The U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) have modified a framework relating to renewable energy projects that qualify for the domestic content bonus tax credit (the “DC Adder”) under Sections 45, 45Y, 48 and 48E of the Internal Revenue Code (the “Code”).

The guidance also offers a new safe harbor (the “New Elective Safe Harbor”) for taxpayers to qualify their energy projects for the DC Adder. Notice 2024-41 (the “Notice”) modifies guidance in Notice 2023-38 (the “Prior Notice”). Capitalized terms not defined herein shall have the meanings set forth in the Notice or Prior Notice.

Before Treasury and the IRS issue proposed regulations on domestic content, taxpayers can rely on the Prior Notice, as modified by the Notice, for projects that begin construction before the date that is 90 days after the proposed regulations are published.

Highlights of the Notice include:

• The New Elective Safe Harbor, which uses a pre-defined table of cost percentages to determine the domestic cost percentage.
• An expansion of the list of Applicable Projects to include hydropower and pumped hydropower storage facilities, providing clarity on component classifications for such projects.
• A redesignation in the list of Applicable Projects of “utility scale photovoltaic systems” as “ground-mount and rooftop photovoltaic systems,” applying the applicable project component categorizations to a wider selection of solar projects.
• The inclusion of certain Manufactured Product Components with respect to previously listed Applicable Projects, expanding the list of identifiable and concrete components for taxpayers to consider in their calculation for the Domestic Cost Percentage.

The DC Adder — Background

• Under the Inflation Reduction Act of 2022, projects qualifying for renewable energy tax credits under Section 45 (production tax credit), Section 45Y (clean energy production tax credit), Section 48 (investment tax credit) or Section 48E (clean electricity investment tax credit) of the Code may also qualify for the DC Adder if such projects have sufficient domestic content.
• The DC Adder is worth up to an additional 10% for the production tax credit (i.e., 110% of the “full” rate) or an additional 10% of qualifying costs for the investment tax credit.
• The Prior Notice describes two requirements that must be met to qualify for the DC Adder:
  • The Steel or Iron Requirement.
  • The Manufactured Product Requirement.
• Both the Steel or Iron Requirement and the Manufactured Product Requirement must be satisfied for a project to qualify for the DC Adder.
• To comply with the Manufactured Product Requirement, taxpayers must calculate direct costs of Manufactured Product Components. This requirement has presented unique challenges in data gathering, substantiation and verification.

Observation: The Prior Notice created uncertainty regarding which components are considered “Manufactured Products.” It also failed to address the unwillingness of a manufacturer to provide direct cost information, as this information also reveals the manufacturer’s implied profit on the sale to its customer. The New Elective Safe Harbor alleviates this concern by providing a predetermined allocation of costs.

New Elective Safe Harbor

• As an alternative to the existing framework of calculating the Domestic Cost Percentage, the New Elective Safe Harbor provides for component classifications and associated percentages for each identified Manufactured Product or Manufactured Product Component that can be added up to determine the Assigned Cost Percentage. To that end, the Notice provides a new table listing Applicable Project Components and Manufactured Product Components for certain energy projects (“Table 1”).
• Table 1 contains an exclusive and exhaustive list of steel or iron products, Manufactured Products, and Manufactured Product Components that will be considered for the purposes of calculating the Domestic Cost Percentage. However, an Applicable Project need not contain all items listed in Table 1 for the specific type of energy project for it to be eligible for the New Elective Safe Harbor. Further, the Applicable Project is not barred from the New Elective Safe Harbor if it contains components not listed in Table 1. The Notice provides that in the above situations, such components will be assigned a value of zero for the calculation to determine the Domestic Cost Percentage.
• Taxpayer must opt into the New Elective Safe Harbor and notify the IRS of such election on the Domestic Content Certification Statement.

Observation: The New Elective Safe Harbor addresses the lingering uncertainty with making a DC Adder qualification determination for those technologies listed in Table 1. However, Table 1 only includes solar PV, land-based wind and BESS. As such, the New Elective Safe Harbor does not provide much more clarity on other types of energy property that otherwise qualify for the DC Adder.

• A taxpayer electing the New Elective Safe Harbor must apply the entirety of Table 1 specific to the Applicable Project. That is, a taxpayer cannot elect the New Elective Safe Harbor for an Applicable Project and also use the Domestic Cost Percentage calculation in the framework outlined in the Prior Notice.
• All other provisions in the Prior Notice continue to apply.

Observation: The New Elective Safe Harbor answers the question regarding which project components are considered steel/iron or Manufactured Products for purposes of the DC Adder and eliminates having to rely on cost information from the manufacturers. While the Notice makes clear that a taxpayer is not required to use the New Elective Safe Harbor to qualify for the DC Adder, our expectation is that, for listed technologies, qualifying under the New Elective Safe Harbor will be preferred by tax equity investors, financing parties, and tax credit purchasers.

Foreign And Domestic-Sourced Manufactured Products And Manufactured Product Components

• A Manufactured Product or Manufactured Product Component listed in Table 1 and sourced from both domestic and foreign sources is considered a “Mixed Source Item.”
• The Notice provides two formulas to determine the Assigned Cost Percentage of the Mixed Source Item, depending on whether the Mixed Source Item has a nameplate capacity on its own. The formulas take into account the Assigned Cost Percentage in Table 1, the nameplate capacity of the Mixed Source Item, and whether such Mixed Source Item contains multiple units sourced from domestic and foreign sources.

Observation: While the Notice makes it easier to make a DC Adder determination, input from manufacturers is still required, specifically with respect to determining whether its component is “manufactured” domestically. For Manufactured Products made from both U.S. and foreign components, the above calculation is used to make the DC Adder determination.

• Production Costs – Table 1 also includes “production costs,” which the Notice clarifies is not a Manufactured Product Component but may be included in the calculation of the Domestic Cost Percentage only if all the Manufactured Product Components of a Manufactured Product are domestically produced. The Notice further clarifies that even if a Manufactured Product contains Manufactured Product Components not listed in Table 1 or if items in the table are not part of such Manufactured Product, taxpayers may still include production costs if the remaining Manufactured Product Components in Table 1 that are part of the Manufactured Product “are mined, produced, or manufactured in the United States.”

Observation: Given that production costs carry significant Assigned Cost Percentage values in Table 1, taxpayers will need to consider how domestically sourced Manufactured Product Components for a Manufactured Product can help unlock production costs to increase the overall Domestic Cost Percentage.

Combined Solar And Storage Systems As Part Of A Single Energy Project

• Solar and storage systems qualifying for the Section 48 credit are eligible to elect the New Elective Safe Harbor. To calculate the Domestic Cost Percentage of such systems as a single energy project, the Notice provides a formula using a “BESS Multiplier,” which converts the nameplate capacity of a BESS into a proportional equivalent nameplate capacity of a solar photovoltaic system. The BESS Multiplier provided in the Notice may be used only for energy projects for which a taxpayer makes a valid election for the New Elective Safe Harbor under the Notice.

Observation: Addressing energy projects that include both PV and BESS components is welcome guidance, as these projects are becoming prevalent. That said, the above applies only when the investment tax credit is being claimed for both the PV and BESS components.

Modification To The Prior Notice

• Table 2 in the Prior Notice provides a non-exhaustive list of the classification of certain Applicable Project Components as steel, iron or Manufactured Products.
• The Notice updates Table 2 in section 3.04 of the Prior Notice to include hydropower facilities and pumped hydropower storage facilities as Applicable Projects. It also includes a list of Applicable Project Components and their categorization as either steel/iron or Manufactured Product. The inclusion of hydropower projects among applicable projects provides further clarity on what components Treasury and the IRS consider in the domestic content determination.
• Table 2 is also updated to replace “Utility-scale photovoltaic system” with “Ground-mount and rooftop photovoltaic system,” which applies the list of applicable project components to a wider range of solar projects.
• The Notice treats any Applicable Project Component and Manufactured Product Component in Table 1 as also listed on Table 2 of the Prior Notice. In case of inconsistency between the two tables, Table 1 will control.

Observation: The inclusion in Table 2 provides more certainty regarding how Treasury and the IRS will evaluate a taxpayer’s determination that a project qualifies for the DC Adder. Technologies not listed in the table will be at a disadvantage in determining eligibility for the DC Adder as compared to technologies benefiting from inclusion in Table 2.

OTHER REQUIREMENTS

• Certification Requirement – The certification requirement described in the Prior Notice continues to apply. It requires a taxpayer claiming the DC Adder to certify to the IRS that it has met the domestic content requirement, using an attachment to IRS Form 8835, IRS Form 3468, or other applicable form. To opt into the New Elective Safe Harbor, a taxpayer must affirmatively indicate such election on the Domestic Content Certification Statement described in section 5.01(2)(c) of the Prior Notice.
• Recordkeeping Requirements – The recordkeeping requirement described in the Prior Notice continues to apply. It requires a taxpayer claiming the DC Adder to maintain and preserve “sufficient records” to establish that a project qualifies for the DC Adder.