On May 12, 2023, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued Public Notice 2023-38, indicating their intent to propose regulations to address application of the rules that taxpayers must satisfy in order to qualify for the “domestic content” bonus tax credit established in the Inflation Reduction Act (IRA). The domestic content bonus tax credit –under Internal Revenue Code Sections 45Y and 48E – is an increased amount of federal tax credit that is otherwise separately available as production tax credit (PTC) or investment tax credit (ITC) for qualified facilities or energy projects that use a certain percentage of domestic content. It applies to clean energy projects that qualify for the existing renewable electricity PTC and ITC. Investments in newer clean energy technologies, such as energy storage facilities, can also qualify for the bonus credits.
The Treasury Department and IRS intend to propose that the forthcoming proposed regulations will apply to taxable years ending after May 12, 2023.
The IRA, which was enacted into law in August 2022, restructured the PTC and ITC to include bonus credits to encourage project owners to source critical building materials, like steel and iron, domestically for clean energy development projects.
To claim the bonus tax credits of up to 10 percent, an applicable project must satisfy two main requirements: the structural iron or steel products in the facility must be 100 percent made in the United States and a certain percentage of the total cost of the other manufactured components in the facility must also be made in the United States. In addition to meeting the domestic manufacturing requirements, to be eligible for the bonus credit, projects must also meet one of the following requirements: (1) the project has a maximum net output of less than 1 MW of energy, (2) construction of the project began before January 29, 2023, or (3) the project satisfies the IRA’s prevailing wage and apprenticeship requirements.
The guidance also details a safe harbor for the classification of more than 20 components in utility-scale photovoltaic systems, land-based and offshore wind facilities, and battery energy storage technologies, such as wind towers, inverters, certain cables and ground screws, including determinations of whether such components are categorized as “steel/iron” or a “manufactured product.” Taxpayers may rely on these classifications and have certainty in claiming the domestic content bonus with respect to their renewable energy project.
Stay tuned for updates as the proposed regulations are rolled out.