[co-author: Trey Frye]
On May 16, 2024, the Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) issued Notice 2024-41 (the “Notice”), which provides supplemental guidance on the domestic content bonus credit (the “Domestic Content Bonus”). While stakeholders may have been hoping for a more fulsome set of proposed regulations, the Notice still provides meaningful updates and clarifications to the previously issued guidance under Notice 2023-38 (the “Prior DC Notice”).1
In particular, the Notice revises the previously provided safe harbor table to (i) include hydropower and pumped hydropower storage facilities, (ii) revise the approach for solar projects to explicitly include ground-mount and rooftop photovoltaic systems, and (iii) provide additional manufactured product components for certain applicable projects. And, in a twist, the Notice provides a safe harbor election that sets forth assigned cost percentages for certain manufactured products and components when determining if a sufficient percentage of manufactured products are produced in the United States (the “Assigned Cost Percentage Safe Harbor”).2
Domestic Content Bonus – Background
The Domestic Content Bonus was enacted as part of the Inflation Reduction Act of 2022 (the “IRA”) as a bonus credit of up to 10% available under sections 45 and 48 of the Internal Revenue Code of 1986, as amended (the “Code”), for “qualified facilities” or “energy projects” placed in service after December 31, 2022, and under Code sections 45Y and 48E for “qualified facilities” or “energy storage projects” placed in service after December 31, 2024 (each, a “DC Project”). To qualify for the Domestic Content Bonus, a DC Project needs to fulfill two requirements: (i) 100% of all steel or iron which is a component of the DC Project must be produced in the U.S. (the “Steel and Iron Requirement”) and (ii) not less than the adjusted percentage3 of the total costs of all manufactured products of the DC Project must be attributable to manufactured products (including components) which are mined, produced, or manufactured in the U.S. (the “Manufactured Product Requirement”).
Expanded Applicable Project Descriptions
The Prior DC Notice provided definitional clarifications and established a table of certain classifications of steel/iron or manufactured products for certain types of DC Projects. As noted above, the Notice clarifies and updates this table by adding a category for hydropower and for pumped hydropower storage facilities as applicable DC Projects, which includes various steel/iron and manufactured products and manufactured product components. In addition, it redesignates the description of “utility scale photovoltaic system” to “ground-mount and rooftop photovoltaic system,” thus expanding the scope of projects which are covered by the table classifications.
The Notice also identifies additional manufactured product components not included in the Prior DC Notice. For example, the Prior DC Notice listed solar trackers as manufactured products, but did not include any solar tracker manufactured product components — the Notice now provides a list of manufactured product components comprising a solar tracker (for example, torque tubes, fasteners, slew drive, dampers, motor, controller, rails).
The Notice does not provide any additional clarity as to the definition of “production,” so taxpayers will still need to carefully analyze the facts in respect of any manufactured product or component purported to be produced in the U.S. for purposes of the Domestic Content Bonus.
Elective Assigned Cost Percentage Safe Harbor
Perhaps most importantly, the Notice created the Assigned Cost Percentage Safe Harbor for DC Projects. Under the Prior DC Notice, in order to establish that the Manufactured Product Requirement was met, taxpayers had to obtain actual material and labor costs from manufacturers of manufactured products and components used in the DC Project; recognizing the sensitive and challenging nature of this requirement, the new Assigned Cost Percentage Safe Harbor allows taxpayers to calculate a DC Project’s adjusted percentage using predetermined cost percentages set forth in the Notice.
The Notice provides a table, similar to the table in the Prior DC Notice, which includes assigned cost percentages for each of the manufactured products and manufactured product components identified. In order to calculate whether the Manufactured Product Requirement is met, taxpayers may simply add up the percentage values from the chart that apply to domestically produced or manufactured products and components. Of course, this is only applicable to applicable projects listed in the Notice and does not provide coverage for DC Projects not currently enumerated, such as qualified biogas projects.
There are some interesting observations:4 for one, in respect of land-based wind projects which rely on the Assigned Cost Percentage Safe Harbor, it appears that the Manufactured Product Requirement will be easily met for DC Projects beginning construction before 2025 if just the nacelle is domestically produced. The same is true for a ground-mount fixed tilt solar energy system if the photovoltaic cells are domestically produced — by comparison, for a ground-mount solar energy system that uses a solar tracker, it is not enough for just the cells to be domestically produced. In order to meet the Manufactured Product Requirement, a material number of other components must also be domestically produced. For stand-alone battery energy storage systems, it appears possible for a system to meet the Manufactured Product Requirement if the battery cells are not manufactured in the U.S. so long as every other component is produced in the U.S.
The Notice explicitly states that any taxpayer electing to rely on the Assigned Cost Percentage Safe Harbor “must use the Applicable Project Components and Manufactured Product Components and the cost percentages list in [the Notice] as the exclusive and exhaustive set of Applicable Project Components and Manufactured Product Components . . . .” (emphasis added).5 More plainly, taxpayers may not pick and choose between actual and the Assigned Cost Percentage Safe Harbor cost percentages. In addition, only those equipment and products applicable to a DC Project that are listed on the table will be counted towards the domestic content percentage (and any equipment and products not used in the project must be treated as having a 0% value). On the flip side, if a taxpayer is relying on the Assigned Cost Percentage Safe Harbor, it can disregard other equipment and products comprising the DC Project which are not listed in the Assigned Cost Percentage Safe Harbor table (e.g., solar or wind step-up transformers and substation assets).6
The Assigned Cost Percentage Safe Harbor even includes assumed costs for production of a manufactured product, but these production costs may only be taken into account if all of the manufactured product components of a manufactured product are domestically produced (for example, you can include the production costs of a wind turbine as a whole so long as each of the blades, rotor hub, nacelle, and power converter are produced in the U.S.).
Undoubtedly, additional questions will arise as stakeholders attempt to apply the Assigned Cost Percentage Safe Harbor in real life, and there are still a sizeable number of projects and stakeholders for which the Assigned Cost Percentage Safe Harbor is not applicable or appropriate, but it appears to provide a more useful framework for qualification for a Domestic Content Bonus and eliminates the need to obtain sensitive and confidential (if not entirely impossible to obtain) data from third parties. We expect that this will make it easier for many projects to obtain financing and confidently claim the Domestic Content Bonus.
*Trey Frye is a law clerk in our New York office.
Reproduced from Notice 2024-41:†
Solar PV Table
Land Based Wind Table
Battery Energy Storage System Table
†Original source should be consulted to ensure accuracy, this table is added as a general reference tool and should not be relied on.
1Our coverage of the Prior DC Notice can be found here. Our prior coverage of the IRA can be found here and here and further coverage and details can be found here.
2While the Notice states that proposed regulations on the Domestic Content Bonus are forthcoming, taxpayers that begin construction on an applicable project prior to 90 days after any future modification, update, or withdrawal to the Assigned Cost Percentage Safe Harbor may rely on it and taxpayers that begin construction on an applicable project no later than 90 days after any such domestic content proposed regulations are published in the Federal Register may rely on the Prior DC Notice, as modified by the Notice.
Treasury has requested comments on the Notice by July 15, 2024.
3The “adjusted percentage” is 40% for DC Projects beginning construction before 2025, 45% in 2025, 50% in 2026 and 55% thereafter (and for offshore wind facilities: 20% for DC Projects beginning construction before 2025, 27.5% in 2025, 35% in 2026, 45% in 2027 and 55% thereafter).
4Of course, this analysis is factually dependent and still requires careful analysis as to whether production has occurred. Taxpayers should work with tax counsel before taking a position as to whether the Domestic Content Bonus is available.
5If a taxpayer intends to utilize the Assigned Cost Percentage Safe Harbor, it must affirmatively elect it on its domestic content certification statement included on the credit forms filed with its U.S. federal income tax return.
6There are some nuances to the Assigned Cost Percentage Safe Harbor that can require further calculation, such as instances when a project sources a manufactured product or manufactured product component from both foreign and domestic sources. Further, DC Projects looking to qualify for the Domestic Content Bonus that are a combined PV and BESS plant claiming an ITC may use the Assigned Cost Percentage Safe Harbor to determine a single percentage. Such combined percentages are calculated using a formula that takes into account the assigned percentages of both the PV and BESS, and includes a BESS multiplier to convert the values to an equivalent comparison.
