On May 12, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released a notice of intent to issue proposed regulations on the domestic content bonus credit for certain clean energy projects1 (Notice).2 As part of the Inflation Reduction Act (IRA), Congress modified the investment tax credit (ITC) and production tax credit (PTC) rules under Code sections 45 and 48 to introduce a domestic content bonus credit for qualified facilities or energy projects commissioned after December 31, 2022. The IRA also established a technology-neutral ITC and PTC under new Code sections 45Y and 48E, which include a domestic content bonus credit for projects placed in service after 2024.3 The bonus credit is available on top of the baseline credit for which a project qualifies.
The Notice describes rules that the Treasury and the IRS intend to include in the forthcoming proposed regulations regarding the domestic content bonus credit requirements and related recordkeeping and certification requirements. The Notice also describes a safe harbor regarding the classification of certain components in different types of PTC and ITC-eligible projects, including energy storage projects. The Treasury and IRS intend for the forthcoming proposed regulations to apply to taxable years ending after May 12, 2023 and state that until the issuance of the proposed regulations, taxpayers may rely on the rules described in the Notice.
The domestic content bonus credit provides taxpayers who claim clean energy tax credits for applicable projects the opportunity to claim an additional credit of up to 10%.4 The applicable projects consist of:
- Qualified facilities eligible for production tax credits under sections 45 or 45Y;
- Energy projects eligible for investment tax credits under section 48, which may also include PTC eligible projects that elect to take an ITC in lieu of PTCs; and
- Qualified investments with respect to a qualified facility or energy storage technology that qualify for the technology-neutral ITC under section 48E.
The credit is intended to incentivize the use of domestic steel, iron, and other manufactured products in these investments. "The domestic content bonus under the Inflation Reduction Act will boost American manufacturing, including in iron and steel, so America's workers and companies continue to benefit from President Biden's Investing in America agenda. These tax credits are key to driving investment and ensuring all Americans share in the growth of the clean energy economy," said Secretary of the Treasury Janet L. Yellen.5
II. Domestic Content Requirement
The Notice provides that the domestic content requirement for an applicable project is satisfied if its steel, iron, or manufactured product components are produced domestically. Specifically, the manufacturing process for all steel and iron used in the construction of the project must take place entirely within the United States, and manufactured products must either be produced domestically or deemed to be produced domestically under the adjusted percentage rule, which is described below.
As noted previously, the steel or iron requirement applies to construction materials primarily composed of steel or iron that are structural in function. However, the rule does not apply to steel or iron used in manufactured product components or subcomponents that are not structural in function such as nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wires, spacers and door hinges. There is also an exception for the metallurgical processes involved in refining steel additives, which are not required to occur in the United States for the requirement to be met.
The manufactured products requirement is satisfied if all applicable project components that are manufactured products are produced domestically, or are deemed to be produced domestically under the adjusted percentage rule. A product is considered US-manufactured if (1) all manufacturing processes take place in the United States, and (2) all components of the product originate from the United States. A component is deemed to be of US origin if it is manufactured domestically, regardless of the origin of its subcomponents.
The adjusted percentage rule is invoked when the above criteria for US-manufactured products are not met. For so-called non-US-manufactured products, if the domestic cost percentage for an applicable project equals or exceeds the adjusted percentage for that project, the project satisfies the adjusted percentage rule. The domestic cost percentage for a project is calculated by dividing the domestic manufactured products and components cost by the total manufactured products cost. In general, the adjusted percentage is 40%, with a lower rate of 20% for offshore wind projects.6 The adjusted percentage is higher under the technology-neutral PTC rules and is dependent on the construction start date: for projects starting construction before 2025, it is 40%, increasing incrementally up to 55% for those starting construction after 2026.7 However, for offshore wind projects claiming the technology-neutral PTC, the adjusted percentage is 20% for projects starting construction before 2025, increasing incrementally up to 55% for those starting after 2027.8
The Notice also provides a useful example demonstrating the application of the adjusted percentage rule in a situation where a taxpayer purchases an applicable project from a contractor, which includes products manufactured in the United States and some product components that are manufactured in the United States and one product component that is manufactured outside the United States.9
III. Safe Harbor
The Notice provides a safe harbor for certain project components that may be found in utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities, and battery energy storage technologies. A table in the Notice lists these project categories and the components typically used therein, and indicates whether these components fall under either the steel or iron requirement or the manufactured product requirement.10 For example, the tower of a wind turbine is considered steel or iron, while the wind turbine itself (i.e., the nacelle, blades, rotor and power converter) is a manufactured product.
IV. Retrofitted Projects
The Notice provides guidance for retrofitted projects, specifying that such projects might be considered placed in service after December 31, 2022 if the fair market value of the used property does not exceed 20% of the total project value. The project's total value is calculated by adding the cost of the new property and the value of the used property. This "80/20 rule" is widely used in the repowering context. If these conditions are satisfied, the project could be eligible for the domestic content credit, if it meets the domestic content requirement and other requirements specified in the Notice.
V. Certification and Recordkeeping Requirements
In addition to the domestic content bonus credit requirements, the Notice also sets forth certain certification and recordkeeping requirements.
The procedures require taxpayers to file a Domestic Content Certification Statement to the IRS, affirming that any steel or iron items or manufactured products used in a relevant project were produced domestically. The statement must contain details about the project such as its nature, exact kind, location, service date, and the total domestic content bonus credit amount for the initial taxable year. This statement should be attached to Form 8835, Renewable Electricity Product Credit; Form 3468, Investment Credit; or other applicable form for reporting domestic content bonus credit amounts under section 45, 45Y, 48, or 48E filed with the taxpayer's annual return, in the first taxable year they report a domestic content bonus credit amount for an applicable project. In subsequent years, a copy of the original statement must be included with the annual return.
The Notice also addresses substantiation, emphasizing that taxpayers must satisfy general recordkeeping requirements under section 6001 to verify compliance with the domestic content requirement. These records must be adequate to establish the amount of gross income, deductions, credits, and other relevant matters, and must be retained as long as they may be pertinent to the administration of any internal revenue law.
1. Unless otherwise specified, all "section" or "§" references are to the Internal Revenue Code of 1986, as amended (Code) or the Income Tax Regulations (26 CFR part 1).
2. IRS Notice 2023-38, 2023-22 IRB 1, at https://www.irs.gov/pub/irs-drop/n-23-38.pdf.
3. See § 13101(g) of the IRA for the domestic content bonus credit under IRC § 45(b)(9); § 13701(a) of the IRA for the domestic content bonus credit under IRC § 45Y(g)(11); § 13102(l) of the IRA for the domestic content bonus credit under IRC § 48(a)(12); and § 13702(a) of the IRA for the domestic content bonus credit under IRC § 48E(a)(3)(B).
4. The additional credit is only 2%, unless the project also satisfies or is otherwise exempt from applicable prevailing wage and apprenticeship rules. For a discussion of these rules please see Mayer Brown Legal Update, The Green Energy Tax Incentives of the Inflation Reduction Act of 2022, August 2, 2022, by Amanda L. Rosenberg and Daniel T. Kiely.
5. Treasury Department Releases Guidance to Boost American Clean Energy Manufacturing (May 12, 2023), at https://home.treasury.gov/news/press-releases/jy1477.
6. IRC § 45(b)(9)(C).
7. IRC § 45Y(g)(11)(C)(i). Specifically, the adjusted percentage is 40% for facilities starting construction before January 1, 2025; 45% for facilities starting construction after December 31, 2024 and before January 1, 2026; 50% for facilities starting construction after December 31, 2025 and before January 1, 2027; and 55% for facilities starting construction after December 31, 2026.
8. IRC § 45Y(g)(11)(C)(ii). Specifically, the adjusted percentage is 20% for facilities starting construction before January 1, 2025; 27.5% for facilities starting construction after December 31, 2024 and before January 1, 2026; 35% for facilities starting construction after December 31, 2025 and before January 1, 2027; 45% for facilities starting construction after December 31, 2026 and before January 1, 2028; and 55% for facilities starting construction after December 31, 2027.
9. IRS Notice 2023-38, supra 2.
10. IRS Notice 2023-38, supra 2, at Table 2.
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