On May 12, 2023, in Notice 2023-38 (the “Notice”), the IRS published rules intended for inclusion in forthcoming regulations regarding domestic content bonus credit amounts.
The Inflation Reduction Act of 2022 amended §§ 45 and 48 of the Internal Revenue Code (the “Code”) to provide a domestic content bonus credit amount for certain qualified facilities or energy projects placed in service after December 31, 2022, and added new Code §§ 45Y and 48E, which include a domestic content bonus credit amount for certain investments in qualified facilities or energy storage technologies placed in service after December 31, 2023.
To claim a domestic content bonus credit amount, a taxpayer must establish that the “Domestic Content Requirement” is satisfied with respect to an “Applicable Project” by certifying to the Secretary of the Treasury that any steel, iron, or manufactured product which is a component of the Applicable Project (upon completion of construction) was produced in the United States. The Notice provides guidance on what is required to meet the Domestic Content Requirement and the procedures for reporting and claiming domestic content bonus credit amounts.
Domestic Content Bonus Credit Amounts
The amount of the §§ 45 and 45Y credits are increased by 10 percent (not 10 percentage points) if the Domestic Content Requirements are satisfied. The calculations used for the §§ 48 and 48E credits may also be favorably adjusted by a bonus 10% if the Domestic Content Requirements are satisfied, subject to the Applicable Project meeting one of the following three requirements:
(i) the energy project has a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy;
(ii) construction of the energy project began before January 29, 2023; or
(iii) the energy project satisfies prevailing wage and apprenticeship requirements.
If the Domestic Content Requirements are met but none of the above three additional requirements are met, the 10% bonus decreases to 2%.
Domestic Content Requirements
All steel and iron materials must be produced in the United States (the “Steel or Iron Requirement”) and a certain “adjusted percentage” of manufactured products that are components of a project must be mined, produced, or manufactured in the United States (the “Manufactured Products Requirement”).
The “adjusted percentage” is set at 40% (20% in the case of an offshore wind facility) and rises to 55% after 2026 (after 2027 for an offshore wind facility). The Notice gives detailed guidance on calculating the “adjusted percentage.”
The Notice provides guidance on whether a particular component of an Applicable Project is subject to the Steel or Iron Requirement or the Manufactured Products Requirement. The Steel or Iron Requirement applies to construction materials made primarily of steel or iron and are “structural in function.” For example, 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 but are not structural in function are not subject to the Steel or Iron Requirement. The Notice provides a list of common components of energy projects and specifies whether each component is to be classified as steel/iron or a manufactured product. For example, in the case of battery energy storage technology, steel or iron rebar in the foundation (e.g., a concrete pad) is steel/iron and a battery pack is a manufactured product.
Reporting Requirements
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 §§ 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 United States. The statement is attached to the applicable form for reporting the underlying credit.
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