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Novogradac Renewable Energy Working Group Suggests Improvements to Domestic Content Bonus Credit Guidance that Would Support More Renewable Energy Development

Published by Rob Bryant on Tuesday, November 14, 2023 - 12:00AM

One key component of the Inflation Reduction Act’s (IRA’s) clean energy incentives is the domestic content bonus credit, but unfortunately, many solar and wind developers are unlikely to meet the current requirements for the domestic content bonus credit as currently drafted. If left unrevised by the U.S. Department of the Treasury, this will hinder the development of renewable energy in the United States. To address this possibility, the Renewable Energy Working Group (REWG) identified several concerns regarding the IRS Domestic Content Bonus Credit Guidance with regards to the IRA in a recent comment letter

Domestic Content Bonus Credit Basics

The domestic content bonus credit applies to renewable energy facilities that are constructed with a minimum percentage of produced and manufactured components from the United States, and provides a 10% bonus for facilities financed by the investment tax credit (ITC) and the production tax credit (PTC) that comply with the prevailing wage and apprenticeship requirements.

Under Internal Revenue Service (IRS) Notice 2023-38, the domestic content bonus credit creates rules relating to recordkeeping and certification requirements, along with threshold amounts for qualified facilities, energy projects and energy storage technologies.

Manufactured Products Requirements

Section 3.03 of Notice 2023-38 explains the manufactured products requirement, which is met if all applicable project components that are manufactured products are produced in the United States or are deemed to be produced in the United States. Manufactured products are considered to be produced in the United States if either all of the manufacturing processes take place in the United States or if all of the manufactured products have a U.S. origin. In Notice 2023-38, the “applicable project” refers to:

  1. a qualified facility under Sections 45 or 45Y;
  2. an energy project under Section 48, which may include qualified property for which a valid irrevocable election under Section 48(a)(5) has been made to treat such qualified property as energy property under Section 48; or
  3. a qualified investment with respect to a qualified facility or energy storage technology under Section 48E.

By dividing the domestic manufactured products and the components costs by the total manufactured products cost, the domestic cost percentage is calculated for an applicable project. If the domestic cost percentage is greater than or equal to the adjusted percentage, then the applicable project satisfies the Adjusted Percentage Rule (APR). The adjusted percentage referred to here for facilities aside from offshore wind is 40%  that gradually increases over time to 55%. However, the adjusted percentage would be 20% in the case of a qualified offshore wind facility. When the APR is satisfied, a project becomes eligible to receive the domestic content bonus credit assuming all iron and steel components are 100% made in the United States. Below is an example of an applicable project that satisfies these requirements:

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The REWG is requesting that domesticated manufactured products and components costs for applicable projects be based on the actual costs of the taxpayer, and not the manufacturer. When domesticated manufactured products and components costs are based off the manufacturer, it requires taxpayers to request internal costs and labor data to verify them. This can be challenging because this data typically contains sensitive information, which often leads to a stand-still between the taxpayer and the manufacturers. Instead of going through these hurdles, manufacturers should simply provide taxpayers with a percentage apart from the internal data to be used to calculate the APR. This would be much simpler than forcing taxpayers to haggle with manufacturers to do their calculations, allowing for the process of receiving tax credits to become more streamlined.

Safe Harbor Classifications

The REWG also expressed concern with Section 3.04, which details safe harbor for classifications of certain applicable project costs. This safe harbor provides protection from legal liability and is “regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies.” Specifically, it outlines the applicable project components that may be found in utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities and battery energy storage technologies. The steel or iron requirement is met if, “all manufacturing processes with respect to any steel or iron items that are applicable project components take place in the United States, except metallurgical processes involving refinement of steel additives.” It only applies to applicable project components that are made primarily of iron and steel. The second category is the manufactured products requirement, listed in the previous section, which covers all other materials. Below is a table that outlines the categorization of applicable project components:

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The REWG requested that this table be updated for a further granular list of applicable projects components for the four applicable projects listed above. Additionally, this table should be updated with additional technologies such as hydro, biomass, combined heat and power systems, etc. Doing so would eliminate uncertainty regarding whether the applicable component of a project is subject to the 100% steel/iron requirement or the calculated manufactured product percentage.

Certification Requirements

The REWG also requests additional guidance on the certification statement. Currently, a taxpayer must submit a statement to the IRS to certify each applicable project to qualify for the domestic content bonus credit. This statement would be attached to Form 8835, Form 3468 and any additional applicable forms. The REWG suggests that the IRS provide additional details on acceptable suppliers and manufacturer documentation to give taxpayers greater certainty in making their certification for the bonus process more efficient.

What’s Next with The Domestic Content Implementation

As additional proposed guidance on domestic content is released in the coming weeks, the REWG will continue to provide commentary. After any proposed regulations are released, there will likely be a 30- or 60-day comment period where the REWG will submit comments. A Treasury/IRS public hearing regarding the forthcoming domestic content proposed regulations may also be held after the comment period concludes.

The REWG is led by Novogradac partners and provides professional analysis on clean energy topics and responds to guidance on clean energy incentives. To become a member or learn more about the REWG, click here.

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