The U.S. Department of the Treasury (Treasury) today released Notice 2024-41, Domestic Content Bonus Credit Amounts under the Inflation Reduction Act of 2022: Expansion of Applicable Projects for Safe Harbor in Notice 2023-38 and New Elective Safe Harbor to Determine Cost Percentages for Adjusted Percentage Rule (the Notice), which modifies and expands previously issued guidance regarding the domestic content bonus tax credit for certain renewable energy projects. 

The Inflation Reduction Act of 2022 (the IRA) added a bonus credit for purposes of calculating the production tax credit (PTC) and investment tax credit (ITC) for an applicable project that incorporates sufficient U.S.-sourced components. The domestic content bonus credit also may apply to a project that qualifies for the clean electricity production credit and the clean electricity investment credit that were added by the IRA and that will take effect with respect to qualified projects placed in service after December 31, 2024. The domestic content bonus credit increases the PTC by up to 10% and the ITC energy percentage by up to 10-percentage points.

Treasury previously issued Notice 2023-38, which provided rules related to the requirement that all steel and iron included in an applicable project be manufactured in the United States, rules for the calculation of the “Domestic Cost Percentage” for purposes of the “Adjusted Percentage Rule,” and a safe harbor for designating certain project components as steel or iron, a manufactured product, or a manufactured product component (as discussed in our prior alert available here).

The Notice modifies the previously issued guidance and establishes a new elective safe harbor for purposes of calculating the “Domestic Cost Percentage” of an applicable project.

Elective Safe Harbor

Notice 2023-38 provided an “Adjusted Percentage Rule” under which all manufactured products included in a project are deemed to be produced in the U.S. if the “Domestic Cost Percentage” for a project equals or exceeds the applicable domestic content adjusted percentage (generally 40% or 20% in the case of offshore wind projects). Under Notice 2023-38, calculation of the Domestic Cost Percentage is based on the direct costs incurred by manufacturers of manufactured products included in a project.  Treasury acknowledged in the Notice that requiring manufacturers’ direct manufacturing costs to calculate the Domestic Cost Percentage presents challenges for taxpayers to substantiate and verify such information.  To address this difficulty, the Notice includes a new elective safe harbor (the Elective Safe Harbor) that would not require a taxpayer obtain actual costs from manufacturers to calculate the Domestic Cost Percentage and satisfy the Adjusted Percentage Rule.

Under the Elective Safe Harbor, the Domestic Content Percentage is calculated based on pre-determined values included in Table 1 of the Notice.  Although the Notice is not totally clear on this point, if a taxpayer elects to apply the Elective Safe Harbor, the taxpayer will identify which manufactured products (as identified on Table 1 to the Notice) included in an applicable project are U.S. Manufactured Products and Non-U.S. Manufactured Products and which components (as identified on Table 1 to the Notice) included in an applicable project are U.S. Components.  For each manufactured product and component identified in Table 1 to the Notice, a corresponding domestic content “value” is assigned.  A taxpayer then adds the domestic content value for any manufactured product and component identified by the taxpayer as a U.S. Manufactured Product or U.S. Component.  If the sum of the domestic content values for all such U.S. Manufactured Products and U.S. Components equals or exceeds the applicable domestic content adjusted percentage and all other requirements are satisfied, including the steel and iron requirement, the project will be eligible for the domestic content bonus credit.

In addition to providing the pre-determined values for calculating the Domestic Content Percentage under the Elective Safe Harbor, Table 1 also provides helpful additional guidance regarding identification of components of manufactured products.  For example, Table 1 of the Notice lists components of a PV tracker to include the torque tube, fasteners, slew drive, dampers, motor, controller, and rails.  Notice 2023-38, by contrast, identified a PV tracker as a manufactured product but did not provide any detail regarding the components that make up a PV tracker.  This additional clarity will be helpful for purposes of identifying the components of a manufactured product, even if a taxpayer does not elect to apply the Elective Safe Harbor.

Special Circumstances Under Elective Safe Harbor

If a taxpayer elects for the Elective Safe Harbor to apply to a project, the safe harbor must be applied in its entirety to that project.  In applying the Elective Safe Harbor, only the manufactured products, manufactured product components, and steel and iron components identified in Table 1 of the Notice are taken into account.  If an applicable project includes manufactured products, manufactured product components, or steel or iron components that are not identified on Table 1, those additional items are not taken into account toward calculating the Domestic Content Percentage, satisfying the Adjusted Percentage Rule, or determining whether the project satisfies the steel and iron requirement.  The Notice includes an example in which an interconnection transformer and substation are included in an applicable project but are not taken into account under the Elective Safe Harbor (or the calculation of the Domestic Cost Percentage) because such equipment is not included in Table 1 of the Notice.  If an applicable project does not include a manufactured product, manufactured product component, or steel or iron that is identified on Table 1, such equipment is treated as having a zero value in calculating the Domestic Cost Percentage.  A taxpayer may elect for the Elective Safe Harbor to apply even if the project does not include all manufactured products, manufactured product components, or steel or iron that are identified on Table 1 of the Notice or includes manufactured products, manufactured product components, or steel or iron components that are not identified on Table 1. 

The Notice also includes special rules for calculating the Domestic Cost Percentage and applying the domestic content values from Table 1 of the Notice in the case of (i) claiming the ITC for an applicable project that includes both a PV system and battery storage system and (ii) an applicable project that includes both foreign and domestic manufactured products of the same type, such as a PV system that includes both foreign-made PV panels and U.S.-made PV panels.

Substantiation

The Notice provides that a taxpayer that claims the domestic content bonus credit must comply with general recordkeeping requirements.  In applying the Elective Safe Harbor, a taxpayer will be required to identify the manufactured products and components that are U.S.-sourced, but the Notice does not specify how a taxpayer may substantiate that a certain manufactured product is a U.S. Manufactured Product or that a component is a U.S. Component.  Thus, even if a taxpayer intends to utilize the Elective Safe Harbor, it will continue to be important to work closely with manufacturers to establish qualification for the domestic content bonus credit.

Additional Changes to Notice 2023-38

The Notice includes additional modification to Notice 2023-38. It adds information for hydropower facilities and pumped hydropower storage facilities to the applicable project component safe harbor in Table 2 to Notice 2023-38, and revises Table 2 to Notice 2023-38 to refer to “ground-mount and rooftop photovoltaic system” instead of “utility-scale photovoltaic system.”.

Reliance

The Notice confirms that Treasury and the IRS intend to issue proposed regulations related to the domestic content bonus credit requirements, including the Elective Safe Harbor, and requests comments related to the domestic content bonus credit, including comments related to the Notice and Notice 2023-38.  Taxpayers may rely on Notice 2023-38, as modified by the Notice, for any applicable project the construction of which begins before the date that is 90 days after the publication in the Federal Register of such proposed regulations.  Taxpayers may also rely on the Elective Safe Harbor provided in the Notice for any applicable project the construction of which begins before the date that is 90 days after any future modification, update, or withdrawal of the Elective Safe Harbor.

While the Elective Safe Harbor provides some additional relief to taxpayers seeking to qualify for the domestic content bonus credit (by not requiring a taxpayer use actual direct manufacturing costs of manufactured products for calculating the Domestic Content Percentage), it will still be important for taxpayers to work with suppliers and contractors to verify and document the components that are included in a manufactured product and whether those components are U.S. sourced or non-U.S. sourced.  A taxpayer electing to utilize the Elective Safe Harbor, however, will not be required to obtain manufacturers’ costs of producing manufactured products.  As such, the Notice provides a welcome modification to the rules that were originally adopted in Notice 2023-38.  While some issues remain outstanding, such as the manner in which a taxpayer may substantiate the origin of manufactured products and components, the Elective Safe Harbor and other guidance in the Notice should help taxpayers determine whether a project qualifies for the domestic content bonus credit.