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Ep335: New IRS Guidance on FEOC and 45Z Tax Credits
00:12:47
Keith Martin, Norton Rose Fulbright partner, discusses newly issued IRS guidance on the FEOC rules, explaining how the Treasury clarified the calculation of prohibited foreign content and what uncertainty remains for developers and tax credit buyers....
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- [00:00]
A
Foreign. Norton Rose Fulbright podcast. Today we welcome back my partner Keith Martin. He joins us to discuss the new Fiat guidance released by the irs, which is designed to remove some of the uncertainty about how the rules are to be applied and the new proposed regulations related to the 40Z tax credits, which should facilitate more tax transfers. Keith, welcome back.
- [00:27]
B
My pleasure, Todd. Thanks for having me.
- [00:29]
A
All right, so everybody's been sitting around waiting for Fiat guidance. I know this is not the complete guidance that everybody wanted, but before we get into why people are not going to be totally satisfied, maybe you can explain first what the FIAC rules are, what they're meant to do, and we can go from there.
- [00:47]
B
FIAC is a set of three restrictions that were in the One Big Beautiful Bill act last summer to make it harder for renewable energy projects to qualify for federal tax credits if they use too much Chinese equipment or have too many ties to China. For example, too much Chinese equity, debt, participation in management, or use of intellectual property coming from China.
- [01:14]
A
And people were saying, you're saying too much of this, too much of that. But people didn't know what too much really meant and how you calculated that. What do these guidelines do to help clear up that uncertainty?
- [01:26]
B
People have been waiting for the treasury to fill in the details. These rules were enacted in July last year. They took effect on January 1st this year. And what the treasury did in the last week was fill in the details about one part of the FIAC restrictions, the limits on the amount of Chinese equipment. Your and my colleague David Burton had a good line about the 95 pages of guidance that were issued. Basically a 95 page answer to a math question. How do you calculate the percentage of Chinese equipment?
- [02:00]
A
And is there a way to summarize that in one sentence?
- [02:04]
B
Not in one sentence, but the good news is that people continue to be able to use some tables they're familiar with from domestic content calculations to calculate the amount of material assistance. It's called if you have too much material assistance, basically Chinese equipment, then you can't claim tax credits. You can look at the table. There is a finite list of parts that you focus on. You don't have to focus on anything else. For example, main power transformers are not listed in the table, therefore they're outside the calculation.
- [02:42]
A
And so what does this mean for, for the market? Does it mean that there's sufficient guidance now that when we're trying to negotiate with somebody who wants to buy tax credits or we're trying to decide what kind of level of certainty there is if we're giving a legal opinion or if we're just giving people guidance that there's enough certainty on this portion of the FIAC rules that will have a high degree of certainty and and make things a little easier to transact.
- [03:13]
B
I think this is coming up in two ways. One is when people buy equipment for US projects, they want a certificate from the supplier that it's not a prohibited foreign entity. In other words, it doesn't have too many ties to China. And if the developer can get that sort of certificate, then it puts that equipment into the good column for these calculations. And then the other place this is coming up is in financings or tax credit purchases. And that has been a little bit more difficult discussion. I think that this guidance will help but not answer all of the questions. We have been like many other law firms, we've been getting pretty comfortable with the FIAC statute. We've all been looking at it since May last year when it started taking shape and we have been writing opinions. Bloomberg ran an article in the last week that suggested that the tax equity market is backing away from financings until more guidance comes out. We have not seen that ourselves, although most of the projects that raise FIAC issues are just starting to come to market.
- [04:19]
A
So what further guidance is expected to help clarify the other aspects of the fiat rules that have not been fully fleshed out and to I know it's impossible to know, but what type of time period are we looking at? Is this something that we can expect by spring? Is this something that who knows how long it's going to take to get the further guidance so that we can have even more clarity, so we can transact easier?
- [04:45]
B
All we know on timing is the treasury says it will roll out guidance during the year in the form of additional notices. This initial notice was 95 pages. We're not likely to see a comprehensive set of regulations anytime soon. On the what's missing There are three parts to fiat. Part one is the limit on Chinese equipment. We now have the answer to the math question how to calculate it. Part two is companies that have too much Chinese ownership or participation in management or debt cannot claim tax credits. So we're seeing factories that are Chinese owned shedding their Chinese ownership or at least reducing it to a level where the factories can claim tax credits for producing solar, wind and storage equipment. Part three is the most difficult and that is a project doesn't qualify for tax credits if it has a contract with a majority Chinese owned company, like, you know, a battery supplier or something like that. That checks three boxes. One is you have a majority Chinese owned company on the opposite side of the contract. Number two is one of 13 provisions is in the contract that Congress identified as giving the Chinese counterparty effective control over some aspect of the project. And number three, there has to have been a payment the year before the tax credit is claimed. So people are planning around that. They're scrubbing contracts, they're looking at all their project contracts to see which ones potentially have majority Chinese owned entities on the other side and scrubbing them. Of the 13 provisions, the most difficult thing to scrub is Congress said if you have a, or granted a license to use intellectual property on or after July 4th last year, that automatically is considered to grant effective control. So you've got to look for some way to avoid those licenses. One way to do it is just to buy the intellectual property. Another which we've been using is not to have a license, but just to have a covenant not to assert breach of intellectual property. Right. That's probably the most difficult place where people are waiting for guidance.
- [07:02]
A
And based on the guidance that we do have, were there any surprises there or do you think the way people were conducting business based on assumptions as to how the guidance would be published, that there were no surprises and we're basically able to continue to do business the way we were doing it a month ago?
- [07:18]
B
I think it was basically favorable. People have been getting certificates from suppliers already that they're not prohibited foreign entities. We've been able to simplify those certificates after the guidance came out because the treasury said it doesn't really matter where the steel and iron, the construction materials that are structural in nature come from. So we've taken that out of the certificates. The one surprise was the need to calculate the amount of Chinese equipment separately for any network upgrades. Most projects are folding their network upgrade costs into the tax basis they use to calculate investment tax credits. But the treasury said you've got to ask the utility to calculate the amount of Chinese equipment in the network upgrades and just separately figure out whether you've, you have too much.
- [08:10]
A
All right, so let, let's switch gears a little bit here and just talk very briefly about the Z tax credit. One, maybe explain what it is and then two, what the new proposed rules are designed to clarify.
- [08:24]
B
Well, the new proposed rules are 170 pages, so it's a lot of dense material to read. Section 45Z tax credits are tax credits of $1 a gallon, up to $1 a gallon for making clean transportation fuels. They used to also be $1.75 a gallon per sustainable aviation fuel. But that was reduced in the OAA BA. The OAA BBBA extended these credits. They were originally available only for three years, 2025, 26 and 27. Now they're available through 2029. The government has been under pressure from corn and ethanol interests to get regulations out promptly. We're well past when they took effect. They took effect in 2025. Here we are in early 2026. Probably the two most important things the 170 pages said were the following. People had been concerned. The Biden guidance suggested that you can't get a tax credit unless you sell the clean transportation fuel directly to somebody who puts the fuel in his or her tank. And so a lot of people were selling to middlemen, blenders and people like that. And the Trump treasury has now allowed those middlemen sales. That was huge. The other thing that guidance helped with is on what is a transportation fuel don't actually have. The statute says that the fuel has to be usable for vehicle, highway, vehicle or aviation. But the regulation said you don't actually have to put it to that use. For example, if it's usable for those purposes, but you use it for marine transportation, that's fine. The guidance also said that they don't want double dipping. So if you're an ethanol producer and you produce a transportation fuel and then you sell it to somebody who turns it into saf, for example, there's only one tax credit allowed and it's on the primary fuel. So if, if ethanol is usable, the transportation fuel, and it's sold and it's the primary ingredient of the saf, then there's only one credit and that's the ethanol producer. People are going to have to pay careful attention to their supply chains and figure out what the primary ingredient is versus just a. A supplemental ingredient.
- [10:44]
A
I know we've closed several Z tax credit sales, but that there have been some players in the market who been reluctant to purchase them because there are other credits that are available that where the rules were much more well defined. Do you think given that this new guidance is available, that it should open up the market to more potential purchasers?
- [11:06]
B
It should. We closed five big deals last year for 45Z credits. The credits are trading at 92 and 93 cents per dollar tax credit. I think the issues were around this reseller issue. The tax insurers were not so keen on insuring that risk and that was holding up some deals. Also, word on the street has been that some of the larger SAF players have been a little less interested in participating. After reduction of the FAF credit amount and the requirement to use only US Mexican and Canadian feedstocks, they get a better emissions rate and therefore higher credit, which when cooking oil rather than soy is used and most of the cooking oil comes from other places than Canada and Mexico.
- [11:52]
A
All right, well, I promised only a short summary of the four Z changes and I think that was was plenty. And I can kind of feel through my computer screen here you keep mentioning how many pages of these these bills are that you got a lot of reading ahead of you and rereading probably. So I'll let you go. Thanks for giving the market an update again and I'm sure I'll see you soon.
- [12:14]
B
My pleasure, Todd. Thanks for having me.
- [12:18]
A
You can find us online at www.projectfinance law or send us an email at currentsordonrosefulbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the current.