Batteries · US tax credits
Battery storage tax credits and Chinese-owned suppliers
Since 2026, a US energy storage project loses its investment tax credit if too much of its cost comes from a "prohibited foreign entity". The test is who owns or controls the company that made each part, not where the part was made. A battery made in Southeast Asia or Mexico can still count against the project.
The short answer
The statute removes from the project's qualifying cost every item "mined, produced, or manufactured by a prohibited foreign entity" (Public Law 119-21, adding 26 U.S.C. 7701(a)(52)). It contains no country-of-origin test. The IRS confirms the definition is applied "to the entity that mined, produced, or manufactured" the item (Notice 2026-15, section 3.01(5)(b)).
Location still matters in one way: any company incorporated in China, or with its principal place of business there, is itself a foreign-controlled entity. That is how a plant in China fails the test. A plant elsewhere fails it through ownership, debt, board rights or contracts, described below.
The terms, and how they nest
The 2025 law calls the restricted supplier a prohibited foreign entity. That is either a specified foreign entity or a foreign-influenced entity. People still say "FEOC", but that was the term in the older electric-vehicle credit, which ended for vehicles acquired after September 30, 2025.
- Covered nations are China, Russia, Iran and North Korea (10 U.S.C. 4872, cross-referenced by section 7701(a)(51)).
- A specified foreign entity includes companies on certain US government lists (for example the Defense Department's list of Chinese military companies) and any foreign-controlled entity: a covered-nation government, a company organized or headquartered in a covered nation, a covered-nation citizen who is not a US citizen or permanent resident, and any company more than 50% controlled by one of these.
- A foreign-influenced entity is a company that a specified foreign entity reaches through a smaller stake, debt, board rights or a contract.
When a producer outside China becomes a prohibited foreign entity
Any one of these is enough (section 7701(a)(51)(C), (D) and (G)):
| Link to a specified foreign entity | Threshold |
|---|---|
| Ownership by a China-organized or China-headquartered parent, or a Chinese government body | More than 50% by vote or value |
| Ownership by any single specified foreign entity | At least 25% |
| Ownership by specified foreign entities together | At least 40% |
| Debt held by specified foreign entities together | At least 15% of the company's debt |
| Right to appoint a board member or a senior executive | Any one appointment, at any ownership level |
| Payments under a contract or technology license that gives "effective control" | No ownership needed |
The license test is the one most likely to surprise a buyer. Among its seven conditions, the statute lists a license "entered into (or modified) on or after" July 4, 2025. Notice 2026-15 (section 5.01) says the IRS expects to treat each condition as enough on its own. So a cell plant outside China that pays royalties under a Chinese technology license signed or amended after that date can be a prohibited foreign entity with no Chinese owner at all. Treasury must issue guidance on effective control by December 31, 2026; none had been published when this page was checked.
Companies whose shares trade on a qualifying exchange get modified versions of these tests (section 7701(a)(51)(E)); exchanges in covered nations do not qualify.
The cost ratio a storage project has to meet
The project computes a material assistance cost ratio: total direct cost of the manufactured products in it, minus the cost of those made by prohibited foreign entities, divided by the total. If the ratio is below the threshold for the year construction begins, the property is not "energy storage technology" for the section 48E credit at all.
| Construction begins | Storage (48E) minimum | Battery components (45X), by year sold |
|---|---|---|
| 2026 | 55% | 60% |
| 2027 | 60% | 65% |
| 2028 | 65% | 70% |
| 2029 | 70% | 80% |
| 2030 and later | 75% | 85% |
To see why cells decide the outcome: the IRS cost table that Notice 2026-15 lets projects use for now (from Notice 2025-08, section 7.02) puts cells at 52.0% of a grid-scale system's direct cost. If only the cells come from a prohibited foreign entity, the ratio is about 48%, below the 55% that applies to construction beginning in 2026. That arithmetic is ours, and the IRS table is an interim safe harbor; a project can also use its own actual costs.
The lithium-mine question is not settled
Whether a Chinese-controlled miner or refiner two or more steps up the chain lowers a storage project's ratio, when the cell maker itself is not a prohibited foreign entity, is not answered by the statute or by Notice 2026-15. The IRS method tracks manufactured products and their components, and its storage table stops at cells.
But the supplier certification a buyer relies on must state that the supplier does not know of a prohibited foreign entity anywhere earlier in the chain of production. Proposed regulations are expected to resolve this. Until they do, treat upstream ownership as something to ask about, not something to ignore.
What the buyer can rely on, and what it costs to be wrong
- Supplier certifications. Until the new tables issue, a buyer may rely on a certification from its direct supplier that an item was not made by a prohibited foreign entity. It must carry the supplier's tax ID, be signed under penalties of perjury, and be kept by both sides for at least six years. It is attached to Form 3468 for the first year the credit is claimed.
- Knowledge defeats it. If the buyer knows, or has reason to know, the certification is wrong, it cannot rely on it.
- Supplier penalty. A supplier that knew or should have known a certification was false faces the greater of 10% of the resulting underpayment or $5,000 (new section 6695B), assessable for six years.
- Buyer exposure. The understatement that triggers the 20% accuracy penalty drops from 10% to 1% for these errors (section 6662(m)), and the IRS has six years to assess (section 6501(o)).
- Recapture. If within ten years of placing the property in service the owner makes a payment that gives a specified foreign entity effective control, all of the section 48E credit can be recaptured (section 50(a)(4)), for credits claimed in taxable years beginning more than two years after enactment.
Contracts signed before mid-2025
A project may elect to leave out of the ratio items bought under a binding written contract entered into before June 16, 2025, if the items are placed in service before 2030 and construction began before August 1, 2025. No form for making that election had been designated when this page was checked.
What is still to come
- Proposed regulations on the definitions and the cost ratio (promised in Notice 2026-15; none found in the Federal Register as of October 14, 2026).
- New safe-harbor cost tables, due by December 31, 2026.
- Effective-control and licensing guidance, due by December 31, 2026.
Each of these is on the trade-rule calendar. For the import duty on the same batteries, see tariffs on lithium-ion batteries from China.
Sources: Public Law 119-21 sections 70512–70514 (139 Stat. 253–275); IRS Notice 2026-15 and release IR-2026-23 (February 12, 2026); IRS Notice 2025-08. This is general information, not tax advice; eligibility turns on a project's own costs and contracts.
Last checked 2026-10-14