The domestic content rules have posed problems in identifying applicable components and gathering necessary information from product manufacturers.
The IRS issued Notice 2024-41 on May 16 providing additional guidance on the domestic content bonus credit enacted under the Inflation Reduction Act of 2022 (IRA). Building upon previously issued guidance in Notice 2023-38, the new notice contains updates in connection with the classification of certain project components as well as a new safe harbor election to aid taxpayers in computing domestic content percentages.
What is the domestic content bonus credit?
The IRA incentivizes the use of American made materials in renewables projects through the domestic content bonus credit, which can be an additional 10% on top of available investment or production tax credits. Additionally, organizations taking advantage of the IRA’s direct pay program may see their otherwise available credits scaled back beginning in 2024 if domestic content requirements are not met.
Eligibility for the bonus credit hinges on two requirements: (i) 100% of the structural steel/iron components of an eligible project must be produced in the US, and (ii) a specified percentage (currently 40% or more) of the project’s manufactured products must be produced in the US.
Since its enactment, the domestic content rules have posed numerous challenges for project owners trying to identify applicable components and gather necessary information from product manufacturers.
Key provisions of Notice 2024-41
Expanded project tables. Notice 2024-41 expands the project categorization tables originally set forth in Notice 2023-38. Namely, the tables now include hydropower and pumped hydropower storage facilities as applicable projects.
The new notice also re-designates “utility scale photovoltaic system” projects as “ground-mount and rooftop photovoltaic system” projects, which broadens the range of solar projects covered under the tables.
Elective safe harbor. The most significant update in Notice 2024-41 is a new elective safe harbor setting forth “assigned cost percentages” that are intended to simplify qualification for and administration of the domestic content rules.
Taxpayers may elect to apply the safe harbor instead of the cost-based provisions of Notice 2023-38, which require taxpayers to use a manufacturer’s direct costs in producing manufactured products and components for qualified projects.
Taxpayers that opt to use the safe harbor for a project must use the new assigned cost percentages as the exclusive method for determining compliance with domestic content requirements for that project.
It’s important to note the list of projects currently provided for in the cost percentage tables only includes solar/PV, land-based wind, and battery energy storage systems; however, the IRS has requested comments as to whether and how new technologies should be added to the safe harbor tables.
The new safe harbor should be welcomed news for many project owners that otherwise would have to obtain the sensitive product cost data that manufacturers have been understandably reluctant to provide.
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