IRS Issues Guidance on Domestic Content Requirements for Credits Under Sections 45, 45Y, 48, and 48E of the Tax Code | Practical Law

IRS Issues Guidance on Domestic Content Requirements for Credits Under Sections 45, 45Y, 48, and 48E of the Tax Code | Practical Law

The US Treasury Department and the Internal Revenue Service issued Notice 2023-08 providing guidance to clean energy project owners regarding the domestic content bonus credit qualifications under the Inflation Reduction Act.

IRS Issues Guidance on Domestic Content Requirements for Credits Under Sections 45, 45Y, 48, and 48E of the Tax Code

by Practical Law Finance
Published on 22 May 2023 • USA (National/Federal)
The US Treasury Department and the Internal Revenue Service issued Notice 2023-08 providing guidance to clean energy project owners regarding the domestic content bonus credit qualifications under the Inflation Reduction Act.
On May 12, 2023, the US Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued Notice 2023-08 (notice), providing guidance to clean energy project owners regarding the domestic content credit (DCC) qualifications under the Inflation Reduction Act (IRA) (Pub. L. 117-169, 136 Stat. 1818 (2022)). The DCC is available to qualifying projects that meet certain steel, iron, and manufactured products domestic content requirements (DCR). Qualifying projects that meet these requirements can receive an additional 10% production tax credit (PTC) or investment tax credit (ITC), as applicable. However, the DCC for an ITC-qualifying project will increase only by 2% if none of the following requirements are satisfied:
The projects that qualify for DCC are:
  • Facilities under IRC §§ 45 or 45Y (qualified facilities).
  • Energy projects under IRC § 48, including qualified property for which a valid irrevocable election under IRC § 48(a)(5) has been made to treat such qualified property as energy property (energy projects).
  • Investments regarding a qualified facility or energy storage technology under IRC § 48E (qualified investments).
This guidance applies to all taxable years ending after May 12, 2023 and tax owners of qualifying projects may rely this guidance for projects that begin construction before the date that is 90 days after the date this guidance is published in the Federal Register.

Domestic Content Requirement

The IRA provides that certain clean energy projects qualify for a bonus credit, if they meet the DCR for steel, iron, or manufactured products. In the case of:
  • Steel or iron, all manufacturing processes with respect to the steel or iron items in the components of an applicable project must take place in the US, with the exception of metallurgic processes involving steel additives. This requirement applies to construction materials made primarily of steel or iron and that are structural in function. It does not apply to steel or iron used in components or subcomponents of manufactured products as defined in the notice (49 C.F.R. §§ 661.5(b) and (c)).
  • Manufactured products, all components of an applicable project must be produced or deemed to be produced in the US. Specifically:
    • all of the manufacturing processes for the manufactured product must take place in the US; and
    • all of the manufactured product components must be of US origin. manufactured product component is defined as any article, material, or supply, whether manufactured or unmanufactured, that is directly incorporated into an applicable project component that is a manufactured product.
      (49 C.F.R. § 661.5(d).)

Certification Requirements

A taxpayer claiming the DCC must certify to the IRS that the DCR has been met. The certification must set out certain specific information, including:
  • Whether the applicable project is a qualified facility, energy project, or energy storage technology.
  • The project type (for example, utility-scale photovoltaic system or battery energy storage technology).
  • The project's location.
  • The date the project was placed in service.
  • The total domestic content bonus credit amount determined under IRC §§ 45(b)(9), 45Y(g)(11), 48(a)(12), or 48E(a)(3)(B).

Classification of Project Components

Based on information gathered by the Federal Transit Administration and Department of Energy, the notice also provides clarification on the safe harbor for classifications of certain applicable project components by identifying components that may be found in utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities, and battery energy storage technologies. The notice includes the following table that, per the notice, is not an exhaustive set of all components of all applicable projects:
Applicable Project
Applicable Project Component
Categorization
Utility-scale photovoltaic system
Steel photovoltaic module racking
Steel/iron
Pile or ground screw
Steel/iron
Steel or iron rebar in foundation (e.g., concrete pad)
Steel/iron
Photovoltaic tracker
Manufactured product
Photovoltaic module (which includes, if applicable, photovoltaic cells, mounting frame or backrail, glass, encapsulant, backsheet, junction box (including pigtails and connectors), edge seals, pottants, adhesives, bus ribbons, and bypass diodes)
Manufactured product
Inverter
Manufactured product
Land-based wind facility
Tower
Steel/iron
Steel or iron rebar in foundation (e.g., spread footing)
Steel/iron
Wind turbine (which includes, if applicable, nacelle, blades, rotor hub, and power converter)
Manufactured product
Wind tower flanges
Manufactured product
Offshore wind facility
Tower
Steel/iron
Jacket foundation
Steel/iron
Wind tower flanges
Manufactured product
Wind turbine (which includes, if applicable, the nacelle, blades, rotor hub, and power converter)
Manufactured product
Transition piece
Manufactured product
Monopile
Manufactured product
Inter-array cable
Manufactured product
Offshore substation
Manufactured product
Export cable
Manufactured product
Battery energy storage technology
Steel or iron rebar in foundation (e.g., concrete pad)
Steel/iron
Battery pack (which includes, if applicable, cells, packaging, thermal management system, and battery management system)
Manufactured product
Battery container/housing
Manufactured product
Inverter
Manufactured product
The notice further provides guidance on whether retrofitted projects can constitute originally placed in service products if the fair market value of the used property in the project is not more than 20% of the applicable project's total value calculated by adding the cost of the new property to the value of the used property (80/20 Rule). According to the notice, if an applicable project is placed in service after December 31, 2022 and it meets the 80/20 Rule, then it is eligible for a domestic content bonus credit if it also meets the DCR and the taxpayer complies with the other requirements set out in the notice.

Practical Implications

According to a Treasury press release announcing the notice, Secretary of the Treasury Janet L. Yellen lauded the IRA and the benefits of the domestic content bonus credit system, stating:
"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. Thanks to President Biden’s Investing in America agenda and the Inflation Reduction Act, the United States is benefitting from a boom in clean energy development and manufacturing, creating good-paying jobs nationwide, strengthening our national security, and advancing our climate goals."
For more information on the IRA, see: