The IRS published Notice 2023-38 on May 12, 2023, announcing their intent to issue regulations with requirements that taxpayers and applicable entities must satisfy to qualify for the domestic content bonus credit. The domestic content bonus credit was enacted as part of the Inflation Reduction Act and is applicable under Internal Revenue Code (IRC) Section 45 for the production tax credit (PTC) and IRC Section 48 for the investment tax credit (ITC).
The regulations suggested in Notice 2023-38 would also apply to IRC Sections 45Y and 48E for technology-neutral clean energy projects placed in service after December 31, 2024.
Below is more information on the requirements for the domestic content bonus credit.
Bonus Credit
The Inflation Reduction Act provides a bonus credit for projects meeting the domestic content requirements equal to 10 percentage points of the amount of clean energy related PTCs generated under IRC Sections 45 and 45Y. For example, in 2023, a project meeting prevailing wage and apprenticeship requirements would qualify for a PTC of $27.50 per megawatt-hour (MWh), and it would increase to $30.25 per MWh if the domestic content requirements are met.
For certain clean energy ITCs under IRC Sections 48 and 48E that meet the domestic content requirements, the ITC is increased by 2% of eligible costs if the prevailing wage and apprenticeship requirements aren’t met, and 10% if they are. For example, the ITC would increase from 30% to 40% if the prevailing wage and apprenticeship requirements are met.
The forthcoming regulations are intended to apply to taxable years ending after May 12, 2023, but taxpayers may rely on the notice for projects that begin construction up to 90 days after the publication date of the future proposed regulations.
Satisfying the Domestic Content Requirement
IRC Sections 45 and 45Y—which are incorporated by reference in IRC Sections 48 and 48E—provide that to satisfy the domestic content requirement, a taxpayer or applicable entity must certify that any steel, iron, or manufactured product that’s a component of the project was produced in the United States under the Buy America requirements administered by the Federal Transit Administration (FTA).
In the case of steel and iron, 100% of those materials must be produced in the United States. In the case of manufactured products that are components of a qualified facility, not less than the adjusted percentage of the manufactured products must be mined, produced, or manufactured in the United States.
Under IRC Sections 45 and 48, the adjusted percentage for qualified facilities is 40%, other than offshore wind facilities which is 20%. Under IRC Sections 45Y and 48E, for projects that begin construction after December 31, 2024, the adjusted percentage increases each year to ultimately be 55% for projects, other than offshore wind facilities, that begin construction after December 31, 2026, and 55% for offshore wind facilities that begin construction after December 31, 2027.
Notice 2023-38 provides several specific definitions related to meeting the domestic content requirements, including the requirements for the steel and iron and manufactured products which are outlined below.
Steel and Iron Requirement
The steel and iron requirement is met if the manufacturing processes for the production of the steel or iron take place in the United States. The steel and iron requirement applies to construction materials made primarily of steel or iron and that are structural in function. Thus, items such as nuts, bolts, and screws that aren’t structural in function aren’t subject to the requirement.
Manufactured Products Requirement
The manufactured products requirement is met if the manufactured products incorporated into the project are produced in the United States. Manufactured products are produced in the United States if all the manufacturing processes take place in the United States and all the components of the manufactured product are of United States origin. A component is considered to be of U.S. origin if it’s manufactured in the United States, regardless of the origin of its subcomponents.
Notice 2023-38 also provides a mechanism whereby all manufactured products that are components of the qualified facility are deemed to be produced in the United States if the domestic cost percentage for a project exceeds the required adjusted percentage set forth in IRC Sections 45 and 45Y. An example of the calculation is provided in the notice.
Safe Harbor for Classification of Some Components
The Treasury and IRS worked with the FTA to identify certain components that may be found in utility-scale photovoltaic systems, land and offshore wind facilities, and battery storage facilities and categorized those components as either subject to the steel and iron requirement or the manufactured product requirement.
Notice 2023-38 provides a table categorizing those items.
Retrofitted Projects
Notice 2023-38 also follows the 80/20 rule established in Revenue Ruling 94-31 to determine if a retrofitted or repowered project can also qualify for the domestic content bonus. As a result, if retained components don’t comprise more than 20% of a project’s total value, calculated by adding the cost of the new property to the value of the used property, the project may qualify as originally placed in service at the time the repowered project is placed in service. Thus, a repowered project meeting the domestic content requirements would be eligible for 10 more years of PTCs at the enhanced rate.
Certification Requirements
Notice 2023-38 also sets forth the requirements for certifying that a project is eligible for the domestic content bonus at the time the project is placed in service. A taxpayer must submit a statement to the IRS certifying that the steel and iron and manufactured products requirements were met for each applicable project where the domestic content bonus is claimed.
The certification statement must be filed with the taxpayer’s federal income tax return for the first taxable year in which the taxpayer reports a domestic content bonus credit amount. In the case of PTCs under IRC Sections 45 and 45Y, a copy of the original certification statement must be attached to the taxpayer’s return in subsequent years in which the bonus credit is claimed.
The certification statement must include:
- Whether the project is a qualified facility, energy project, or energy storage technology
- The specific type of project, such as battery energy storage technology
- The geographic coordinates and address of the project, if applicable
- The date the project was placed in service
- The total domestic content bonus credit amount for the first taxable year reported
- Any other information required by the forms and instructions
The certification statement must be signed by a person with legal authority to bind the taxpayer under the penalties of perjury.
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