On May 12, 2023, the US Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2023-38, Domestic Content Bonus Credit Guidance under Sections 45, 45Y, 48, and 48E (the Notice), which announces an intent to propose regulations on the domestic content bonus tax credits under the Inflation Reduction Act of 2022 (IRA).1 The Notice describes rules that are intended to be included in the forthcoming proposed regulations. The forthcoming proposed regulations will apply to tax years ending after May 12, 2023. However, taxpayers may rely on the rules in the Notice for projects with respect to which construction began before the date that is 90 days after publication of the forthcoming proposed regulations.
Overview of the domestic content bonus credit
The IRA expanded and extended several tax credits for clean energy infrastructure programs by amending Internal Revenue Code sections 45 and 48 and adding new sections 45Y and 48E as "successor" provisions thereto (see W&C's previous coverage of all the IRA's energy provisions here). Along with encouraging the private sector to switch from carbon-intensive to clean energy sources, Congress also embedded several other policy objectives into these tax credits. On top of the newly-established "base amount" of these tax credits is a 5X multiplier to such base amounts in cases where projects giving rise to the credits meet new "wage and apprenticeship requirements" designed to ensure that construction workers involved in applicable projects are paid at prevailing wages and that qualified apprentices certified with the US and state departments of labor are used. Moreover, along with this 5X increase, there are several bonus tax credits that energy projects can receive. For example, if projects are in certain brownfield, low-income, or traditionally coal or fossil fuels-based communities, additional "Energy Communities Bonus Credits" could apply, or projects that utilize a requisite amount of "domestic content" (i.e., components produced by domestic manufacturers using domestic materials) could qualify for additional "Domestic Content Bonus Credits". The guidance published on May 12 focuses on, and is an important step towards implementing, these Domestic Content Bonus Credits, although many questions remain on the details of the rules.
Domestic Content Bonus Credits are available to increase credits provided under Internal Revenue Code sections 45 (production tax credit) and 45Y (clean energy production tax credit) (each, a "PTC") and sections 48 (investment tax credit) and 48E (clean electricity investment tax credit) (each, an "ITC"). The Domestic Content Bonus Credit offers a 10% increase for a PTC, and an increase of as much as 10 percentage points (which could be as much as a 33% increase in the ITC amount) for the ITC in the case of projects for which wage and apprenticeship requirements are met or which are otherwise exempt from such requirements.
As outlined by the Notice, the requirements to qualify for the Domestic Content Bonus Credit are based largely on the existing Buy America Requirements in sections 661.1 through 661.21 of title 49 of the Code of Federal Regulations. The Buy America Requirements, however, were developed by the Federal Transit Administration (FTA) for transit projects. The FTA and the IRS had to work with the Department of Energy in an attempt to adapt these rules to the clean energy sector. As a result, the rules described in the Notice may diverge from standard Buy America Requirements in some places. According to the IRS, such deviations do not represent a change in policy for other applications of the Buy America Requirements.
Qualifying for the domestic content bonus
Under the Notice, to qualify for the Domestic Content Bonus Credit: a project must otherwise be considered an "Applicable Project," and must also meet three additional requirements: 1) the Steel or Iron Requirement, 2) the Manufactured Products Requirement, and 3) a certification requirement.
For these purposes, an "Applicable Project" generally means a project that would otherwise qualify for the PTC and ITC respectively; in other words, a "qualified facility" under section 45 or 45Y, an "energy project" under section 48, or a "qualified investment" with respect to a qualified facility or energy storage technology under section 48E.
Meeting the Steel or Iron and Manufactured Products Requirements will require classifying certain key project components as "steel or iron" or as a "Manufactured Product." This classification will be crucial because the standards for meeting the Manufactured Product requirement are less stringent than those for steel or iron, allowing for a phased-in approach that will deem all manufactured products as having been produced in the United States if a certain threshold percentage is met. For this purpose, Table 2 in the Notice contains a safe harbor list of common products and components included in energy projects, specifically designating them as iron/steel or as manufactured products. This list provides some clarity on how taxpayers can apply these rules, but the list is far from complete. Not only does the list not cover all relevant products or subcomponents, it provides no guidance in the case of certain less-high profile technologies that qualify for the applicable tax credits. Apparently recognizing the shortcomings, the guidance notes the Treasury is open to proposals for alternative approaches to the safe harbor list.
Though the bonus credits appear primarily focused on incentivizing the construction of new green energy facilities, retrofitted facilities can also qualify under rules similar to existing PTC and ITC standards. For these purposes, the Notice adopts the familiar "80/20 Rule," under which a retrofitted facility can qualify for the credit if the market value of the used property in such facility does not exceed 20% of the retrofitted facility's total value.
Steel or Iron Requirement
The domestic content requirement for steel and iron requires that all manufacturing processes for structural steel and iron occur in the United States (except for metallurgical processes for refinement of steel additives). This will be applied consistently with 49 CFR sections 661.5(b) and (c). The standard applies specifically to "Applicable Project Components that are construction materials made primarily of steel or iron and are structural in function." It will not apply to iron and steel components or subcomponents of manufactured products; rather, these items will be subject to the generally more lenient standards of the Manufactured Products Requirement, discussed below.
Manufactured Products Requirement
The rule for manufactured products is more flexible. A project will meet the manufactured products requirement if "not less than the adjusted percentage… of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States." This is called the Adjusted Percentage Rule. To meet the Adjusted Percentage Rule, starting in 2023, 40% of the value of manufactured products and components will have to originate in the United States, scaling up to 55% after 2026. Offshore wind projects start lower at 20% and scale to 55% after 2027.
The Notice considers a manufactured product or component to have originated in the United States if "(1) all of the manufacturing processes for the Manufactured Product take place in the United States; and (2) all of the Manufactured Product Components of the Manufactured Product are of US origin." Only the manufactured product and its immediate components must meet these requirements. Subcomponents of the components can originate from anywhere. Non-manufactured components must be mined in the United States to qualify as domestic components, however. Several parts of these provisions raise further questions, including on the difference between manufacturing and assembling and the difference between components and subcomponents, particularly in the context of a multitude of different PTC and ITC-eligible technologies.
To claim the Domestic Content Bonus Credit, taxpayers should include a Domestic Content Certification Statement with Form 8835, Renewable Electricity Product Credit; Form 3468, Investment Credit; or other relevant forms in their annual tax returns. Taxpayers should also follow the general recordkeeping requirements under Internal Revenue Code section 6001 to document compliance.
The Treasury's IRA implementation agenda
The Treasury and the IRS plan to publish more guidance on the IRA's clean energy provisions over the next few months. The Treasury has called this the first phase of IRA implementation, putting the May 12 guidance alongside the electric vehicle guidance from March and the April notice of intent to propose regulations for the energy community requirement.2 Rules for prevailing wages and apprenticeship programs will likely be issued soon, to supplement the initial guidance published in November 2022.3
By the end of May, the Treasury also expects to issue additional guidance on the Section 48C Advanced Energy Project Credit. This credit is competitive and capped at $10 billion. Its first funding round begins on May 31 and closes on July 31, 2023. Partial initial guidance for the funding rounds, including general rules for determining the section 48C credit, definitions of qualifying advanced energy projects, application instructions, and the procedures for allocating the credits, were published in February.4 The added guidance will contain details about the information applicants will have to submit to request credit allocations including definitions of covered energy property, rules for dual use property, application of the 80/20 Rule to retrofitted energy property, and eligibility of off-site components of energy property.
Guidelines for receiving the tax credits through the new direct pay or transferability mechanisms are also expected sometime in the spring, with the pre-filing registration process opening later in the year. These new means of monetizing tax credits are intended to significantly expand the reach of such tax credits to companies and other organizations that were previously unable to enjoy the benefits of such incentives.
1 Domestic Content Bonus Credit Guidance under Sections 45, 45Y, 48, and 48, Notice 2023-38, available here.
2 IRS issues guidance on eligibility requirement for energy communities for the bonus credit program under the Inflation Reduction Act, IR-2023-69, 4/4/2023, available here.
3 Prevailing Wage and Apprenticeship Initial Guidance Under Section 45(b)(6)(B)(ii) and Other Substantially Similar Provisions, 87 FR 73580, 11/30/2022, available here, and a correction here.
4 IRS and Treasury provide guidance on the Qualifying Advanced Energy Project Credit, IR-2023-27, 2/13/2023, available here.
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