IRS Guidance Simplifies Leveraging Domestic Content Bonus Credit
The IRS issued Notice 2024-41 modifying the existing domestic content guidance in Notice 2023-38 on May 16, 2024. It provides a new elective safe harbor that simplifies the calculation needed to determine if solar, onshore wind, and battery projects meet domestic content requirements to qualify for a 10% bonus credit.
Taxpayers can elect to use predetermined values to calculate domestic cost percentage, which could make it easier to take advantage of the credit.
Background
The domestic content bonus credit was enacted under the Inflation Reduction Act of 2022, which is applicable under the following Internal Revenue Code (IRC) Sections:
- IRC Section 45, Renewable Electricity Production Tax Credit
- IRC Section 45Y, Clean Energy Production Tax Credit
- IRC Section 48, Energy Investment Tax Credit
- IRC Section 48E, Clean Energy Investment Tax Credit
After December 31, 2024, Section 45 (PTC) and Section 48 (ITC) will be replaced by Technology-Neutral Sections 45Y and 48E, respectively.
The domestic content bonus is an opportunity for taxpayers claiming clean energy tax credits to claim an additional 10% credit for qualified projects using enough US-made steel, iron, and manufactured products that meet domestic content requirements.
These are, generally:
- Steel and iron must be 100% produced in the United States
- Manufactured products must be at least 40% US-made initially, increasing to 55% over time; offshore wind starts at 20%
Notice 2023-38, issued in May 2023 by the Department of the Treasury and the IRS, provided some initial guidance for taxpayers wanting to claim this bonus credit. Part of this guidance stated that taxpayers were required to collect three direct costs from manufacturers from whom they procured equipment to calculate the manufactured product’s domestic cost percentage.
These three direct costs were:
- Wages paid to workers to make the products,
- Payroll taxes on those wages, and
- Amount paid to suppliers for the parts supplied to the factory.
In practice, this requirement made it difficult for taxpayers to determine whether their projects met the domestic cost requirements, and many taxpayers have struggled to benefit from the domestic content bonus credit. As a result, the industry has been lobbying for a move to an acquisition cost model that would make it unnecessary to determine a manufacturer’s actual costs.
What Changes with Notice 2024-41
New Elective Safe Harbor
Notice 2024-41 acknowledges the substantiation and verification challenge the requirement posed to taxpayers attempting to gather the direct costs data from suppliers and manufacturers.
The notice provides a new elective safe harbor that allows taxpayers to use an acquisition cost approach to calculate the domestic cost percentage and fulfill the Adjusted Percentage Rule rather than needing to obtain actual costs from manufacturers, at least for certain technologies.
The deemed acquisition costs listed in Table 1 of the notice greatly simplify the calculations for determining the domestic content needed to qualify solar, onshore wind, and battery projects for the bonus credit, in turn making it simpler for companies to take advantage of this incentive program.
Not all project types were included in the table, so simpler calculations are not yet available for offshore wind, geothermal, hydropower, renewable natural gas, and other types of projects. For these, taxpayers must continue to obtain direct cost information from suppliers and manufacturers. However, in a press release, the Treasury expressed plans to add sectors, including offshore wind, to the new elective safe harbor in future guidance.
If a taxpayer elects to apply the new elective safe harbor to a project, it must be applied to the entire project. Only manufactured products or manufactured product components identified in Table 1 may be considered when calculating the domestic cost percentage.
If an applicable project includes manufactured products or manufactured product components that are not identified in Table 1, these products or components must be disregarded for purposes of determining the domestic cost percentage if the taxpayer is applying the new elective safe harbor.
Example
In tax year 2024, the taxpayer purchases a 10-kilowatt direct current (kWdc) rooftop PV solar system with a DC optimized inverter system—Applicable Project A—from the contractor under an engineering, procurement, and construction (EPC) contract and places it in service.
New Elective Safe Harbor
The PV cells in Applicable Project A are US Components of the PV module, and the taxpayer makes a valid election to use the New Elective Safe Harbor to qualify for the domestic content bonus credit.
2024 Adjusted Percentage Requirement to Meet Domestic Content Requirements
40%
Table 1 Excerpt: Solar PV—Rooftop (MLPE)
Applicable Project Components (APC)
PV Module
Applicable Project A uses PV modules manufactured in the United States, but only the PV cells are manufactured in the United States. The PV modules are Non-US Manufactured Products because some of their MPCs aren’t produced in the United States.
Inverter
Applicable Project A uses a DC optimized inverter system. The inverter and the DC optimizers are manufactured in the United States. The inverter uses printed circuit board assemblies produced in the United States; the DC optimizers use printed circuit board assemblies not produced in the United States.
Non-Steel Roof Racking
The non-steel roof racking used in Applicable Project A is manufactured in the United States and has two categories of MPCs—fasteners and rails—both of which are manufactured in the United States. The non-steel roof racking is a U.S. Manufactured Product because all of its MPCs are produced in the United States.
Calculating Adjusted Percentage
The PV cells in Applicable Project A are US Components of the PV module. Table 1 identifies the PV cell MPC of a PV module as constituting 21.5% of the total cost of manufactured products for this type of Applicable Project.
The fasteners and rails in Applicable Project A are US Components of the non-steel roof racking. Table 1 identifies the fasteners as constituting 11.1 % of the total cost, and the rails as constituting 8.6% of the total cost of manufactured products for this type of Applicable Project. Additionally, because the non-steel roof racking is a US Manufactured Product with all its MPCs produced domestically, the production cost of 6.1% can be included in the domestic cost percentage.
Only components listed in Table 1 should be considered.
Adjusted % of Applicable Project A
47.3% (21.5% + 11.1% + 8.6% + 6.1%)
Conclusion
Applicable Project A satisfies the Adjusted Percentage Rule because its domestic cost percentage of 47.3% exceeds the adjusted percentage requirement that applies to Applicable Project A (40%).
The new elective safe harbor and other guidance in the notice should help simplify the process for taxpayers to determine whether a project qualifies for the domestic content bonus credit.
This additional level of certainty surrounding a project’s qualification for the bonus credit should assist not only the project developers but also other stakeholders such as tax equity investors, tax credit purchasers, and lenders.
Issues with Co-Located ITC Solar and Battery Storage
The notice clarifies that a co-located solar and battery energy storage system (BESS) that comprises a single energy project claiming ITC must determine its domestic content percentage as a single project and prescribes the formula to do so.
The numerator is the domestic content percentage of the solar facility multiplied by the solar nameplate capacity in MWdc plus the domestic content percentage of the battery multiplied by the storage capacity in MWh and multiplied further by a BESS multiplier."
The BESS multiplier varies from 0.57 to 0.99 depending on whether the solar facility is utility-scale and uses trackers or fixed-tilt mounting or rooftop and uses string inverters or some other means to convert the electricity from direct current to alternating current.
The denominator is the sum of the solar nameplate capacity and the battery storage capacity.
This may cause solar facilities or BESS that would qualify for domestic content on their own to fail to so qualify. In the same situation, it would be possible to elect PTC on the solar without the need to combine the facilities for domestic content purposes.
Importance to Nonprofit, Governmental, Tribal, and Higher Education Organizations
Applicable entities, such as tax-exempt entities, not-for-profits, local governments, or Tribes, with projects beginning construction on or after January 1, 2024, with a net output greater than one megawatt of alternating current that doesn’t meet the increased cost exception or non-availability exception should consider utilizing the Elective Safe Harbor to determine if they meet the Domestic Content requirements to both:
- Obtain the Domestic Content bonus credit
- Avoid having their IRA credit amount reduced by the applicable percentage
Hydropower and Other Considerations
In addition to the new elective safe harbor, Notice 2024-41 modifies Table 2 and Section 3.04 of Notice 2023-38. This modification:
- Expands the list of applicable projects in Table 2 to include hydropower and pumped hydropower storage facilities, providing a safe harbor for categorizing project components are manufactured products, manufactured product components, or steel, or iron components. Notice 2023-38 did the same for utility-scale solar, wind and battery storage.
- Redesignates the utility-scale photovoltaic system applicable project as the ground-mount and rooftop photovoltaic system.
- Provides that component categorizations used in Table 1 control over conflicting categorizations in Table 2.
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