diff --git a/compiler/packages/babel-plugin-react-forget/src/HIR/BuildHIR.ts b/compiler/packages/babel-plugin-react-forget/src/HIR/BuildHIR.ts
index 74e5f89c00..77b860051d 100644
--- a/compiler/packages/babel-plugin-react-forget/src/HIR/BuildHIR.ts
+++ b/compiler/packages/babel-plugin-react-forget/src/HIR/BuildHIR.ts
@@ -210,6 +210,7 @@ export function lower(
   return Ok({
     id,
     params,
+    fnType: parent == null ? env.fnType : "Other",
     returnType: null, // TODO: extract the actual return type node if present
     body: builder.build(),
     context,
diff --git a/compiler/packages/babel-plugin-react-forget/src/HIR/HIR.ts b/compiler/packages/babel-plugin-react-forget/src/HIR/HIR.ts
index 4bd46477e7..0f56cce988 100644
--- a/compiler/packages/babel-plugin-react-forget/src/HIR/HIR.ts
+++ b/compiler/packages/babel-plugin-react-forget/src/HIR/HIR.ts
@@ -8,7 +8,7 @@
 import * as t from "@babel/types";
 import { CompilerError, CompilerErrorDetailOptions } from "../CompilerError";
 import { assertExhaustive } from "../Utils/utils";
-import { Environment } from "./Environment";
+import { Environment, ReactFunctionType } from "./Environment";
 import { HookKind } from "./ObjectShape";
 import { Type } from "./Types";
 
@@ -240,6 +240,7 @@ export type ReactiveTryTerminal = {
 export type HIRFunction = {
   loc: SourceLocation;
   id: string | null;
+  fnType: ReactFunctionType;
   env: Environment;
   params: Array<Place | SpreadPattern>;
   returnType: t.FlowType | t.TSType | null;
diff --git a/compiler/packages/babel-plugin-react-forget/src/Inference/InferReferenceEffects.ts b/compiler/packages/babel-plugin-react-forget/src/Inference/InferReferenceEffects.ts
index 518ec1b504..edb3a9df31 100644
--- a/compiler/packages/babel-plugin-react-forget/src/Inference/InferReferenceEffects.ts
+++ b/compiler/packages/babel-plugin-react-forget/src/Inference/InferReferenceEffects.ts
@@ -137,7 +137,7 @@ export default function inferReferenceEffects(
         reason: new Set([ValueReason.ReactiveFunctionArgument]),
       };
 
-  if (fn.env.fnType === "Component") {
+  if (fn.fnType === "Component") {
     CompilerError.invariant(fn.params.length <= 2, {
       reason:
         "Expected React component to have not more than two parameters: one for props and for ref",
diff --git a/compiler/packages/babel-plugin-react-forget/src/__tests__/fixtures/compiler/component-inner-function-with-many-args.expect.md b/compiler/packages/babel-plugin-react-forget/src/__tests__/fixtures/compiler/component-inner-function-with-many-args.expect.md
new file mode 100644
index 0000000000..f0c6f0e8f9
--- /dev/null
+++ b/compiler/packages/babel-plugin-react-forget/src/__tests__/fixtures/compiler/component-inner-function-with-many-args.expect.md
@@ -0,0 +1,53 @@
+
+## Input
+
+```javascript
+import { Stringify } from "shared-runtime";
+function Component(props) {
+  const cb = (x, y, z) => x + y + z;
+
+  return <Stringify cb={cb} id={props.id} />;
+}
+
+export const FIXTURE_ENTRYPOINT = {
+  fn: Component,
+  params: [{ id: 0 }],
+};
+
+```
+
+## Code
+
+```javascript
+import { unstable_useMemoCache as useMemoCache } from "react";
+import { Stringify } from "shared-runtime";
+function Component(props) {
+  const $ = useMemoCache(3);
+  let t0;
+  if ($[0] === Symbol.for("react.memo_cache_sentinel")) {
+    t0 = (x, y, z) => x + y + z;
+    $[0] = t0;
+  } else {
+    t0 = $[0];
+  }
+  const cb = t0;
+  let t1;
+  if ($[1] !== props.id) {
+    t1 = <Stringify cb={cb} id={props.id} />;
+    $[1] = props.id;
+    $[2] = t1;
+  } else {
+    t1 = $[2];
+  }
+  return t1;
+}
+
+export const FIXTURE_ENTRYPOINT = {
+  fn: Component,
+  params: [{ id: 0 }],
+};
+
+```
+      
+### Eval output
+(kind: ok) <div>{"cb":"[[ function params=3 ]]","id":0}</div>
\ No newline at end of file
diff --git a/compiler/packages/babel-plugin-react-forget/src/__tests__/fixtures/compiler/component-inner-function-with-many-args.tsx b/compiler/packages/babel-plugin-react-forget/src/__tests__/fixtures/compiler/component-inner-function-with-many-args.tsx
new file mode 100644
index 0000000000..92525fd6a6
--- /dev/null
+++ b/compiler/packages/babel-plugin-react-forget/src/__tests__/fixtures/compiler/component-inner-function-with-many-args.tsx
@@ -0,0 +1,11 @@
+import { Stringify } from "shared-runtime";
+function Component(props) {
+  const cb = (x, y, z) => x + y + z;
+
+  return <Stringify cb={cb} id={props.id} />;
+}
+
+export const FIXTURE_ENTRYPOINT = {
+  fn: Component,
+  params: [{ id: 0 }],
+};