On May 12, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2023-38 to provide guidance on the domestic content requirements under IRC sections 45, 45Y, 48, and 48E. 

In general, renewable energy projects that satisfy the domestic content requirements are eligible for bonus production tax credits or investment tax credits under IRC sections 45, 45Y, 48 or 48E, as applicable. The domestic content bonus generally is 2-10% depending on whether the renewable energy project also satisfies (or is deemed to satisfy) certain wage and apprenticeship requirements. The domestic content requirements also are relevant to the elective pay provision of IRC section 6417. In this regard, if the domestic content requirements are not satisfied, the amount of any elective payment may be subject to limitation; however, the elective pay limitation is subject to exceptions that may apply in circumstances where domestic content is unavailable or prohibitively expensive.

The domestic content bonus requirements generally require a taxpayer to certify that any steel, iron or manufactured product that is a component of the renewable energy project (upon completion of construction) was produced in the United States (US). In general, for this purpose, manufactured products are deemed to have been produced in the US if 40-55% of costs of manufactured products (depending on the year in which construction begins) are attributed to components mined, produced or manufactured in the US. (Notably, a lower 20-55% threshold applies for offshore wind facilities.)

According to the Notice, Treasury and the IRS intend to propose regulations (forthcoming proposed regulations) to address the requirements that taxpayers must satisfy in order to qualify for the domestic content bonus under sections 45, 45Y, 48, and 48E. The Notice describes certain rules, as summarized below, that Treasury and the IRS intend to include in the forthcoming proposed regulations.

• The Notice includes separate domestic content requirements and related definitions with respect to (1) steel or iron items (Steel or Iron Requirement) and (2) items that are manufactured products (Manufactured Products Requirement). The Steel or Iron Requirement does not apply to steel or iron used in manufactured products.

• With respect to the Manufactured Products Requirement, the Notice includes rules for purposes of determining whether the “adjusted percentage” of the total cost of all manufactured products are attributable to manufactured products which are mined, produced or manufactured in the US (Adjusted Percentage Rule). Further, the Notice includes an example of the Adjusted Percentage Rule.

• The Notice includes a “safe harbor” that identifies certain items as being subject to either the Steel or Iron Requirement or the Manufactured Products Requirement (including items that may be found in utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities, and battery energy storage technologies).
• The Notice provides guidance with respect to applying the domestic content bonus to retrofitted projects, which generally follows the 80/20 Rule, consistent with prior guidance. An applicable project may qualify as originally placed in service even though it contains some used property, provided that the fair market value of the used property is not more than 20 percent of the applicable project’s total value calculated by adding the cost of the new property to the value of the used property.

• The Notice contains a certification statement requirement pursuant to which a taxpayer must submit to the IRS a statement certifying, for each applicable project for which the taxpayer is reporting a domestic content bonus credit amount under sections 45, 45Y, 48, or 48E, that any steel or iron items subject to the Steel or Iron Requirement or manufactured product that is a component of the applicable project upon completion of construction was produced in the US.

• The Notice confirms that a taxpayer reporting a domestic content bonus credit amount must meet the general recordkeeping requirements under IRC section 6001 in order to substantiate that the domestic content requirements have been met.

Treasury and the IRS intend to propose that the forthcoming proposed regulations will apply to taxable years ending after May 12, 2023. To address the transition from the Notice to the forthcoming proposed regulations, the Notice provides that taxpayers may rely on rules in the Notice with respect to a renewable energy project if construction begins on the project before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register. 

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