Following the release of energy community bonus credit and low-income community bonus credit guidance, the U.S. Department of the Treasury and IRS recently provided taxpayers with the domestic content bonus credit guidance. With the release of the domestic content guidance in Notice 2023-38, taxpayers now have preliminary guidance for all three bonus credit opportunities available under the Inflation Reduction Act (IRA).
Domestic Content Bonus Credit Basics
The domestic content bonus credit amount is available if steel, iron and manufactured products of a qualified facility or energy property were produced in the United States as determined under the rules discussed below.
The domestic content bonus credit amounts available are as follows:
Steel and Iron
Under the domestic content rules, the steel and iron requirement is met if, consistent with 49 CFR § 661.5(b) and (c), all manufacturing processes with respect to any steel or iron items that are "Applicable Project Components" take place in the U.S. (excluding metallurgical processes involving refinement of steel additives). An Applicable Project Component includes article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into the final project.
Importantly, under the Notice, the steel and iron requirement only applies to Applicable Project Components that 1) are construction materials made primarily of steel or iron and 2) are structural in function.
Any steel or iron used in manufactured products is subject to the manufactured product rule discussed below. For example, nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, door hinges and similar items made of steel or iron that are not structural in function are not subject to the steel and iron requirement but instead are subject to the manufactured product rule.
Manufactured Products
Under the domestic content rules as announced by the Notice, all manufactured products must be produced in the United States, and their components also must be of U.S. origin, i.e., all manufactured products must be "U.S. Manufactured Products" (subject to the rules described below).2 A "Manufactured Product" is an item produced as a result of the manufacturing process, defined as the application of processes to alter the form or function of materials or of elements of a product in a manner adding value and transforming those materials or elements so that they represent a new item functionally different from that which would result from mere assembly of the elements or materials.
If all manufactured products are not U.S. Manufactured Products, then a taxpayer must apply the "Adjusted Percentage Rule." Under such rule, manufactured products are deemed to have been produced in the United States if not less than the adjusted percentage of the total costs of all such manufactured products are attributable to manufactured products or components that are mined, produced or manufactured in the United States. A "Manufactured Product Component" is any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into a manufactured product.
The adjusted percentage is:
To determine whether the Adjusted Percentage Rule is met, the Notice provides the following steps.
Calculate the Domestic Manufactured Products and Components Cost
The Domestic Manufactured Products and Components Cost equals the sum cost of all:
- U.S. manufactured products
- All components mined, produced or manufactured in the United States (a "U.S. Component") that are part of a non-U.S. Manufactured Product
As stated above, a manufactured product is a "U.S. Manufactured Product" if 1) all of the manufacturing processes for the manufactured product take place in the United States, and 2) all of the components of the manufactured product are of U.S. origin. A component is a U.S. component if it is manufactured or produced (or mined if applicable) in the United States, regardless of the origin of its subcomponents.
Only direct material and labor costs are includible in the cost of a U.S. manufactured product or U.S. component. Direct costs of incorporating the Applicable Project Components into the Applicable Project are not counted in the Domestic Manufactured Products and Components Cost.
Calculate the Total Manufactured Products Cost
The Total Manufactured Products Cost is the sum of the costs of each manufactured product. Only direct costs are includible in the total manufactured products cost.
Determine the Domestic Cost Percentage
To determine the Domestic Cost Percentage, divide the Domestic Manufactured Products and Components Cost by the Total Manufactured Products Cost. If the Domestic Cost Percentage exceeds the Adjusted Percentage in the chart above, then the of the domestic content rules have been met as they apply to manufactured products.
Safe Harbor Classifications
The Notice also includes safe harbor classifications for certain components prevalent in solar, wind and battery storage projects. The safe harbor classifications dictate the appropriate test to apply to determine if the domestic content rules have been met.
Notes
1 This assumes satisfaction of the prevailing wage and apprenticeship requirements. The IRS provided guidance on those requirements in Notice 2022-61.
2 Notice 2023-38 clarifies that the origin of subcomponents is irrelevant.