On May 16, 2024, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released Notice 2024-41 (the Notice), providing further guidance on domestic content bonus credit amounts applicable under Sections 45, 45Y, 48, and 48E of the Internal Revenue Code of 1986, as amended (the Code) pursuant to changes authorized by the Inflation Reduction Act of 2022 (IRA). The Notice modifies previously issued guidance under Notice 2023-38 (the Previous Guidance), previously discussed by Wilson Sonsini, and provides for a new elective safe harbor (the New Elective Safe Harbor) for taxpayers claiming domestic content bonus credits.

The Domestic Content Credit Generally

The domestic content bonus credit provides a (i) 10% increased production tax credit (PTC) amount for a qualified facility or (ii) a 10 percentage point (or 2 percentage point if prevailing wage and apprenticeship requirements are not satisfied) increased investment tax credit (ITC) amount for an energy project, qualified facility or energy storage technology, if the Applicable Project satisfies the “domestic content requirement,” and the taxpayer timely submits a certification statement to the IRS.

Key Takeaways

The Notice includes the following additions and clarifications on domestic content rules:

• New Elective Safe Harbor that taxpayers may use to classify Applicable Project Components and Manufactured Product Components and calculate the Domestic Cost Percentage in an Applicable Project for domestic content bonus credit under Sections 45, 45Y, 48, and 48E;
  • Eliminates Ambiguity Regarding Which Applicable Project Components and Manufactured Product Components Count for Taxpayers: Under the Previous Guidance, it was not clear how materials or components that were not expressly listed should be treated. The New Elective Safe Harbor works by creating a definitive list of Applicable Project Components and Manufactured Project Components that can be utilized for the calculation of the Domestic Cost Percentage. Materials or components not listed in the Notice can be disregarded.
  • Taxpayers Not Required to Calculate Direct Costs: The New Elective Safe Harbor allows taxpayers to rely on predetermined “cost percentages” for each Applicable Project Component and Manufactured Product Component instead of having to independently calculate the direct cost percentage of each. That is, in collaboration with the Department of Energy (DOE), the Notice sets certain cost percentages that will apply, meaning that the primary analysis a taxpayer must undertake is in determining whether each Applicable Project Component and Manufactured Product Component is foreign or domestic.
  • Weighting by Nameplate Capacity: The Notice provides methods to weight or adjust the cost percentages assigned to each Applicable Project Component or Manufactured Product Component by nameplate capacity, as applicable, in instances such as combined solar + storage facilities or when projects incorporate certain Applicable Project Components or Manufactured Product Components from a mix of foreign and domestic sources (i.e., using a mix of foreign and domestic PV modules).
• expansion of Applicable Projects under Table 2 in Section 3.04 of the Previous Guidance to include hydropower and pumped hydropower storage facilities;
• redesignation of “Utility-scale photovoltaic system” Applicable Project as “Ground-mount and rooftop photovoltaic system;”
• examples illustrating how taxpayers may use Table 1 of the Notice with respect to Applicable Projects; and
• the inclusion of specified Manufactured Product Components related to Applicable Projects provided under the Previous Guidance.

The New Elective Safe Harbor

In General. Section 4.02 of the Notice introduces the New Elective Safe Harbor, which provides for the classification of Applicable Project Components and Assigned Cost Percentages for the identified Manufactured Products and Manufactured Product Components with respect to such project. The New Elective Safe Harbor is consistent with the modified Table 2 under the Previous Guidance, but also provides cost percentage information from the DOE to calculate the Domestic Cost Percentages required to satisfy the Adjusted Percentage Rule.

Application for Domestic Content Requirements. The Notice provides classifications and cost percentages under Table 1 of Section 4.04, which will be accepted by the IRS for identified Manufactured Products and Manufactured Product Components to determine compliance with the Steel or Iron Requirement and for calculating the Domestic Cost Percentage, provided that all other requirements under the Previous Guidance are still met. Taxpayers electing to use the New Elective Safe Harbor for Applicable Projects must use the Applicable Project Components, Manufactured Product Components and the cost percentages listed in Table 1 as the exclusive and exhaustive set of Applicable Project Components and Manufactured Product Components to determine compliance with the Domestic Content Requirement.

Applicable Project Eligibility. Applicable Projects are not required to be composed of the full Applicable Project Components list in Table 1, and each Applicable Project Component listed is not required to be constituted of the full Manufactured Product Components in Table 1, respectively. The New Elective Safe Harbor may still be used even if all Table 1 entries are not used as inputs for Applicable Projects or Manufactured Products, or if an Applicable Project contains additional inputs not listed in Table 1. Project Components or Manufactured Product Components that are not utilized as an input are treated as having no value in calculating the Domestic Cost Percentage. Unlisted Applicable Project or Manufactured Product Components will not disqualify taxpayer’s from electing the New Elective Safe Harbor, but unlisted items will not count toward the Adjusted Percentage Rule.

Treatment of Inconsistencies Between the Previous Guidance and the Notice. The Notice affirms that, to the extent Table 2 of the Previous Guidance and Table 1 of the Notice are inconsistent with respect to the classification of Applicable Project Components or Manufactured Product Components, Table 1 of the Notice will control.

New Elective Safe Harbor and the Previous Guidance. Generally, the requirements under the Previous Guidance for domestic content bonus credits must still be met under the New Elective Safe Harbor regime unless otherwise specified.

No Partial Safe Harbor Reliance. Taxpayers making the election must apply Table 1 of the Notice for their specific Applicable Project, including Project Components, Manufactured Product Components, Assigned Cost Percentages, etc., without substitution.

Determining Domestic Cost Percentage. For a given Applicable Project, electing taxpayers determine the Domestic Cost Percentage through Table 1 of the Notice and add the Assigned Cost Percentages for each listed U.S. Manufactured Product and Component (as defined in the Previous Guidance). Listed Products and Components that are not part of the Applicable Project are assigned zero value for the Assigned Cost Percentage, while unlisted Products or Components are disregarded for Domestic Cost Percentage purposes.

Foreign and Domestic Sourced Products and Components. The Notice provides a mechanism for taxpayers to adjust the Assigned Cost Percentage of Manufactured Product Components if such components come from a mix of both foreign and domestic sources. In essence, for example, if a taxpayer has a mix of foreign and domestically sourced PV modules, they must right-size the Assigned Cost Percentage based upon the nameplate capacity value of the PV modules. Specifically, taxpayers who source the same Manufactured Product or Component (i.e., components or products listed in the same Table 1 row) from both foreign and domestic sources (a Mixed Source Item or “MSI”) may determine a single Assigned Cost Percentage for each separate MSI. For MSIs that have a nameplate capacity (e.g., PV modules), a weighted average formula may be used to determine the Assigned Cost Percentage for each type of MSI. For MSIs that do not have a nameplate capacity, these MSIs are still required to utilized the weighted average formula, but must use the nameplate capacity of the associated Applicable Project Component that the MSI is directly integrated into. If, however, a MSI without a nameplate capacity has multiple “units” that are both foreign and domestically sourced and directly integrated into the same Applicable Project Component without a nameplate capacity, then all of the MSIs of this category must be treated as foreign-sourced. The Notice provides examples where a taxpayer sources some of its PV modules domestically, and the Adjusted Cost Percentage is effectively reduced to only give “credit” for the domestic PV modules. In contrast, the Notice gives the example of a rooftop solar system that uses an inverter, which incorporates printed circuit board assemblies (PCBAs) from a mix of foreign and domestic sources. Because the PCBAs are incorporated into the inverter (an Applicable Project Component) that does not have a nameplate rating, the domestically-sourced PCBAs cannot count towards the Domestic Cost Percentage.

Production Costs. Table 1 of the Notice introduces a line item labeled “Production” under Manufactured Product Component. “Production” refers to the production cost of a relevant Manufactured Product and may be included in the Domestic Cost Percentage only if all Manufactured Product Components for such Manufactured Product are domestically produced.

Solar Plus Storage. Electing taxpayers claiming a credit under Section 48 of the Code may determine a single Domestic Cost Percentage that applies to the combined solar + storage system. That is, taxpayers do not need to independently determine the Domestic Cost Percentage for the solar facility and separately for the battery in order to be in compliance—they are assigned a single Domestic Cost Percentage. The Notice provides for a weighted calculation, whereby the total Assigned Cost Percentage of the solar facility is weighted by its nameplate capacity and the battery system is weighted by a multiplier that was determined by the DOE. This multiplier takes into account the fact that battery electric storage systems do not have nameplate capacity ratings, so the multiplier functions as a weighting tool to allow the ultimate Domestic Cost Percentage to be weighted by the respective capacity ratings of the solar and storage. For an illustrative example, please see Example 6 in the Notice.

Certification. Taxpayers must notify the IRS of their election in the manner provided by Section 5 of the Previous Guidance. The certification statement must be attached to an applicable IRS Form (e.g., Form 8835, Renewable Electricity Product Credit or Form 3468, Investment Credit) and submitted for the first taxable year in which the taxpayer reports a domestic content credit amount for such Applicable Project.

Substantiation. Taxpayers reporting a domestic content bonus credit amount must meet general recordkeeping requirements under Section 6001 of the Code to substantiate that the Domestic Content Requirement has been met.

Examples of the New Elective Safe Harbor Method. The Notice provides examples to illustrate how taxpayers apply the New Elective Safe Harbor using Table 1 in multiple scenarios.

Example 1

In taxable year 2024, a taxpayer purchases a 5-megawatt alternating current (MWac) land-based wind facility (Project A) from Contractor under an engineering, procurement, and construction contract (EPC contract) and places Project A in service. The taxpayer makes a valid election to use the New Elective Safe Harbor to qualify for the domestic content bonus credit amount under Section 45 of the Code. Project A is comprised of four Applicable Project Components identified in Table 1 of the Notice: wind turbine, wind tower flanges, tower, and steel rebar in foundation. For taxable year 2024, Section 45(b)(9)(C) of the Code provides that, for purposes of the Adjusted Percentage Rule, the adjusted percentage is 40% for qualified facilities that are not offshore wind facilities.

The taxpayer identifies the tower and steel rebar in foundation as steel or iron products in accordance with Table 1 of the Notice. The tower and steel rebar in foundation are manufactured in the United States and meet the Steel or Iron Requirement described in section 3.02 of the Previous Guidance. The taxpayer further identifies the wind turbine and the wind tower flanges as Manufactured Products in accordance with Table 1 of the Notice. The wind turbine is manufactured in the United States and has four Manufactured Product Components: (1) blades, (2) rotor hub, (3) nacelle, and (4) power converter. The blades and nacelles are manufactured in the United States and the rotor hub and power converter are not manufactured in the United States. The wind turbine is, therefore, a Non-U.S. Manufactured Product because some of its Manufactured Product Components are not produced in the United States. The wind tower flanges are not manufactured in the United States and therefore are Non-U.S. Manufactured Products. Two Manufactured Product Components identified in Table 1 of the Notice are U.S. Components, namely, the blades and nacelle of the wind turbine. Table 1 of the Notice identifies the blades as constituting 31.2% and the nacelle as constituting 47.5% of the total cost of the Manufactured Products of the land-based wind facility.

Project A satisfies the Adjusted Percentage Rule because its Domestic Cost Percentage of 78.7% (31.2% + 47.5%) exceeds the adjusted percentage that applies to Project A (40%).

Example 2

In taxable year 2024, a taxpayer purchases a 100-megawatt direct current (MWdc) ground-mounted PV (tracker) (Project B) from Contractor under an EPC contract, places the project in service, and makes a valid election to use the New Elective Safe Harbor to qualify for the domestic content bonus credit amount under Section 48 of the Code. Project B is an energy project that is comprised of five Applicable Project Components identified in Table 1 of the Notice for a ground-mounted PV (tracker): (1) PV modules, (2) inverters, (3) PV trackers, (4) steel piles, and (5) steel rebar in foundation. For purposes of the Adjusted Percentage Rule, the adjusted percentage is 40%for energy projects that are not offshore wind facilities.

Using Table 1 of the Notice, the taxpayer identifies the steel piles and steel rebar in foundation as steel or iron products and the PV modules, inverters, and PV trackers as Manufactured Products. All of the steel piles and steel rebar in foundation are manufactured in the United States and meet the Steel or Iron Requirement. Two sets of PV modules are used in the Applicable Project B. One set has a capacity of 60 MWdc and uses PV modules manufactured in the United States, all of whose Manufactured Product Components, as identified in accordance with Table 1 of the Notice, are also manufactured in the United States. The remaining set has a capacity of 40 MWdc and uses PV modules that are not manufactured in the United States and that have no U.S. Components. None of Applicable Project B’s PV inverters are manufactured in the United States or have any U.S. Components.

The PV trackers used in Applicable Project B are manufactured in the United States and have seven categories of Manufactured Product Components (torque tubes, fasteners, slew drives, dampers, motor, controllers, and rails) of which a portion of the torque tubes are manufactured in the United States. The PV trackers are associated and directly integrated with all the PV modules used in Applicable Project B. The torque tubes manufactured in the United States are the only torque tubes associated and directly integrated with 80 MWdc of Applicable Project B’s PV modules. The remainder of torque tubes and other PV tracker components are not manufactured in the United States. The PV trackers are Non-U.S. Manufactured Products because some of their Manufactured Product Components are not produced in the United States.

Applicable Project B’s steel or iron products identified in Table 1 of the Notice meet the Steel or Iron Requirement. Table 1 of the Notice identifies the torque tube Manufactured Product Component of a PV tracker as constituting 9.7% of the total cost of manufactured products for this type of Applicable Project. Table 1 of the Notice identifies the Manufactured Product Components of a PV module as constituting 54.8% of the total cost of Manufactured Products for an Applicable Project that is a ground-mounted PV (tracking). In addition to these costs, Table 1 of the Notice provides that the cost to produce PV modules for such an Applicable Project constitutes 11.5% of the total cost of Manufactured Products for such an Applicable Project. Based on a nameplate capacity weighted average of Applicable Project Component categories and Manufactured Product Component categories identified in Table 1 of the Notice, the total Assigned Cost Percentage attributable to the PV modules of Project B would be calculated as: (54.8% + 11.5%) x 60 / 100 = 39.8%. Based on a nameplate capacity weighted average of Applicable Project Components associated with torque tubes, the Assigned Cost Percentage attributable to the torque tubes of Project B would be calculated as: 9.7% x 80 / 100 = 7.8%. Project B’s overall Domestic Cost Percentage is: 39.8% + 7.8% = 47.6%. Project B satisfies the Adjusted Percentage Rule because its Domestic Cost Percentage of 47.6% exceeds the adjusted percentage that applies to Project B (40%).

Modification of the Previous Guidance

Modification of Applicable Projects. The Notice modifies Table 2 provided in Section 3.04 of the Previous Guidance to include hydropower facilities and pumped hydropower storage facilities, along with a list of Applicable Project Components. The revised Table also includes categorization information with respect to the Steel or Iron Requirement, and the Manufactured Products Requirement, respectively. Further, the Notice redesignates the “Utility scale photovoltaic system” Applicable Project as the “Ground-Mount and rooftop photovoltaic system” and expounds upon certain Manufactured Product Components from the Previous Guidance (in particular with respect to inverters).

Modifications to Certain Manufactured Product Components. Taxpayers may treat any Applicable Project Components or Manufactured Product Components listed in Table 1 of the Notice as also listed in Table 2 (as modified by the Notice) in the Previous Guidance.

Request for Comments

Treasury and IRS request comments on the New Elective Safe Harbor Method, including:

• whether any other technologies or technology subsets should be addressed by Table 1 of the Notice and what criteria should be used for subsequent additions to Table 1;
• how often the tables should be updated;
• whether the nameplate capacity allocation used for calculating domestic content for a mix of foreign and domestic Manufactured Product Components should be clarified or expanded upon; and
• how the Assigned Cost Percentages should be allocated to Applicable Project Components which include a mix of foreign and domestic Manufactured Product Components.

Written comments should be submitted by July 15, 2024.

Effective Date

The Notice states that taxpayers may rely on the rules described in the Previous Guidance and modifications thereto (including the Notice) for any project the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the federal register.