Article

Documentation is the backbone of tax credit transferability

Beware of FEOC restrictions looming in 2026 and new beginning of construction rules

Sept. 4, 2025 · Authored by Robert Moczulewski, Joel M. Laubenstein, Beckett Woodworth

As tax credit transactions under the Inflation Reduction Act (IRA) gain momentum, documentation has become a defining issue for both buyers and sellers. For tax credit sellers and organizations electing direct pay, the key to lowering risk lies in maintaining thorough, IRS-ready records. Credit buyers often require higher hurdles, which in practice means the selling entity must provide sufficient documentation to prove the credit is valid and transferable.

A new layer of complexity comes from the Foreign Entity of Concern (FEOC) restrictions, which trigger starting Jan. 1, 2026. These rules, especially the material assistance cost ratio calculations, require projects to carefully examine their supply chains to avoid disqualification. The good news is that taxpayers who establish beginning of construction (BoC) before 2026 may remain eligible under the current regime.

Two safe harbors are available:

• Physical work of a significant nature
• The 5% safe harbor test

The IRS reinforced this framework in Notice 2025-42, released on Aug. 15, 2025, which clarifies new rules and documentation expectations tied to BoC. With year-end deadlines approaching, the message is clear: investors and municipalities alike must move quickly and document thoroughly to lock in today’s more favorable rules. For practical guidance on physical work and the 5% safe harbor, explore our latest BoC analysis.