STEEL OR IRON RULES

• Identifying Steel or Iron – Steel or iron refers to “construction materials made primarily of steel or iron and that are structural in function.”
  • The Notice provides “safe harbor” classifications of the following components as steel or iron:
    • Racking, pile or ground screws, and steel or iron rebar for solar projects;
    • Towers, steel or iron rebar for onshore wind projects;
    • Towers and jacket foundations for offshore wind projects; and
    • Steel or iron rebar for a storage project.
  • The Notice excludes any steel or iron used in components or subcomponents of manufactured products and gives examples of items such as nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, door hinges and similar items that are made primarily of steel or iron if they are not structural in function.

Observation: A concern in the industry has been whether the presence of a single nut, bolt, washer or screw of non-U.S. origin would mean that an entire renewable energy project would fail to qualify for the domestic content adder. The Notice is helpful from that perspective but requires an analysis of whether a nut, bolt, washer, screw or other similar part is “structural in function.”

• Steel or Iron Requirement – Once identified, steel or iron will qualify as domestic content if all of its manufacturing processes take place in the U.S., except metallurgical processes involving refinement of steel additives.

Observation: The 100% rule for steel or iron is embedded in the IRA and not likely something Treasury and the IRS could change by administrative guidance. Nevertheless, it can result in somewhat draconian consequences. As the safe harbor table illustrates, a single piece of non-U.S. rebar in a solar project or a non-U.S. tower in a wind farm could cause a project to fail the test.

MANUFACTURED PRODUCT RULES

• Identifying Manufactured Products and Components – Manufactured product refers to project components that are produced as part of a process that alters the form or function of materials or elements in a manner that adds value and transforms them into a functionally new item. Components of a manufactured product include any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into a manufactured product. The Notice does not explain how to identify subcomponents. The safe harbor classifications in the Notice identify the following items as manufactured product:
  • Trackers, modules^[3] and inverters for solar projects;
  • Wind turbines^[4] and wind tower flanges for onshore wind projects;
  • Wind turbines, transitions pieces, monopiles, inter-array cables, offshore substations and export cables for offshore wind projects; and
  • Battery packs,^[5] the battery container/housing and inverters for storage projects.

Observation: Although the Notice’s safe harbor tables are incomplete in that they do not address the treatment of every single potential project component, they provide a much-needed starting point to analyze how the domestic content rules should apply to a renewable energy project. Prior to the Notice there had been significant market uncertainty regarding whether items like modules and inverters should be considered manufactured products or components.

• Manufactured Product Requirement – As described above, at least the “applicable percentage” of a project’s manufactured product must be produced in the U.S. For manufactured product to be produced in the U.S., (i) all of the manufacturing processes for the manufactured product must take place in the U.S., and (ii) all of the components of the manufactured product must be of U.S. origin. Components are treated as being of U.S. origin if they are manufactured in the U.S., regardless of the origin of the subcomponents.

Observation: The Notice’s confirmation that components must be of U.S. origin (a requirement which comes from the pre-IRA Department of Transportation regulations for “Buy America Requirements,” on which the domestic content rules are based) adds significant complexity to the domestic content analysis. It will require project developers to dig into the origin of components of equipment they are buying and also determine which portions of those components should be treated as subcomponents that do not need to be from the U.S.

• Application of the Adjusted Percentage Rule – The adjusted percentage is determined by dividing (A) the “Domestic Manufactured Products and Components Cost” by (B) the “Total Manufactured Products Cost.”
  • “Domestic Manufactured Products and Components” include both (i) manufactured products produced in the U.S., and (ii) components of manufactured products that are not produced in the U.S. if the components of the non-U.S. manufactured product are nevertheless mined, produced, or manufactured in the U.S.
  • “Total Manufactured Products” includes all of the manufactured products in the project (i.e., both U.S. and non-U.S. produced). It does not look at individual components.
  • For example, if the cost of a U.S. manufactured product is $100 and the cost of a non-U.S. manufactured product is $200, but the non-U.S. manufactured product includes U.S.-sourced components that cost $80, the test would be applied by comparing $180 (i.e, the cost of U.S. manufactured product plus the $80 cost of the U.S. components of the non-U.S. manufactured product) and $300 (i.e, the combined total cost of the manufactured product).

Observation: The inclusion of U.S.-produced components of non-U.S. manufactured product in the numerator of the adjusted percentage test is helpful in that it allows taxpayers to partially benefit from manufactured products with some U.S. components. The downside is that it further increases the test’s complexity because taxpayers who want to take advantage of the rule will need to track components of non-U.S. sourced manufactured products. It is unclear how easy it will be to obtain this information from manufacturers.

• How to Determine “Cost” – Cost for purposes of both the numerator and denominator of the adjusted percentage test means the direct material and direct labor costs that are paid or incurred by the manufacturer to produce the manufactured product or produce or acquire the U.S. component. Costs (including labor costs) of incorporating the manufactured product into the actual project do not count.

Observation: Proving that the domestic content test has been met will require information from manufacturers about their direct costs. This will likely be a source of tension between developers who are being asked to pay a premium for U.S.-produced equipment and manufacturers who are generally reluctant to provide details about their actual costs. This method appears intended to isolate true cost as much as possible without taking into account the increased value (or markup) associated with domestic content qualification.

OTHER REQUIREMENTS

• Certification Requirement – A taxpayer claiming the domestic content adder will need to certify to the IRS that the domestic content requirement has been met, in an attachment to IRS Form 8835 or IRS Form 3468, or other applicable form.
• Recordkeeping Requirements – A taxpayer claiming the domestic content adder must maintain and preserve “sufficient records” to establish that a project qualifies for the domestic content adder.