule and the application of this rule, deciding which entity, whether it's a partner or partnership, has really become a focus for industry.
• 9:02
  SPEAKER_03: Also, you know, during the previous tax year, these rules require a taxpayer to determine if they've made a payment to a specified foreign entity pursuant to a contract or other arrangement, which would entitle the SFE to exercise effective control over any energy project or eligible component.
• 9:19
  SPEAKER_03: Very complicated, very hard to measure.
• 9:22
  SPEAKER_03: Some things to consider here are the quantity or timing of production, purchasing or use of input, and licensing rights that the taxpayer would need to use.
• 9:31
  SPEAKER_03: So if they've paid a specified foreign entity for any of those rights, they could be subject to these rules.
• 9:36
  SPEAKER_03: The bottom line is that the project entities with significant foreign equity or debt investment, such as project or equipment financing, can easily get caught up in these rules.
• 9:45
  SPEAKER_02: Wow.
• 9:45
  SPEAKER_02: I mean, stepping back and thinking about this, you know, typically, you know, we've seen rules from the SEC over the past few years that are really look at like where companies are headquarters and looking at ownership.
• 9:55
  SPEAKER_02: But this seems to get much broader really than just ownership.
• 9:58
  SPEAKER_02: You're often to look at the financing and even contractual relationships between these entities.
• 10:02
  SPEAKER_02: And as you talked about, you know, payments and that type of thing.
• 10:06
  SPEAKER_02: So it seems like these this can be really tricky.
• 10:08
  SPEAKER_03: It's very tricky.
• 10:09
  SPEAKER_03: It's very tricky.
• 10:10
  SPEAKER_03: And it's, I think it's causing a lot of anxiety for everyone involved because the statute is very broad.
• 10:16
  SPEAKER_03: And the rules that were provided, you know, during a first installment of guidance from Treasury and the IRS, we'll discuss in more detail in a minute, really did not define terms around who is a specified foreign entity, who's a foreign influenced entity, and how to apply those tests.
• 10:32
  SPEAKER_02: Wow.
• 10:32
  SPEAKER_02: So okay, so that was just the taxpayer.
• 10:35
  SPEAKER_02: And now we have this the second test as well.
• 10:37
  SPEAKER_02: So the test related to the projects or the components that are manufactured that are eligible for these tax credits.
• 10:44
  SPEAKER_02: So can you talk to us about those tests?
• 10:47
  SPEAKER_03: Sure.
• 10:47
  SPEAKER_03: So that's called the material assistance test.
• 10:49
  SPEAKER_03: It's often referred to as makers, not to be confused with the acronym used for a common type of depreciation in our world.
• 10:56
  SPEAKER_03: Um the makers test looks at the supply chain tied to a project, an energy project, or a manufacturing process.
• 11:03
  SPEAKER_03: And it provides, these rules provide that no energy credit can be claimed if a PFE is provided material assistance above a permissible ratio to the taxpayer for that project or manufacturing products.
• 11:15
  SPEAKER_03: So no, there would be no credit if a qualified facility or an energy storage technology, for instance, a nuclear plant or energy storage technology, such as traditional batteries, thermal batteries, there would be no credit for that if they include material assistance above a permissible ratio from a PFE.
• 11:33
  SPEAKER_03: And this applies to construction of facilities beginning after December 31, 2025.
• 11:38
  SPEAKER_03: So we're already live on these rights.
• 11:41
  SPEAKER_03: Similarly, there's no credit if an eligible component such as different types of critical minerals or wind and solar components include material assistance above a permissible ratio from a PFE.
• 11:53
  SPEAKER_03: And that applies for taxable years as after July 4th, 2025.
• 11:58
  SPEAKER_03: So again, these are rules we're all reckoning with now.
• 12:00
  SPEAKER_03: Um so the ratio I'm referring to is used to determine whether the amount of material assistance is permissible.
• 12:06
  SPEAKER_03: It's basically isolating the foreign or PFE provided direct costs from non-PFE direct costs.
• 12:15
  SPEAKER_03: So the goal is to isolate the PFE costs and have higher non-PFE costs.
• 12:19
  SPEAKER_03: And there are certain ratios given by statute for the credits under section 45X, 45Y, and 48E.
• 12:26
  SPEAKER_03: The statute also requires, provides that the government will issue safe harbor tables by 2027.
• 12:32
  SPEAKER_03: So everyone is hoping for those, but we uh, you know, we have to have to try to move forward now.
• 12:38
  SPEAKER_03: And the statute says that until Treasury and IRS issue guidance, taxpayers may rely on guidance under existing domestic content rules, which are very tricky on their own, which we have a lot of guidance for.
• 12:50
  SPEAKER_03: And also supplier certifications consistent with 45X regulations.
• 12:55
  SPEAKER_03: Um and there is a reason to know standard that applies to those supplier certifications.
• 12:59
  SPEAKER_03: So we're even doing quite a bit of work for clients that come to us, you know, as suppliers, you know, and they they want to make sure that the certifications they're giving are viable, um, that they have checked all the boxes and that they have met, you know, the reason to know standard about their own behavior that goes into issuing um a certification.
• 13:20
  SPEAKER_03: And on the other side, we have clients that are receiving supplier certifications and are asking us to sort of pressure test them to make sure that the facts behind that certification is are reasonable.
• 13:31
  SPEAKER_03: You know, they that they've done enough diligence to be able to present that to the IRS on audit down the road.
• 13:36
  SPEAKER_03: That this was, you know, given in a in in the spirit of compliance and it, you know, everything is above board and smells right.
• 13:43
  SPEAKER_02: Right.
• 13:43
  SPEAKER_02: So it's really like changed the industry into like the type of information that you need to provide when you're entering into these types of tax credits.
• 13:50
  SPEAKER_03: It really has, yeah.
• 13:51
  SPEAKER_03: And as we'll discuss in a bit, Treasury uh and IRS did re recently issue notice 2026-15, which largely addresses the makers' rules.
• 14:00
  SPEAKER_03: Obviously, you know, we could always use more information, but at least they uh made an effort and a really valiant effort to provide some framework around the makers' rules.
• 14:09
  SPEAKER_03: Okay.
• 14:10
  SPEAKER_02: So I mean, I I think as we've talked about, or as it sounds like, like companies are really going to need to trace where their components are coming from.
• 14:17
  SPEAKER_02: And you got into this, you know, thinking about how much of the cost is from a prohibitive foreign entity or or not.
• 14:24
  SPEAKER_02: And so that really understanding the cost components too and allocating between those.
• 14:28
  SPEAKER_02: It's true.
• 14:29
  SPEAKER_03: Yeah.
• 14:29
  SPEAKER_03: And as a backdrop, we have obviously inflationary pressures.
• 14:33
  SPEAKER_03: We have tariffs being applied to different components needed in in this space.
• 14:37
  SPEAKER_03: So it's very hard to model out a transaction for a project and to plan into your financing.
• 14:44
  SPEAKER_02: Right.
• 14:44
  SPEAKER_02: And I think, you know, as you said, with all these supply chain challenges too, companies are in many times, right, not trying to just have one supplier of something, but really looking to have, you know, for the to manage their own risk.
• 14:55
  SPEAKER_02: And so you thinking about then applying these on top of doing all the due diligence and identifying, you know, where where these components are coming from is could be a real challenge.
• 15:05
  SPEAKER_02: It's been very challenging.
• 15:06
  SPEAKER_03: It will be very challenging for a long while.
• 15:08
  SPEAKER_03: Yeah.
• 15:09
  SPEAKER_02: Well, maybe um, maybe two follow-up questions.
• 15:12
  SPEAKER_02: One is, and I know this might be an area where there's still some questions, but I would assume this is like for entities you need to look to your tier one suppliers.
• 15:21
  SPEAKER_02: Is that right?
• 15:22
  SPEAKER_03: And that is that that is the way the rules work in Notice 2026-15.
• 15:26
  SPEAKER_03: Um, this is an area of a lot of anxiety for industry because it simply is, in many cases, fairly impossible to go beyond.
• 15:35
  SPEAKER_03: To go beyond, um, partly because, you know, entities in the supply chain are loath to to break up even their costs because they don't want to sort of show a profit margin or what goes into their formulas.
• 15:49
  SPEAKER_03: But um, they also often just don't have line of sight beyond their their own first first level.
• 15:55
  SPEAKER_03: And so um there's been a lot of confusion in this area before notice 2026-15 came out.
• 16:01
  SPEAKER_03: There were um administration officials that indicated that, you know, the guidance might require more than one level of of supply tracing.
• 16:08
  SPEAKER_03: Um, but at least at this point, we're working with what we see in NOTIS 2026-15, which indicates one level.
• 16:14
  SPEAKER_02: Yeah.
• 16:15
  SPEAKER_02: Okay, well, great.
• 16:16
  SPEAKER_02: That's helpful.
• 16:17
  SPEAKER_02: The second thing was you you mentioned the term material assistance and you know, material, we hear that used in a lot of different contexts.
• 16:23
  SPEAKER_02: So can you give us some some thinking around like how an entity would think about material instance in this case?
• 16:29
  SPEAKER_03: Sure.
• 16:30
  SPEAKER_03: Um, so for energy projects um that claim the 45Y and 48E credits.
• 16:34
  SPEAKER_03: So we're talking about electricity generating uh projects and energy storage, they have to meet a minimum threshold of direct costs that are not associated with PFEs.
• 16:44
  SPEAKER_03: Um and it's it's based on the year that they begin construction and then increases yearly for projects that you know begin in later years.
• 16:52
  SPEAKER_03: So for instance, in 2026, um, for electricity generating projects, 40% of their costs have to not come from a PFE.
• 17:01
  SPEAKER_03: And this seems very low, except that most of the components for these projects are made in foreign countries and a lot of them have been from China.
• 17:08
  SPEAKER_03: So this is really a further incentive for the US supply chain to really get ramped up around the energy industry.
• 17:17
  SPEAKER_03: Also, for batteries, um, the threshold is 55%.
• 17:21
  SPEAKER_03: That is extremely hard.
• 17:22
  SPEAKER_03: Um, so that's something the industry is really, really working, working towards accomplishing, um, you know, having enough supply in the US or at least in friendly countries where we can um continue to order what we need.
• 17:37
  SPEAKER_03: And then for eligible components for which taxpayers claim a 45X credit.
• 17:41
  SPEAKER_03: So that's the components of energy projects as well as critical minerals, they have to meet a threshold of direct material costs that are not associated with PFEs.
• 17:50
  SPEAKER_03: And this this is very high.
• 17:52
  SPEAKER_03: I mean, it it's it's based on the year of the sale of the component.
• 17:55
  SPEAKER_03: And for 2026, the lowest is 50% and the highest is 85%.
• 18:00
  SPEAKER_03: Wow.
• 18:01
  SPEAKER_03: So on top of, you know, in a way, if the 45X credit was the carat for um basically providing a credit for manufacturing of energy-related components, I try to I think of the PFE rules as the stick, sort of coming up behind and saying, you know, your projects are are not even going to be viable if you don't manage to onshore or fringe shore your supply chain.
• 18:24
  SPEAKER_02: And is is that level of supply available in in countries that are friendly to the US or in the US?
• 18:30
  SPEAKER_03: Um in some areas, uh in some areas, no.
• 18:34
  SPEAKER_03: I mean, batteries in particular are very tough.
• 18:37
  SPEAKER_03: Um, solar, solar, um, solar cells and panels, very tough.
• 18:42
  SPEAKER_03: But, you know, after IRA, we did have the 45x credit that was enacted and it it it gave a tremendous boon to domestic production of energy components.
• 18:52
  SPEAKER_03: So we are seeing the industry ramp up.
• 18:54
  SPEAKER_03: We just we don't necessarily know that those thresholds reflect reality now.
• 18:58
  SPEAKER_02: Right.
• 18:59
  SPEAKER_03: It takes time, right, to build out all of the this capacity.
• 19:02
  SPEAKER_03: It takes time.
• 19:03
  SPEAKER_03: The good news is that for projects that beginning and can began construction in 2025 and 2026, they largely did so with um in ways that they didn't need to be subject to these rules is the short answer.
• 19:16
  SPEAKER_03: So there will be a little bit of a rampa period, but it's gonna have to be very aggressive.
• 19:19
  SPEAKER_03: I would say by 2027, you know, the industry is really gonna have to find a way to provide for itself to a large extent.
• 19:27
  SPEAKER_02: Well, maybe just to summarize, I mean, I think it seems like as you as you've laid out, that this is incredibly data intensive.
• 19:33
  SPEAKER_02: You're tracing your costs, identifying your suppliers, figuring out which of these ties back to a prohibited foreign entity.
• 19:41
  SPEAKER_02: You have these certifications we talked about.
• 19:44
  SPEAKER_02: So very complex process.
• 19:46
  SPEAKER_02: And seems like a lot of people are struggling with it.
• 19:48
  SPEAKER_02: And I think one of the things that I've heard at least is the idea of tracing your entire supply chain and that that's really challenging.
• 19:55
  SPEAKER_02: So maybe, Jennifer, like how hard is this in reality?
• 19:59
  SPEAKER_02: And are companies really expected to trace their entire supply chain, you know, for for every entity within it?
• 20:08
  SPEAKER_02: And it just seems really challenging.
• 20:09
  SPEAKER_02: Is there any simplification built into the rules or relief?
• 20:13
  SPEAKER_03: Yeah.
• 20:14
  SPEAKER_03: So on February 12th, Treasury and the IRS released notice 2026-15.
• 20:18
  SPEAKER_03: Um, and while it didn't provide significant guidance to help taxpayers determine whether they'll be considered a PFE for purposes of the energy credits, in fact, it just provided a general warning that future guidance will establish rules to prevent entities from evading, circumventing, or abusing the application of the PFE rules without telling us what they are.
• 20:37
  SPEAKER_03: You know, the notice did a great job, on the other hand, of providing detailed makers' guidance, including safe harbors.
• 20:44
  SPEAKER_03: Um, so there are now like four different sort of mechanisms that taxpayers can think about in terms of how to trace and comply with the rules.
• 20:52
  SPEAKER_03: The first is a direct cost method, which is, you know, which is basically what the statute gives us.
• 20:57
  SPEAKER_03: It's a way to determine the makers ratio using actual costs of your project.
• 21:02
  SPEAKER_03: A lot of taxpayers are not going to use this.
• 21:04
  SPEAKER_03: It may be incredibly accurate, but it's super hard to actually prove up.
• 21:09
  SPEAKER_03: Another is the cost percentage safe harbor, which substitutes table-based cost allocations for these costs.
• 21:15
  SPEAKER_03: This is a big help.
• 21:17
  SPEAKER_03: But the problem is that there are not tables for all the types of components and the types of energy projects that are now subject to these rules.
• 21:25
  SPEAKER_02: So that's you can only use it if you if it has your component.
• 21:28
  SPEAKER_03: Right, right.
• 21:29
  SPEAKER_03: There's also the identification safe harbor, which affects only how components are defined, but a taxpayers still need to compute makers using one of the cost determination methods.
• 21:38
  SPEAKER_03: And then there's a certification safe harbor, which affects how PV status, including cost information, is verified.
• 21:45
  SPEAKER_03: Again, the taxpayer still needs to compute makers using one of the cost determination methods, but I think taxpayers are most comfortable using the certification safe harbor in general.
• 21:54
  SPEAKER_03: And as I mentioned, we do have a lot of clients that are both issuing and receiving certifications.
• 22:00
  SPEAKER_03: And so the market seems to be really robust in that regard.
• 22:03
  SPEAKER_03: Yeah.
• 22:03
  SPEAKER_03: So in summary, you know, without Safe Harbors, taxpayers have had to trace components all the way back through their supply chain to determine the percentage of costs attributable to PFEs.
• 22:12
  SPEAKER_03: Safe harbors certainly simplify that process by allowing taxpayers to use an assumed base percentage based on the table of industry averages published by the government, but those tables are incomplete.
• 22:22
  SPEAKER_03: They don't address all energy problems.
• 22:24
  SPEAKER_02: Right.
• 22:25
  SPEAKER_02: So a lot of companies, it really doesn't help them.
• 22:27
  SPEAKER_03: Yeah.
• 22:27
  SPEAKER_03: And they also, in some cases, don't bear a strong relationship to actual costs.
• 22:31
  SPEAKER_03: So that could be a bit distortive over time.
• 22:34
  SPEAKER_03: Okay.
• 22:34
  SPEAKER_03: So where does that leave taxpayers today?
• 22:37
  SPEAKER_03: So taxpayers are hoping for more guidance on the tests that determine if they are an SFE or an FIE.
• 22:44
  SPEAKER_03: In particular, as I mentioned, taxpayers have asked Treasury and the IRS to address issues around the debt tests and the treatment of qualified interconnection property is another real really big issue around this.
• 22:56
  SPEAKER_03: We expect proposed regulations in the fall, likely after midterms, and expect to see strong messaging and that guidance directed at transactions such as IP transfers and restructuring.
• 23:06
  SPEAKER_03: We expect the rules to be, you know, fairly harsh at first before taxpayers get a chance to have a chance to come in and react.
• 23:14
  SPEAKER_03: And then what generally happens is final rules are a bit more industry informed and a little bit sort of maybe less harsh, more user-friendly, but you know, this is a very political area.
• 23:26
  SPEAKER_03: So we expect that that there will be a lot of flux on what we see between proposed and final rules.
• 23:32
  SPEAKER_03: You know, I just also want to remind our listeners that while the deadline for comments is passed, Treasury and IRS continue to review comment letters that are submitted.
• 23:39
  SPEAKER_03: So I tell my clients, you know, comment early and often and even monitor what comments the rest of the market is making.
• 23:47
  SPEAKER_03: And feel free to go in and comment on another comment or endorse another comment if you find that it is, you know, in harmony with your issue or your fact pattern.
• 23:56
  SPEAKER_03: Um, I also wanted to note that there is a chance that our friends at Treasury, who I know are working really hard on this, um, in particular to address the debt test and partnership issues, could possibly provide interim guidance this summer on those issues.
• 24:10
  SPEAKER_03: So we'll be looking out for that.
• 24:12
  SPEAKER_02: Yeah, I I think it's a great point on the comment letters is to make sure that you comment, make sure your voice is heard.
• 24:17
  SPEAKER_02: Even if you, to your point, see another comment, you know, there's a lot of analysis around, oh, we got X number of comments on the same thing.
• 24:25
  SPEAKER_02: This must be a real issue.
• 24:26
  SPEAKER_02: So I think it is a good to reinforce that even if you feel like your perspective has been reflected by other comment letters, either to your point saying we agree with this or sharing your own perspective is is always really important to make sure that the regulations are informed by practice and industry.
• 24:43
  SPEAKER_03: Right.
• 24:43
  SPEAKER_03: I know you've had your own experience with this.
• 24:45
  SPEAKER_03: And my experience was that we would always at Treasury be happier to work with and implement um a rule that we knew was was of broad interest across the industry as opposed to one voice or even one influential voice.
• 24:59
  SPEAKER_03: So I certainly encourage people to raise their voice as much as possible about this.
• 25:03
  SPEAKER_02: Yeah, well, maybe just briefly before we we wrap up here, Jennifer, is there anything?
• 25:08
  SPEAKER_02: So I, you know, we have the the comment letters that have been received, and then that, you know, there's open issues that you've kind of highlighted throughout.
• 25:15
  SPEAKER_02: Is there any additional things that you would highlight, you know, as open areas or that people need to be aware of as they're thinking through these rules?
• 25:22
  SPEAKER_03: I mean, I I think the real sort of the the issues that are getting the most attention, I've certainly mentioned the debt issue, application of those rules to partnerships.
• 25:31
  SPEAKER_03: Um I think all the issues around the definitions of taxpayer effective control, foreign-influenced entity, which licensing arrangements will be impacted by those rules.
• 25:42
  SPEAKER_03: Um, all of those are affecting the ambiguity around those is affecting, you know, comply, you know, the ability of taxpayers to comply and also creating uncertainty in the finance market.
• 25:52
  SPEAKER_03: Right.
• 25:52
  SPEAKER_03: Um the expansion and updating of safe harbor tables, as I mentioned, is super important because they don't, they don't address all the technologies that are now subject to these rules.
• 26:01
  SPEAKER_03: Um there's a ton of interest in, you know, having taxpayers be able to really rely on certifications and to sort of hem in the amount of tracing, the levels of tracing.
• 26:11
  SPEAKER_03: And also qualified interconnection property.
• 26:14
  SPEAKER_03: Well, this is kind of a weird twist in the rules, it um between IRA and OB3, there was a difference in the way that this property was treated.
• 26:23
  SPEAKER_03: It's property that connects an energy project to the grid.
• 26:27
  SPEAKER_03: Okay.
• 26:27
  SPEAKER_03: And it's not owned by the same taxpayer that owns the energy project.
• 26:31
  SPEAKER_03: And so for the IRA rules, when we looked at prevailing wage requirements and we look at domestic content requirements, those requirements are not applied to qualified interconnection property, but in sort of a strange twist in OB3, qualified interconnection property is now subject to the fiak rules, even though this taxpayer that owns the energy facility doesn't own and own that that property doesn't have control over it.
• 26:55
  SPEAKER_03: So a lot of folks are really struggling with the application of the rules to that property.
• 27:00
  SPEAKER_03: The fortunate thing is that it does, the rules do allow for a separate maker's calculation apart from the facility, but it's really chilling the market when we're looking at energy generating facilities and how they're going to get up and running.
• 27:13
  SPEAKER_02: Right.
• 27:13
  SPEAKER_02: I mean, obviously, a critically important point is like how are you connecting into the grid?
• 27:17
  SPEAKER_02: How are you delivering that energy?
• 27:19
  SPEAKER_02: Right, right.
• 27:20
  SPEAKER_02: Well, a lot to think about, a lot of still open questions, but this has been extremely helpful.
• 27:25
  SPEAKER_02: As we wrap up, what advice do you have for our listeners as they're navigating these rules?
• 27:30
  SPEAKER_03: We struggle with this every day, and I feel like the advice changes every week.
• 27:34
  SPEAKER_03: Um, while the lack of guidance on taxpayer level tests is hindering investment in energy projects subject to the fiak rules, because many projects began construction before the fiak rules became effective, there's a significant pipeline of projects that have already begun construction, certainly between through 2025 and 2026.
• 27:54
  SPEAKER_03: So we expect that by 2027, when new projects begin construction, sort of have to have every everything in place, that we will have hopefully final regulations and the industry has had time to shift towards complying with those rules as they are understood.
• 28:10
  SPEAKER_03: So while we await the additional guidance on the vehicle, the energy industry, including the tax credit transfer market and tax credit insurers, are certainly struggling to find a path forward.
• 28:20
  SPEAKER_03: They're doing it together.
• 28:21
  SPEAKER_03: And I think that that's a reason to be hopeful.
• 28:23
  SPEAKER_02: Well, wonderful.
• 28:24
  SPEAKER_02: Well, this has been a great conversation.
• 28:26
  SPEAKER_02: Thank you so much for joining me today.
• 28:28
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• 28:29
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• 28:51
  SPEAKER_01: From Thought Leadership at PWC, I'm Heather Horn.
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