May 29, 2024

Breaking Down the New Domestic Content Safe Harbor Guidance

Holland & Knight Alert
Nicole M. Elliott | Amish Shah | Mary Kate Nicholson | Brad M. Seltzer | Roger David Aksamit | Joshua David Odintz | Bryan Marcelino | Daniel Graham Strickland | Kenneth W. Parsons | Eli Brander | Rachel T. Provencher

Highlights

  • The IRS on May 16, 2024, issued Notice 2024-41, which provides updated guidance regarding the domestic content bonus credit under Sections 45, 48, 45Y and 48E of the Internal Revenue Code.
  • The new notice modifies previously issued Notice 2023-38, which provided initial safe harbor classifications for Applicable Project Components for certain technologies eligible for a production tax credit or an investment tax credit.
  • This Holland & Knight alert examines the state of the domestic content bonus credit after the release of Notice 2024-41.

The IRS issued Notice 2024-41 on May 16, 2024, which provides updated guidance regarding the domestic content bonus credit under Sections 45, 48, 45Y and 48E of the Internal Revenue Code. The new notice modifies previously issued Notice 2023-38, which provided initial safe harbor classifications for Applicable Project Components for certain technologies eligible for a production tax credit (PTC) or an investment tax credit (ITC). (See Holland & Knight's previous alert, "Break Out Your Calculator: IRS Releases Domestic Content Bonus Credit Guidance," May 17, 2023.) Notice 2024-41 modifies and adds to the previously issued safe harbor classifications and provides for a new elective cost safe harbor for purposes of calculating the domestic content percentage.

This Holland & Knight alert breaks down the state of the domestic content bonus credit after the release of Notice 2024-41.

Safe Harbor for Classification

Notice 2023-38 previously provided safe harbor classifications for applicable project components as either subject to the Steel and Iron Rule or the Manufactured Project Rule. In particular, Notice 2023-38 provided safe harbor classifications for solar, wind and battery energy storage projects. Notice 2024-41 modifies those previously provided classifications by identifying additional Manufactured Product Components with respect to previously listed Manufactured Projects.

In addition to the classifications previously provided for in Notice 2023-38, Notice 2024-41 provides a safe harbor classification for hydropower and pumped hydropower storage facilities. There remain other PTC- and ITC-eligible technologies for the which the IRS has not yet provided a safe harbor classification.

 

Holland & Knight Insight

Notice 2024-41 provides that "Taxpayers may rely on Notice 2023-38, as modified by this notice, for the domestic content bonus credit requirements for any Applicable Project the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations on the domestic content bonus credit requirements in the Federal Register." Taxpayers relying on Notice 2023-38 for the safe harbor classification of Applicable Project Components should consult the updated tables provided in Notice 2024-41 to determine what is steel and iron, a Manufactured Product and a Manufactured Product Component.

Elective Safe Harbor for Domestic Costs

For purposes of calculating the Domestic Cost Percentage, Notice 2023-38 requires that costs that are included in the numerator and denominator are the direct materials and direct labor costs that are paid or incurred by the manufacturer of the Manufactured Product. Notice 2024-41 provides an elective safe harbor for solar, wind and battery storage projects for calculating the Domestic Cost Percentage. If a taxpayer elects to apply the safe harbor, it must use it for the entire Applicable Project.

Under the elective safe harbor, a taxpayer must refer to Notice 2024-41, Table 1, and choose the appropriate Applicable Project. Second, the taxpayer must confirm that all items identified as steel and iron were produced in the U.S. Third, the taxpayer must determine with respect to each listed Manufactured Product Component whether it was manufactured in the U.S. Next, the Assigned Cost Percentages (provided in Table 1) for each listed U.S. Manufactured Product of the Applicable Project must be totaled. This total value is the Domestic Cost Percentage for purposes of the New Elective Safe Harbor.

For Manufactured Products or Manufactured Product Components that are from both foreign and domestic sources, a portion of the Assigned Cost Percentage is available based on nameplate capacity of such item or, if not available for such item, for the associated Applicable Project Components. Notice 2024-41 also provides similar rules for energy properties that comprise both solar and battery energy storage to determine a single Domestic Cost Percentage.

The Assigned Cost Percentage for Production Costs is available only if all of the Manufactured Product Components of a Manufactured Product are domestically produced.

In totaling the Assigned Cost Percentages, if a taxpayer's Applicable Project does not include the all of the Applicable Project Components or Manufactured Product Components provided in Table 1, the taxpayer must treat the missing component as "zero" in the numerator. If an Applicable Project Component or Manufactured Product Component in the Applicable Project is missing from the Table 1 list, the unlisted item is disregarded for purposes of calculating the Domestic Cost Percentage.

The Steel and Iron Rule still must be satisfied under the elective safe harbor.

 

Holland & Knight Insight

Though the elective safe harbor is helpful for those unable to secure direct cost information, it applies only for certain types of energy projects. Further, taxpayers far along in sourcing domestic components may be better off using actual direct costs (to the extent that such costs can be obtained) if they have U.S. Manufactured Products or U.S. Manufactured Product Components not listed on Table 1.

The additional guidance is welcome news in providing additional guidance for certain industries. Further guidance is still needed for PTC- and ITC-eligible technologies not addressed in these notices under the safe harbor for classification and/or the elective safe harbor for direct costs. Also, even for PTC- and ITC-eligible technologies that are addressed in these notices, taxpayers should consider whether such guidance needs to be revised to reflect the realities of the such technology or the development of such projects.

Request for Comments

The IRS has requested comments, which should be submitted by July 15, 2024, although the IRS will consider comments submitted after that date.

The IRS specifically has requested comments on the following questions:

  1. Are there any other technologies, or technology subsets, that should be addressed by Table 1 of this notice, and what criteria should be used for new additions? How often should these tables be updated?
  2. Are there instances in which the nameplate capacity allocation approach in Section 4.03 of this notice for calculating domestic content for a mix of foreign and domestic Manufactured Product Components should be clarified, either for current technologies or technologies that may be addressed in the future? In those instances, how should the Assigned Cost Percentages be allocated to Applicable Project Components with a mix of foreign and domestic Manufactured Product Components?

Holland & Knight Insight

Taxpayers should consider providing comments with regard to the above questions in addition to other comments related to technologies that have not been fully addressed by existing guidance. The availability of safe harbor classification guidance, and the elective safe harbor for domestic costs, for each ITC- and PTC-eligible technology is essential to ensuring that taxpayers are properly incentivized to use domestic content as intended by Congress. Further, such guidance must reflect the realities of the development of each technology such that comments reflecting concerns with the existing guidance should be provided as well.

The Holland & Knight Energy Tax Team is reviewing the guidance and can provide additional analysis. For more information or questions, please contact the authors or subscribe to our alerts.


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.


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