IRS updates domestic content credit bonus guidance

In detail

Statutory background

To qualify for the domestic content credit bonus, a taxpayer must certify that any steel, iron, or manufactured product that is a component of an applicable project was produced in the United States, as determined under Department of Transportation regulations. The bonus amount is an additional 10% of the basic credit. However, for the Section 48 and 48E credits, the bonus is 10% only if a taxpayer satisfies wage and apprenticeship requirements or exceptions, and otherwise is 2%.

Steel or iron is produced in the United States only if all steel and iron manufacturing processes take place in the United States, except metallurgical processes involving refinement of steel additives. Manufactured products are treated as produced in the United States if at least an adjusted percentage of the total costs of all manufactured products are mined, produced, or manufactured in the United States. Under Sections 45, 48, and 48E, the adjusted percentage is 20% for offshore wind facilities and 40% for other applicable projects. For Section 45Y, the adjusted percentage for offshore wind facilities is 20% if construction of a project begins before 2025 and increases annually up to 55% for projects beginning construction after 2027, and ranges from 40% to 55% for other applicable projects.

Notice 2024-41 safe harbor

Notice 2024-41 provides a new elective safe harbor in the form of a table (Table 1) that classifies certain applicable project components as steel/iron or manufactured product and assists taxpayers in determining the domestic cost percentages for identified manufactured products and manufactured product components included in a project. The notice notes the substantiation and verification challenges involved in gathering cost data from multiple suppliers and manufacturers, including foreign manufacturers, and advises that taxpayers may rely on the domestic content percentages determined under the safe harbor.

Observation: The safe harbors in both Notice 2024-41 and Notice 2023-38 apply to only the three types of technology identified. For other technologies, taxpayers will need to continue to obtain data from suppliers.

Table 1 is divided into sections for the applicable projects of solar photovoltaic systems, land-based wind projects, and battery electric storage systems. Each section identifies applicable project components and related manufactured products and manufactured product components. The manufactured products and components are each assigned a value. An additional value is provided for “production” if all components of a manufactured product listed in Table 1 are domestically produced. The values are added for each domestically produced manufactured product or component that is present in the applicable project to determine the domestic content percentage for the project.

Notice 2024-41 provides that manufactured products and components that are part of the project but not included in Table 1 are disregarded (i.e., have a zero value). These products and components also are disregarded in determining if all components identified in Table 1 were domestically produced (and thus the applicable project qualifies for the production value).

A taxpayer that sources the same manufactured product or component from both foreign and domestic sources for a particular applicable project may use Table 1 to determine a single value for each type of mixed source item. Notice 2024-41 provides a weighted average formula that gives the value to be assigned to mixed source items that have a nameplate capacity and a modified formula for items that do not have a nameplate capacity.

Notice 2024-41 provides an additional formula to determine a single domestic content percentage for Section 48 energy projects that include both solar photovoltaic and battery energy storage systems.

Table 1 also identifies project components that it classifies as steel/iron and that must be 100% domestically produced and identifies manufactured product components in more detail. For example, Table 2 of Notice 2023-38 identifies an inverter as a manufactured product but does not identify any components. Table 1 of Notice 2024-41 elaborates that an inverter includes components such as printed circuit board assemblies and electrical parts. Notice 2024-41 advises that taxpayers may rely on the classification in Table 1 of components that are not included in Table 2.

A taxpayer that uses Table 1 for an applicable project must use the table for the classification and domestic content percentage values for all listed manufactured products and components.

Observation: While the safe harbor may be helpful in some cases, it may not always result in establishing domestic content compliance. Taxpayers should consider modeling to determine if the safe harbor provides the more beneficial result.