Break Out Your Calculator: IRS Releases Domestic Content Bonus Credit Guidance
Highlights
- Following the release of energy community bonus credit and low-income community bonus credit guidance, the U.S. Department of the Treasury and IRS recently provided taxpayers with the domestic content bonus credit guidance.
- Notice 2023-38 provides taxpayers with preliminary guidance for the domestic content rules, including the calculation for determining whether manufactured products are deemed produced in the United States.
- Notice 2023-38 also provides a non-exhaustive list of safe harbor classifications for certain solar, wind and energy storage components.
Following the release of energy community bonus credit and low-income community bonus credit guidance, the U.S. Department of the Treasury and IRS recently provided taxpayers with the domestic content bonus credit guidance. With the release of the domestic content guidance in Notice 2023-38, taxpayers now have preliminary guidance for all three bonus credit opportunities available under the Inflation Reduction Act (IRA).
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Holland & Knight Insight: The Treasury Department and IRS intend to propose regulations that will apply to taxable years ending after May 12, 2023. In the interim, taxpayers can rely on the rules in Notice 2023-38 for construction that begins prior to 90 days after the publication of those proposed regulations. |
Domestic Content Bonus Credit Basics
The domestic content bonus credit amount is available if steel, iron and manufactured products of a qualified facility or energy property were produced in the United States as determined under the rules discussed below.
The domestic content bonus credit amounts available are as follows:
|
Credit |
Base amount1 |
Domestic Content Bonus Credit Amount |
Example |
|
Section 45 Production Tax Credit (PTC) or Section 45Y Clean PTC |
PTC rate of $2.75 cents per kilowatt-hour (kWh) |
Increased by 10 percent of the amount that can be claimed |
Bonus Amount: $0.275 cents per kWh Total PTC: 3.025 cents per kWh |
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Section 48 Investment Tax Credit (ITC) or Section 48E Clean ITC |
30 percent ITC of property basis
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Increased by 2 percent if prevailing wage and apprenticeship requirements are not satisfied, 10 percent if prevailing wage and apprenticeship requirements satisfied |
Bonus Amount: 10 percent Total ITC: 40 percent |
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Holland & Knight Insight: For taxpayers electing direct payment of a tax credit under Section 6417, may face reductions in the amount paid if the domestic content requirements are not satisfied for projects construction of which begins after 2023. Exceptions to the reduction in direct pay are available where a waiver is obtained because 1) the inclusion of steel, iron or manufactured products that are produced in the United States increases the overall costs of construction of qualified facilities by more than 25 percent or 2) relevant steel, iron or manufactured products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality. This notice does not extend those waivers to the domestic content bonus or otherwise address those waivers. Waiver provisions are expected to be addressed in forthcoming guidance on the direct pay and transferability under Sections 6417 and 6418. |
Steel and Iron
Under the domestic content rules, the steel and iron requirement is met if, consistent with 49 CFR § 661.5(b) and (c), all manufacturing processes with respect to any steel or iron items that are "Applicable Project Components" take place in the U.S. (excluding metallurgical processes involving refinement of steel additives). An Applicable Project Component includes article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into the final project.
Importantly, under the Notice, the steel and iron requirement only applies to Applicable Project Components that 1) are construction materials made primarily of steel or iron and 2) are structural in function.
Any steel or iron used in manufactured products is subject to the manufactured product rule discussed below. For example, nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, door hinges and similar items made of steel or iron that are not structural in function are not subject to the steel and iron requirement but instead are subject to the manufactured product rule.
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Holland & Knight Insight: The requirements for iron and steel that are Applicable Project Components rely on the standards developed by the Federal Transit Administration (FTA) in the Buy America context. For Buy America compliance of iron and steel, U.S. manufacturers often have compliance certificates readily available that confirm the iron and steel is manufactured in the United States. |
Manufactured Products
Under the domestic content rules as announced by the Notice, all manufactured products must be produced in the United States, and their components also must be of U.S. origin, i.e., all manufactured products must be "U.S. Manufactured Products" (subject to the rules described below).2 A "Manufactured Product" is an item produced as a result of the manufacturing process, defined as the application of processes to alter the form or function of materials or of elements of a product in a manner adding value and transforming those materials or elements so that they represent a new item functionally different from that which would result from mere assembly of the elements or materials.
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Holland & Knight Insight: Mere assembly of components and testing of a manufactured product is likely insufficient to establish that a "Manufactured Product" was manufactured in the United States. In instances where taxpayers only have limited information about the manufacturing processes applicable to a manufactured product, taxpayers will need to look down the supply chain for purposes of applying the domestic content rules. |
If all manufactured products are not U.S. Manufactured Products, then a taxpayer must apply the "Adjusted Percentage Rule." Under such rule, manufactured products are deemed to have been produced in the United States if not less than the adjusted percentage of the total costs of all such manufactured products are attributable to manufactured products or components that are mined, produced or manufactured in the United States. A "Manufactured Product Component" is any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into a manufactured product.
The adjusted percentage is:
|
Begin Construction Year |
Adjusted Percentage (for all but Offshore Wind) |
Offshore Wind Adjusted Percentage |
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Before 2025 |
40 percent |
20 percent |
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2025 |
45 percent |
27.5 percent |
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2026 |
50 percent |
35 percent |
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2027 |
55 percent |
45 percent |
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After 2027 |
55 percent |
55 percent |
To determine whether the Adjusted Percentage Rule is met, the Notice provides the following steps.
Calculate the Domestic Manufactured Products and Components Cost
The Domestic Manufactured Products and Components Cost equals the sum cost of all:
- U.S. manufactured products
- All components mined, produced or manufactured in the United States (a "U.S. Component") that are part of a non-U.S. Manufactured Product
As stated above, a manufactured product is a "U.S. Manufactured Product" if 1) all of the manufacturing processes for the manufactured product take place in the United States, and 2) all of the components of the manufactured product are of U.S. origin. A component is a U.S. component if it is manufactured or produced (or mined if applicable) in the United States, regardless of the origin of its subcomponents.
Only direct material and labor costs are includible in the cost of a U.S. manufactured product or U.S. component. Direct costs of incorporating the Applicable Project Components into the Applicable Project are not counted in the Domestic Manufactured Products and Components Cost.
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Example: U.S. versus Non-U.S. Manufactured Product Manufactured Product 1 is manufactured in the United States and has two components (Components 1A and 1B) that are both manufactured in the United States, and the direct cost of the Manufactured Product equals $500. Manufactured Product 1 is a U.S. Manufactured Product because it and both of its components are produced in the United States. Therefore, all $500 of direct costs associated with Manufactured Product 1 are included in the Domestic Manufactured Products and Components Cost. Manufactured Product 2 is manufactured in the United States and has three components (Components 2A, 2B and 2C). The direct cost of the Manufactured Product equals $1,000. Component 2A and Component 2B are manufactured in the United States with direct costs of $300 each. Component 2C is manufactured outside of the United States with direct costs of $250. Manufactured Product 2 is a Non-U.S. Manufactured Product because Component 2C is manufactured outside of the United States. Components 2A and 2B are U.S. Components because they are manufactured in the United States. Therefore, only $600 of the direct costs associated with Components 2A and 2B are included in the Domestic Manufactured Products and Components Cost. Therefore, the total Domestic Manufactured Products and Components Cost equals $1,100. |
Calculate the Total Manufactured Products Cost
The Total Manufactured Products Cost is the sum of the costs of each manufactured product. Only direct costs are includible in the total manufactured products cost.
Determine the Domestic Cost Percentage
To determine the Domestic Cost Percentage, divide the Domestic Manufactured Products and Components Cost by the Total Manufactured Products Cost. If the Domestic Cost Percentage exceeds the Adjusted Percentage in the chart above, then the of the domestic content rules have been met as they apply to manufactured products.
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Example: Determining the Domestic Cost Percentage Continuing the example above, assume the Total Manufactured Products Cost is $1,800. Project is placed in service in 2023. Domestic Manufactured Products and Components Cost: $1,100 Total Manufactured Products Cost: $1,800 Domestic Cost Percentage: 61 percent Because 61 percent exceeds 40 percent, all Manufactured Products of Project are deemed to be produced in the U.S. for purposes of the domestic content rules. |
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Holland & Knight Insight: Recordkeeping will be key to the domestic content analysis (and in the event of any IRS audit). Taxpayers will need to work with suppliers to determine the source of steel, iron and any manufactured products (and the components thereof) and should keep records detailing the analysis that underlies Domestic Content Bonus certifications. |
Safe Harbor Classifications
The Notice also includes safe harbor classifications for certain components prevalent in solar, wind and battery storage projects. The safe harbor classifications dictate the appropriate test to apply to determine if the domestic content rules have been met.
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Applicable Project |
Applicable Project Component |
Categorization |
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Utility-Scale Photovoltaic System |
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Steel photovoltaic module racking |
Steel/Iron |
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Pile or ground screw |
Steel/Iron |
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Steel or iron rebar in foundation (e.g., concrete pad) |
Steel/Iron |
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Photovoltaic tracker |
Manufactured Product |
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Photovoltaic module (which includes the following manufactured product components, if applicable: photovoltaic cells, mounting frame or backrail, glass, encapsulant, backsheet, junction box (including pigtails and connectors), edge seals, pottants, adhesives, bus ribbons and bypass diodes) |
Manufactured Product |
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Inverter |
Manufactured Product |
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Land-Based Wind Facility |
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Tower |
Steel/Iron |
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Steel or iron rebar in foundation (e.g., spread footing) |
Steel/Iron |
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Wind turbine (which includes the following manufactured product components, if applicable: the nacelle, blades, rotor hub and power converter) |
Manufactured Product |
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Wind tower flanges |
Manufactured Product |
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Offshore Wind Facility |
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Tower |
Steel/Iron |
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Jacket foundation |
Steel/Iron |
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Wind tower flanges |
Manufactured Product |
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Wind turbine (which includes the following manufactured product components, if applicable: the nacelle, blades, rotor hub and power converter) |
Manufactured Product |
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Transition piece |
Manufactured Product |
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Monopile |
Manufactured Product |
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Inter-array cable |
Manufactured Product |
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Offshore substation |
Manufactured Product |
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Export cable |
Manufactured Product |
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Battery Energy Storage Technology |
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Steel or iron rebar in foundation (e.g., concrete pad) |
Steel/Iron |
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Battery pack (which includes the following manufactured product components, if applicable: cells, packaging, thermal management system and battery management system) |
Manufactured Product |
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Battery container/housing |
Manufactured Product |
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Inverter |
Manufactured Product |
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Holland & Knight Insight: The safe harbor guidance provides much-needed clarity regarding certain common energy projects. Additional guidance is likely needed with respect to newer technologies eligible under Sections 45, 45Y, 48 and 48E, such as renewable natural gas projects newly eligible as qualified biogas property and nuclear projects eligible under Section 45Y or 48E. |
Notes
1 This assumes satisfaction of the prevailing wage and apprenticeship requirements. The IRS provided guidance on those requirements in Notice 2022-61.
2 Notice 2023-38 clarifies that the origin of subcomponents is irrelevant.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.