On May 16, 2024, the Internal Revenue Service (IRS) issued further guidance (Notice 2024-41, the Additional Notice) intended to provide clarity and certainty surrounding the domestic content¹ bonus credit by (among other changes) adding a new elective safe harbor designed to make it easier for taxpayers to establish that they qualify for the bonus amount, which is only available for certain of the clean energy production and investment tax credits (PTC and ITC) added or amended by the Inflation Reduction Act of 2022 (IRA, P.L. 117-169).

In the original guidance issued by the IRS on May 12, 2023 (Notice 2023-38, the “Original Notice,” see our prior alert here), taxpayer developers were required to collect detailed, commercially sensitive cost information from manufacturers to perform the required calculations to claim the bonus credit amount. The new elective safe harbor set out in the Additional Notice obviates that need in certain types of projects (those that are listed) by providing default cost percentages of Manufactured Product Components obtained from the Department of Energy that taxpayers can rely upon instead of obtaining actual costs from the manufacturers. As established in the IRA, if the domestic content rules are satisfied, the bonus provides a tax credit boost of as much as 10% (in the case of Sections 45 and 45Y) or 10 percentage points (in the case of Sections 48 and 48E).²

The Additional Notice comes one year after the Original Notice, which outlined the basic rules for how taxpayers qualify for the domestic content bonus credit amount, including certification requirements. The Additional Notice also updates a table from the Original Notice (Table 2) that contained safe harbor classifications (identifying categories of Applicable Project Components³) for commercial solar, land and offshore wind and battery storage. The expanded table now also includes safe harbor classifications for hydropower and pumped hydropower storage facilities. In addition, the Additional Notice renamed one of the applicable projects in Table 2, originally categorized as utility-scale photovoltaic system to instead be characterized as ground-mount (both tracking and fixed) and rooftop photovoltaic system (both MLPE and string).

Note that the IRS makes clear in the Additional Notice that it still intends to issue proposed regulations, which will incorporate the guidance contained in both the Original and Additional Notices. Taxpayers may continue to rely on the Original Notice, as modified by the Additional Notice, for any project the construction of which begins before the date that is 90 days after the forthcoming proposed regulations are published.

Guidance Limited to PTC, ITC

As a reminder, domestic content bonus credit amounts are only available for four tax credits:

1. The Section 45 production tax credit (PTC) for renewable electricity (e.g., wind⁴), which the IRA amended and extended through 2024,⁵ when it is replaced with (see #2);
2. the Section 45Y clean electricity PTC (which is designed to be more tech-neutral⁶ and is scheduled to phase down after 2033 and expire by 2036, assuming certain greenhouse gas emission reduction goals are achieved);
3. the Section 48 investment tax credit (ITC) for energy property (e.g., solar⁷), which the IRA amended and extended through 2024,⁸ when it is replaced with (see #4); and
4. the Section 48E clean electricity ITC (which is designed to be more tech-neutral⁹ and is scheduled to phase down after 2033 and expire by 2036, assuming certain greenhouse gas emission reduction goals are achieved).

Taxpayers are eligible for a tax credit boost of as much as 10% (in the case of Sections 45 and 45Y) or 10 percentage points (in the case of Sections 48 and 48E) if the steel, iron and “Manufactured Products”¹⁰ which are components of the project or facility upon completion of construction were produced in the U.S.

For steel or iron, the IRA states that the domestic requirement should be applied in a manner consistent with 49 C.F.R. 661.5, which requires that “all steel and iron manufacturing processes must take place in the United States, except metallurgical processes involving refinement of steel additives.”

For Manufactured Products, the domestic content requirement is met if not less than the adjusted percentage specified in the IRA of the total costs of all the Manufactured Products that are components of a qualified facility upon completion of construction are attributable to Manufactured Products (including components) which are mined, produced or manufactured in the United States.

New Elective Safe Harbor

The Additional Notice contains a New Elective Safe Harbor in Table 1 that provides classifications and cost percentages that can be relied upon when calculating the domestic cost percentage (used to determine whether the steel, iron or Manufactured Products satisfy the domestic content requirement). The so-called Adjusted Percentage Rule,¹¹ which was detailed in the Original Notice, is used to determine whether a Manufactured Product satisfies the domestic content requirement.

As a reminder, even if a Manufactured Product contains Manufactured Product Components¹² that were manufactured outside of the United States (and is therefore a “Non-U.S. Manufactured Product” as evidenced in the example below), it can still be deemed to have been produced in the United States if it satisfies the Adjusted Percentage Rule. For example, if the Domestic Manufactured Products and Components Cost¹³ divided by the Total Manufactured Products Cost¹⁴ is at least 40% (for a facility for which construction begins before 2025), then the facility is deemed to satisfy the domestic content requirement for Manufactured Products.

Note that the required domestic content percentage for a project’s Manufactured Products to be deemed to satisfy the domestic content requirement under the Adjusted Percentage Rule increases to 45% for a facility for which constructions begins in 2025, 50% in 2026, and 55% after 2026. These required percentage thresholds are lowered for offshore wind facilities—starting at 20% and increasing to 55% over a longer period. At a high level, there are two ways to begin construction for tax purposes—either by conducting “physical work of a significant nature” (the Physical Work Test) or by paying or incurring at least 5% of the total project cost (the 5% Test).

However, to perform the Adjusted Percentage Rule calculation, a taxpayer needs to know the direct costs¹⁵ (including both materials and labor) that are paid or incurred by the manufacturer to produce a product or component. According to the Additional Notice, the IRS is “aware that obtaining a manufacturer’s direct costs of manufacturing may require the taxpayer to gather cost data from multiple suppliers and manufacturers, including foreign manufacturers, and may present challenges for substantiation and verification.”

Therefore, the Additional Notice contains the New Elective Safe Harbor, which gives taxpayers the option to calculate their domestic cost percentage (either for determining compliance with the steel or iron requirement or, pursuant to the Adjusted Percentage Rule, for determining compliance with the manufactured products requirement) by using the assigned cost percentages for each of the Manufactured Product Components listed in Table 1 of the Additional Notice that are incorporated into that Applicable Project Component instead of obtaining detailed direct cost information. Examples are provided to help illustrate how the New Elective Safe Harbor works.

In one of the examples, a taxpayer purchases from a contractor and places into service a land-based wind facility comprised of four Applicable Project Components listed in Table 1 (wind turbine, wind tower flanges, tower, and steel rebar in foundation). The taxpayer elects to use the New Elective Safe Harbor to determine how much of the domestic content bonus credit amount it can claim (as a reminder, for 2024, the relevant domestic content percentage that must be met is 40%).

Looking to Table 1, the taxpayer determines the following for its land-based wind facility:

Because 47.5% + 31.2% (reflecting the domestic cost percentage) exceeds 40%, the wind turbine satisfies the Adjusted Percentage Rule. The classification and cost percentages in Table 1 will be accepted by the IRS for purposes of calculating the domestic cost percentage, provided all other requirements are met. So even though the wind turbine (which comprises nacelle, blades, rotor hub, etc.) includes Non-U.S. Manufactured Products because it contains components that were manufactured outside of the U.S., the wind turbine is deemed to have been produced in the U.S. because it satisfies the Adjusted Percentage Rule, after adding up the assigned cost percentages for each listed U.S. Manufactured Product in Table 1.

Taxpayers that elect to use the New Elective Safe Harbor must use the assigned cost percentages in Table 1 exclusively and exhaustively. That is, they must use the information for all the Manufactured Products and Manufactured Product Components in their project without substitution. If a component is listed in the table but is not an input to the taxpayer’s project, a zero value must be used. If a component is an input to a taxpayer’s project but isn’t listed in Table 1, then it must be disregarded for purposes of determining the domestic cost percentage (and it will not disqualify the taxpayer from using the New Elective Safe Harbor).

Table 1 of this notice also contains a line item for “Production”, which refers to the production cost of the relevant Manufactured Product and can only be included in the total Domestic Cost Percentage if all the Manufactured Product Components of the Manufactured Product are produced in the U.S.

Special rules are provided for situation in which the Manufactured Product or Manufactured Product Component is sourced from both foreign and domestic suppliers (a so-called Mixed Source Item), in which case a weighted average formula may be used to determine assigned cost percentage attributable to the item.

One of the concerns with the New Elective Safe Harbor is the percentage of costs the IRS has assigned to the Manufactured Product Components for solar projects. PV cells, which are not currently manufactured in commercial quantities in the U.S., are assigned almost 37% of the overall cost in a ground-mounted system with tracking and approximately 49% in a fixed ground-mounted system. This assumed percentage means that most other components will need to come from the US to meet the 40% domestic content requirement. 

In order to take advantage of the New Elective Safe Harbor, a taxpayer must provide a statement indicating its reliance on the safe harbor in the domestic content certification statement that it is required to attach to the Form 8335, Renewable Electricity Production Credit (or whatever other applicable form it uses to claim the credit).

Expanded Applicable Project Component Safe Harbor

A challenging aspect of the domestic content rules is determining which parts of a clean energy project should be categorized as an Applicable Project Component (and which of those should be subject to the Steel or Iron Requirement as opposed to the Manufactured Products Requirement).

The Additional Notice modified Table 2 from the Original Notice, expanding it to include new safe harbor classifications for hydropower and pumped hydropower storage facilities. We have copied the expanded portion of the table below for your reference:

Table 2 – Categorization of Applicable Project Components

The IRS is soliciting comments on the Additional Notice, which are due July 15, 2024. The IRS is especially interested to know whether there are any other technologies that should be included in Table 1 and how often practitioners think the table should be updated. Additionally, the IRS wanted feedback on its nameplate capacity allocation approach (the weighted average formula) for allocating assigned cost percentages in the case of Mixed Source Items. We encourage you to contact one of the below attorneys if you have questions regarding this IRS guidance.

^{1 The Domestic Content Requirement is in Tax Code Section 45(b)(9)(B)(i) (incorporated by cross-reference in Section 48(a)(12), which is incorporated by cross-reference in Section 48E(a)(3)(B)) and in Section 45Y(g)(11)(B)(i).}

^{2 Note that additional credit increases are also available if the project/facility meets certain prevailing wage and apprenticeship requirements (see initial guidance at Notice 2022–61) and/or is located in an energy community, however the guidance in the Original and Additional Notices is limited to credit boosts associated with the domestic content requirements.}

^{3 Notice 2023-38 defines “Applicable Project Component” as “any article, material, or supply, whether manufactured or unmanufactured, that is directly incorporated into an Applicable Project. An Applicable Project Component may qualify as steel, iron, or a Manufactured Product.”}

^{4 Note that facilities generating electricity from wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, and marine and hydrokinetic renewable energy may all be eligible.}

^{5 Construction must begin before Jan. 1, 2025.}

^{6 But limited to qualifying solar and wind facilities with a maximum net output of less than 5 megawatts, including associated energy storage technology.}

^{7 Note that eligible projects may include fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties.}

^{8 Construction must begin before Jan. 1, 2025.}

^{9 But limited to facilities that generate electricity with a greenhouse gas emissions rate that is not greater than zero and qualified energy storage technologies.}

^{10 Notice 2023-38 defines “Manufactured Product” as “an item produced as a result of the manufacturing process.”}

^{11 See section 3.03(2) of Notice 2023-38.}

^{12 Notice 2023-38 defines “Manufactured Product Component” as “any article, material, or supply, whether manufactured or unmanufactured, that is directly incorporated into an Applicable Project Component that is a Manufactured Product.”}

^{13 According to Notice 2023-38, “[t]he Domestic Manufactured Products and Components Cost is the sum of the costs of an Applicable Project’s (1) U.S. Manufactured Products that are Applicable Project Components and (2) Manufactured Product Components of Non-U.S. Manufactured Products that are Applicable Project Components if the Manufactured Product Components are mined, produced, or manufactured in the United States (U.S. Component).”}

^{14 According to Notice 2023-38, “[t]he Total Manufactured Products Cost for an Applicable Project is the sum of the costs of each Applicable Project Component that is a Manufactured Product.”}

^{15 Defined in Treas. Reg. Section 1.263A-1(e)(2)(i).}