Breaking Down the New Domestic Content Safe Harbor Guidance

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.

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.

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?

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.