IRS Provides Initial Guidance on Domestic Content Bonus Credit

(Parker Tax Publishing May 2023)

The IRS announced in a notice that it intends to propose regulations addressing the application of the rules that taxpayers must satisfy to qualify for the domestic content bonus credit under Code Secs. 45, 45Y, 48, and Code Sec. 48E, which was provided by the Inflation Reduction Act of 2022 for certain qualified facilities and energy projects placed in service after December 31, 2022, and for certain investments in qualified facilities or energy storage technologies placed in service after December 31, 2024. The notice describes rules that the IRS intends to include in the forthcoming proposed regulations regarding the domestic content bonus credit requirements and related recordkeeping and certification requirements; the notice also describes a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies. Notice 2023-38.

Background

The Inflation Reduction Act of 2022 (IRA) amended Code Secs. 45 and 48 to provide a domestic content bonus credit amount for certain qualified facilities or energy projects placed in service after December 31, 2022. The IRA also added new Code Secs. 45Y and 48E, which include a domestic content bonus credit amount for certain investments in qualified facilities or energy storage technologies placed in service after December 31, 2024.

Domestic content bonus credit amounts are available under Code Secs. 45(b)(9), 45Y(g)(11), 48(a)(12), and Code Sec. 48E(a)(3)(B) to increase the amount of a credit determined under Code Sec. 45 (Section 45 credit), Code Sec. 45Y (Section 45Y credit), Code Sec. 48 (Section 48 credit), and Code Sec. 48E (Section 48E credit), respectively, for a taxpayer whose "applicable project" satisfies the domestic content requirement set forth in Code Sec. 45(b)(9)(B)(i). An "applicable project" refers to: (1) a qualified facility under Code Sec. 45 or Code Sec. 45Y; (2) an energy project under Code Sec. 48, which may include qualified property for which a valid irrevocable election under Code Sec. 48(a)(5) has been made to treat such qualified property as energy property under Code Sec. 48; or (3) a qualified investment with respect to a qualified facility or energy storage technology under Code Sec. 48E. A taxpayer establishes that the domestic content requirement is satisfied with respect to an applicable project by certifying to the Secretary of the Treasury that any steel, iron, or manufactured product which is a component of the applicable project (upon completion of construction) was produced in the United States.

Code Sec. 45(b)(9)(A) provides that in the case of any Code Sec. 45 qualified facility, the amount of the Section 45 credit (determined after application of Code Sec. 45(b)(1) through (8)) is increased by 10 percent (not 10 percentage points) if the domestic content requirement is satisfied. Similarly, for any Code Sec. 45Y qualified facility placed in service after December 31, 2024, Code Sec. 45Y(g)(11)(A) provides that the amount of the Section 45Y credit (determined without application of Code Sec. 45(g)(7)) is increased by 10 percent (not 10 percentage points) if the domestic content requirement is satisfied.

Code Sec. 48(a)(12)(C) provides a domestic content bonus credit amount for a Code Sec. 48 energy project by increasing the "energy percentage" provided in Code Sec. 48(a)(2), which is used to determine the amount of the Section 48 credit, by 10 percentage points if (1) the domestic content requirement is satisfied and (2) any one of the following requirements is satisfied (and by 2 percentage points if the domestic content requirement is satisfied, and none of the following requirements are satisfied): (i) the energy project has a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy; (ii) construction of the energy project began before January 29, 2023; or (iii) the energy project satisfies the prevailing wage and apprenticeship requirements in Code Sec. 48(a)(10)(A) and (11).

If the domestic content requirement is satisfied for any Code Sec. 48E qualified investment with respect to a qualified facility or energy storage technology placed in service after December 31, 2024, Code Sec. 48E(a)(3)(B) provides that rules similar to the rules of Code Sec. 48(a)(12) apply for determining whether the domestic content bonus credit amount increases the "applicable percentage" provided in Code Sec. 48E(a)(2) by 10 percentage points or 2 percentage points.

Steel, Iron, or Manufactured Products

In general, the domestic content requirement applies to any steel, iron, or manufactured product (as defined in Notice 2023-38) that is a component of an applicable project.

Code Secs. 45(b)(9)(B)(iii) and 45Y(g)(11)(B)(iii) provide that "manufactured products which are components of a qualified facility upon completion of construction shall be deemed to have been produced in the United States 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" (i.e., the adjusted percentage rule).

Code Sec. 45(b)(9)(C) provides that, for purposes of Code Sec. 45(b)(9)(B)(iii), the adjusted percentage is 40 percent, or 20 percent in the case of a qualified facility that is an offshore wind facility. Under Code Sec. 45Y(g)(11)(C) the adjusted percentage increases from 40 percent for qualified facilities the construction of which begins before 2025 to 55 percent for qualified facilities the construction of which begins after 2026, and from 20 percent for a qualified facility that is an offshore wind facility the construction of which begins before 2025 to 55 percent in the case of a qualified facility that is an offshore wind facility the construction of which begins after 2027.

As provided in Section 2.01 of Notice 2023-38, Code Sec. 48(a)(12)(B) provides that rules similar to the rules of Code Sec. 45(b)(9)(B) apply for purposes of determining the domestic content bonus credit amount under Code Sec. 48. Similarly, Code Sec. 48E(a)(3)(B) provides that rules similar to the rules of Code Sec. 48(a)(12) apply for purposes of determining the domestic content bonus credit amount under Code Sec. 48E.

Notice 2023-38

Under Notice 2023-38, an applicable project is eligible for a domestic content bonus credit amount if (1) the applicable project satisfies the domestic content requirement and (2) the taxpayer timely submits to the IRS the certification described in Section 5 of the notice.

Domestic Content Requirement

Notice 2023-38 provides that an applicable project satisfies the domestic content requirement if (1) the steel or iron requirement described in Section 3.02 and (2) the manufactured products requirement described in Section 3.03 are satisfied.

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. The steel or iron requirement applies to applicable project components that are construction materials made primarily of steel or iron and are structural in function. The steel or iron requirement does not apply to steel or iron used in manufactured product components or subcomponents of manufactured product components. For example, items such as nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, door hinges, and similar items that are made primarily of steel or iron but are not structural in function are not subject to the steel or iron requirement.

The manufactured products requirement 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. All applicable project components that are manufactured products are deemed to be produced in the United States if the adjusted percentage rule described in Section 3.03(2) of Notice 2023-38 is satisfied. A manufactured product is considered to be produced 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 U.S. origin. A manufactured product component is considered to be of U.S. origin if it is manufactured in the United States, regardless of the origin of its subcomponents.

The percentage produced by dividing the domestic manufactured products and components cost (as described in Section 3.03(2)(b) of Notice 2023-38) by the total manufactured products cost (as described in Section 3.03(2)(c) of Notice 2023-38) is the "domestic cost percentage." If the domestic cost percentage for an applicable project equals or exceeds the adjusted percentage that applies to the applicable project, then the applicable project satisfies the adjusted percentage rule.

A safe harbor provision is provided for classifications of certain 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 categorization of each item described in Table 2 of Notice 2023-38 as subject to either the steel or iron requirement or manufactured product requirement will be accepted by the IRS for those applicable project components and manufactured product components.

Certification Procedures

A taxpayer must submit to the IRS a domestic content certification statement, certifying for each applicable project for which the taxpayer is reporting a domestic content bonus credit amount under Code Secs. 45, 45Y, 48, or Code Sec. 48E that any steel or iron items subject to the steel or iron requirement or manufactured product that is a component of the applicable project upon completion of construction was produced in the United States.

The domestic content certification statement must be attached to Form 8835, Renewable Electricity Product Credit; Form 3468, Investment Credit; or other applicable form for reporting domestic content bonus credit amounts filed with the taxpayer's annual return for the first tax year in which the taxpayer reports a domestic content bonus credit amount for such applicable project. For each tax year after the first tax year in which a taxpayer initially reports a domestic content bonus credit amount, a taxpayer must attach a copy of the domestic content certification statement that was initially submitted to the IRS with the annual return for the first tax year. Section 5.01(2)(c) sets forth the specific information required to be included in the domestic content certification statement for each applicable project.

A taxpayer must certify that an applicable project meets the domestic content requirement as of the date the applicable project is placed in service. The date an applicable project is considered placed in service for purposes of Notice 2023-38 is the date on which such property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income.

Applicable Date

The forthcoming proposed regulations will apply to tax years ending after May 12, 2023. Taxpayers may rely on the rules described in Sections 3 through 6 of Notice 2023-38 for the domestic content bonus credit requirements for any qualified facility, energy project, or energy storage technology the construction of which begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register.

For a discussion of the domestic content bonus credit, see Parker Tax ¶104,315.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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