Key Takeaways

• As expected, Notice 2023-38 (the Notice) confirms the cross-references in § 45(b)(9) to regulations under 49 C.F.R. § 661 (i.e., Buy America Requirements) control most of the requirements for qualifying for the domestic content bonus credit.[1] It remains to be seen, however, whether the Notice’s defined terms (e.g., manufacturing process) will carry over to other renewable energy credits not mentioned in the Notice.
• Manufacturers and suppliers of products and components that are used in renewable energy projects that attempt to qualify for credits under § 45, § 45Y, § 48 and § 48E will want to pay close attention to the Notice, as will investors, developers and managers of projects.
• The Notice contains a safe harbor for purposes of the Manufactured Products Requirement (defined below) that should be well received by taxpayers. The safe harbor is met if the costs of domestic manufactured products and components are above a certain percentage of the total costs of all manufactured products and components (described below).
• The carveout from the Manufactured Products Requirement for subcomponents also should be welcomed by project developers, manufacturers and suppliers.
• The Notice contains a safe harbor for certain listed project components that states the components listed in Table 2 of the Notice only need to satisfy either the Steel and Iron Requirement (defined below) or the Manufactured Products Requirement (also defined below). In addition, the Notice states that the list of project components is not exhaustive, meaning that the IRS may add to it in additional guidance. That table is reproduced at the end of this alert.
• Project developers should assess whether complying with the Domestic Content Requirements (defined below) results in increased costs. If there are cost increases, project developers should determine whether the value of the domestic content bonus credits offsets or exceeds the increased costs.

On May 12, 2023, the Internal Revenue Service (IRS) issued initial guidance in the form of the Notice[2] that provides taxpayers with preliminary guidance relating to the application of the domestic content bonus requirements under § 45, § 45Y, § 48 and § 48E of the Code. The Notice additionally states that the IRS intends to issue proposed regulations addressing the application of the rules described in the Notice.

As background, the Inflation Reduction Act of 2022 (IRA)[3] amended a number of the existing renewable energy credit provisions, including § 45 and § 48, and also added several new provisions, including § 45Y and § 48E. Included in the amended provisions and new provisions are domestic content bonus requirements that, when met, increase the amount of a credit under § 45, § 45Y, § 48 and § 48E. The domestic content requirements are satisfied if a taxpayer certifies to the IRS that any steel iron or manufactured product that is a component of a qualified facility was produced in the United States (Domestic Content Requirements).[4] What follows is a discussion of the Domestic Content Requirements and the guidance under the Notice.

I. Defining Key Terms

The application of the Domestic Content Requirements is tied to several definitions. The first is “applicable project,” which refers to (a) a qualified facility under §§ 45 or 45Y; (b) an energy project under § 48; or (c) a qualified investment with respect to a qualified facility or energy storage technology under § 48E (Applicable Project).

An Applicable Project satisfies the Domestic Content Requirements if it (1) uses U.S.-based manufacturing processes for all steel and iron items that are “applicable project components” (Steel or Iron Requirement);[5] and (2) ensures all “applicable project components” that constitute “manufactured products” are produced in the United States or are deemed to be produced in the United States (Manufactured Products Requirement). An “applicable project component” is any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into an Applicable Project (Applicable Project Component). A “manufactured product” is an item produced as a result of a “manufacturing process” (Manufactured Product), which is 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 (Manufacturing Process).[6] The term “manufactured” is defined as an item produced as a result of the manufacturing process.[7]

Observations:

• The defined term Manufacturing Process is aligned with the definition under 49 C.F.R. § 661.3, which applies to the Steel and Iron Requirement as a result of being cross-referenced in § 45(b)(9)(B)(ii). It remains to be seen, however, if other provisions under the IRA will adopt similar definitions of manufacturer or producer.
• While not discussed herein, the Notice clarifies that the Domestic Content Requirements, when met, increase the § 45 credit and § 45Y credit by 10 percent, not 10 percentage points. In contrast, the Domestic Content Requirements increase the § 48 and § 48E credits by 10 percentage points if additional criteria described under each statute are met.

II. The Domestic Content Requirements

A. Steel and Iron Requirement

The Steel and Iron Requirement applies to Applicable Project Components that are construction materials made primarily of steel or iron and are structural in function. The Steel and Iron Requirement, however, does not apply to steel or iron used in Manufactured Product Components or subcomponents of Manufactured Product Components. As an example, the Notice states the Steel and Iron Requirement does not apply to 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 that are not structural in function.

Observations:

• The Steel and Iron Requirement under the Notice should not be a surprise to taxpayers. The statutory text under § 45(b)(9)(B)(ii) cross-referenced regulations adopting the Buy America Requirements, which are similar (if not identical) to these provisions.
• The carveouts for subcomponents and Manufactured Product Components reduce the burden on manufacturers to trace and track subcomponents that are contained in a Manufactured Product. Notwithstanding, the Manufactured Product Components must still be of U.S. origin (discussed below).

B. Manufactured Products Requirement

A Manufactured Product is produced in the United States if (1) all the manufacturing processes for the Manufactured Product take place in the United States; and (2) all the Manufactured Product Components of the Manufactured Product are of U.S. origin. A Manufactured Product Component is considered to have a U.S. origin if it is manufactured in the United States, regardless of the origin of its components.

The Notice additionally contains a safe harbor for satisfying the Manufactured Products Requirement. Under the safe harbor, all Applicable Project Components that are Manufactured Products are deemed to be produced in the United States if a certain adjusted percentage of the total costs of such Manufactured Products are attributable to Manufactured Products that are produced or manufactured in the United States (Adjusted Percentage Rule). The adjusted percentage is 40 percent (20 percent if the qualified facility is a wind facility), increasing to 55 percent for qualified facilities whose construction begins after 2026. This ratio is calculated by comparing the costs of domestic Manufactured Products and Manufactured Product Components to the total costs of all Manufactured Products and Manufactured Product Components (including costs paid to a supplier for a product).

Observations:

• The Notice makes clear that a manufacturer that acquires components from a supplier will need to determine whether the supplier or manufacturers used by the supplier produced the product or component within the United States. Manufacturers will accordingly need to analyze their supply chains.
• The costs used to calculate the Adjusted Percentage Rule are the direct costs of the Manufactured Products. Project developers may need to consider how they can obtain these costs from their suppliers.
• The Adjusted Percentage Rule provides manufacturers with a safe harbor method for satisfying the Manufactured Products Requirement. The lower percentage of 40 percent for qualified facilities built before 2025 allows manufacturers time to ensure that they may satisfy the higher percentage of 55 percent that goes into effect after 2026.

III. Certification Requirements

The Notice additionally provides procedures for how taxpayers may certify that an Applicable Project satisfies the Domestic Content Requirements. The certification must be attached to IRS Form 8835, Renewable Electricity Product Credit, IRS Form 3468, Investment Credit, or another applicable form for reporting the Domestic Content Requirements that is filed with the taxpayer’s annual federal income tax return. The certification must include the following items:

• Whether the Applicable Project is a qualified facility, energy project or energy storage technology;
• The specific type of Applicable Project;
• The geographic coordinates of the Applicable Project and the address of the Applicable Project, if applicable;
• The date the Applicable Project was placed in service;
• The total domestic content bonus credit amount determined under §§ 45(b)(9), 45Y(g)(11), 48(a)(12) or 48E(a)(3)(B) with respect to the Applicable Project in the first taxable year in which the taxpayer reports a domestic content bonus credit amount for such Applicable Project; and
• Any additional information with respect to the Applicable Project that is required by the applicable forms and instructions for reporting domestic content bonus credit amounts.

The certification must be signed under penalties of perjury by a person with legal authority to bind the taxpayer. In addition, the certificate must state that the Applicable Project meets the Domestic Content Requirements as of the date the Applicable Project is placed in service.

IV. Additional Items

A. Certain Applicable Project Components Subject to Either Steel and Iron Requirement or Manufactured Products Requirement

The Notice also identified certain Applicable Project Components that are found in utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities and battery energy storage technologies that will only be subject to either the Steel or Iron Requirement or the Manufactured Products Requirement. Thus, manufacturers and suppliers of these types of projects may only be subject to one of the two Domestic Content Requirements. The Notice also notes that the list is not exhaustive, indicating that additional Applicable Project Components may be added to it in the future. A list of the Applicable Project Components is contained at the end of this alert.

B. Retrofitted Projects

Applicable Projects that contain used property qualify as being originally placed in service after Dec. 31, 2022, if not more than 20 percent of the Applicable Project’s total value consists of used property. An Applicable Project with used property thus may qualify for the Domestic Content Requirements (and increase to credits).

C. Recordkeeping

The Notice also provides that a taxpayer reporting a domestic content bonus credit must comply with the general recordkeeping requirements under § 6001.

Observations:

• Manufacturers or suppliers of utility-scale projects will want to closely review the list of Applicable Project Components that are only subject to the Steel and Iron Requirement or the Manufactured Products Requirement.
• The confirmation that retrofitted projects may qualify for the domestic content bonus credits should be welcome news to developers. They will need, however, to carefully document the percentage of their Applicable Project that consists of used components.

Table of Applicable Project Components Subject to Either Steel and Iron Requirement or Manufactured Products Requirement

[View source.]