On May 17, 2024, the IRS released Notice 2024-41, which provides new safe harbors for determining certain energy projects’ qualification for the 10% domestic content bonus under the production tax credit (PTC) and investment tax credit (ITC).
The new safe harbor allows taxpayers to determine a project’s domestic content percentage by relying on additive fixed percentages for specifically identified U.S. manufactured components or subcomponents, rather than relying on the manufacturer disclosing its actual direct cost to manufacture products. Projects also can qualify for the domestic content bonus under earlier IRS guidance in Notice 2023-38 by determining an energy project’s total percentage of its manufacturer’s U.S. direct costs of products over all manufacturer’s direct costs of U.S. and non-U.S. products. However, the new safe harbor will make it unnecessary to track down all manufacturer’s costs for many developers and sponsors of energy projects. Gathering supporting information for a manufacturer’s direct costs of a product had become a challenging task for the industry and Notice 2024-41 is welcome guidance for the renewable energy industry.
The Inflation Reduction Act of 2022 (IRA) created a 10% tax credit adder, known as the domestic content bonus credit, for the use of “domestic content” for certain renewable energy projects that qualify for the PTC and ITC under the Internal Revenue Code (IRC). To satisfy the domestic content bonus criteria, taxpayers must construct a project with 100% U.S. content steel and iron (the steel or iron requirement) and incorporate the appropriate “adjusted percentage” of domestically manufactured products (the manufactured products requirement). The adjusted percentage for projects that begin construction in 2024 is 40% (20% for offshore wind), which increases to 55% for projects that begin construction after 2026 (after 2027 for offshore wind). The applicable percentage applies to the percentage of the energy project’s direct cost of manufactured products that are manufactured in the United States.
On May 12, 2023, the IRS released Notice 2023-38 introducing the initial guidance on this bonus program and the standards on which projects will be evaluated. Notice 2024-41 updates the prior IRS guidance.
Categorization of Applicable Project Components
For purposes of qualifying for the domestic content bonus credit, Table 2 of Notice 2023-38 identifies specific project components and manufactured product components that may be found in (i) utility-scale photovoltaic (PV) systems, (ii) land-based wind facilities, (iii) offshore wind facilities and (iv) battery energy storage technologies. Each item listed in this categorization of components must comply with the steel or iron requirement or the manufactured products requirement, as applicable, to obtain the domestic content bonus credit.
Notice 2024-41 modifies this categorization to add “Hydropower Facility, or Pumped Hydropower Storage Facility” as an applicable project under the guidance and to substitute “Utility-scale photovoltaic system” for “Ground-mount and rooftop photovoltaic system.”
New Elective Safe Harbor
To qualify for the domestic content bonus credit, taxpayers implementing the new elective safe harbor must still comply with the steel or iron requirement and the manufactured products requirement promulgated in Notice 2023-38. However, Notice 2024-41 makes certain important changes taxpayers should know.
- Exclusive and Exhaustive List of Project Components — Notice 2023-38 provided a non-exhaustive safe harbor list of common project components for classification as a “steel or iron” component or a “manufactured product” that taxpayers can rely on when claiming the domestic content bonus with respect to their renewable energy project. Notice 2024-41, however, introduces an exclusive and exhaustive set of project components for purposes of determining a certain renewable energy project’s qualification for the domestic content bonus credit. Under the new elective safe harbor, any steel or iron component or manufactured product listed in Table 1 of Notice 2024-41 not utilized in the project shall be deemed to have zero value in calculating the domestic cost percentage. Any steel or iron component or manufactured product utilized in the project but not listed in Table 1 of Notice 2024-41 will not disqualify the taxpayer from using the new elective safe harbor, but such unlisted items will be excluded from consideration in determining the adjusted percentage of domestically manufactured products. Only those products listed as subject to the steel or iron requirements in Table 1 of Notice 2024-41 must satisfy the steel or iron requirements established by Notice 2023-38, and the project does not need to substantiate the steel or iron requirements for any other structural products incorporated into the energy project.
- No Partial Safe Harbor Reliance — Taxpayers must also apply the new elective safe harbor in its entirety. For example, if the project is a solar photovoltaic system (solar PV) facility, the taxpayer must use the component classifications in Table 1 of Notice 2024-41 with respect to solar PV. The taxpayer also is required to use the assigned cost percentages for all the manufactured products and manufactured product components provided in Table 1 that are implemented into the project without substitution, even if they have documentation from a particular equipment manufacturer that the actual U.S. direct costs of a particular product are different than the percentage proposed by the IRS in Table 1 of Notice 2024-41. As a result, taxpayers using the new elective safe harbor must disregard any manufactured product or manufactured product component not listed in Table 1 for purposes of determining the domestic cost percentage.
- Mixed Source Item — Notice 2024-41 introduces the concept of mixed source item (MSI), which is when a taxpayer sources the same type of manufactured product or manufactured product component from foreign and domestic sources for use in a particular renewable energy project. Notice 2024-41 permits such taxpayers to use the new elective safe harbor to determine a single assigned cost percentage for each separate type of MSI in the renewable energy project by establishing a weighted average mathematical formula to determine the project’s U.S. manufactured costs percentage for such components that are sourced from multiple manufacturers. For purposes of determining the assigned cost percentage, Notice 2024-41 provides a weighted formula that applies differently to MSIs that have a nameplate capacity and MSIs that do not have a nameplate capacity.
- BESS Multiplier — Taxpayers who claim the energy tax credit determined under IRC section 48 for renewable energy projects comprised of a solar PV and battery energy storage system (BESS) described in Table 1 of Notice 2024-41 may use the new elective safe harbor and the BESS multiplier, which is based on the energy project’s nameplate capacity, to calculate a single domestic cost percentage for a single renewable energy project.
Below are the “applicable percentage” tables for project components listed in the new elective safe harbor. Each component manufactured in the United States is assigned a U.S. percentage value. For projects that begin construction in 2024 or earlier, at least a 40% U.S. percentage value is required to qualify for the domestic content bonus ITC or PTC.
Certification and Substantiation
Taxpayers will be required to submit a certification to the IRS when relying on the new elective safe harbor for the project’s qualification for the domestic content bonus. The IRS has not prescribed a specific certification form for the domestic content bonus credit. However, Notice 2023-38 gives a comprehensive list of information that must be included with the certification. The list includes the specific type of project and the tax credit it is claiming, the geographic location, the total amount of bonus credit claimed and a requirement that it be signed by an authorized person under penalties of perjury. This certification is required at the time the tax return is filed for the year the credits are claimed and attached to Form 8835 (renewable electricity production credit) or Form 3468 (investment credit).
Taxpayers also are required to keep general records to substantiate that the domestic content requirement has been met. This record keeping requirement is consistent with general record-keeping for tax filings and is not a heightened standard.
