Treasury issues Notice 2024-41 for IRA domestic content bonus credit rules

Executive summary: The IRS provides further guidance on the domestic content bonus credit for taxpayers claiming an energy credit under sections 45, 45Y, 48 or 48E.

On May 16, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service released Notice 2024-41 modifying section 3.03(2)(b) and (c) and section 3.04 of Notice 2023-38 and created a new safe harbor (“New Elective Safe Harbor”) taxpayers may elect to use to qualify for the domestic content bonus credit.   Taxpayers may rely on Notice 2023-38, as modified by Notice 2024-41, for any Applicable Project the construction of which begins before the date that is 90 days after the date any proposed regulations are published. Taxpayers may rely on the New Elective Safe Harbor for any Applicable Project the construction of which begins before the date that is 90 days after any future modification, update or withdrawal of the New Elective Safe Harbor. All defined terms used in this article have the same meaning as that used in Notice 2023-38 or Notice 2024-41.

Background

The Inflation Reduction Act (IRA) amended sections 45 and 48, and added new sections 45Y and 48E, permitting taxpayers to claim a domestic content bonus credit up to 10% or 10 percentage points depending on the credit claimed and if certain prevailing wage and apprenticeship requirements are met.

Generally, to satisfy the domestic content requirement, all steel or iron used in a structural function and not less than the adjusted percentage of the total costs of all such manufactured products in an Applicable Project must be mined, produced or manufactured in the United States. For an Applicable Project, the construction of which begins before 2025, the adjusted percentage is 40%, or 20% for offshore wind facilities. The adjusted percentage subsequently increases to 55% for qualified facilities that begun construction after 2026 and offshore wind facilities that begun construction after 2027.

On May 12, 2023, Treasury and the IRS issued Notice 2023-38, which provided details on both the Steel or Iron Requirement and the Manufactured Product Requirement. Section 3.04 of the Notice provided a safe harbor for categorizing certain Applicable Project Components as subject to either the Steel or Iron Requirement or the Manufactured Product Requirement. This safe harbor was limited to Applicable Project Components found in utility-scale photovoltaic systems, land-based and offshore wind facilities, and battery energy storage technologies. See RSM's prior article.

Notice 2024-41

The IRS made three key changes to section 3.04 of Notice 2023-38:

• Expanded the safe harbor to include hydropower and pumped hydropower storage facilities;
• Redesignated the “utility scale photovoltaic system” as the “ground-mount and rooftop photovoltaic system”; and
• Added certain Manufactured Product Components to the list of Applicable Projects.

Notice 2024-41 also provided the New Elective Safe Harbor that taxpayers may use to classify Applicable Project Components and to calculate the Domestic Cost Percentage of an Applicable Project.

New Elective Safe Harbor

Under the New Elective Safe Harbor, taxpayers are still required:

• To determine the Applicable Project;
• To determine the Applicable Project Components of the Applicable Project;
• Classify the Applicable Project Components as subject to either the Steel or Iron Requirement or the Manufactured Product Requirement;
• Satisfy the Steel or Iron Requirement described in section 3.02 of Notice 2023-38;
• Identify the Manufactured Product Components;
• Determine whether the Manufactured Product and the Manufactured Product Components (as applicable) are of U.S. or Non-U.S. origin as described in section 3.03(1) and (2)(b) of Notice 2023-38;
• Satisfy the Adjusted Percentage Rule; and
• Make a valid election, certify compliance and meet general recordkeeping requirements.

However, instead of utilizing the manufacturer’s direct costs in calculating the Domestic Manufactured Products and Components Costs, the Total Manufactured Products Costs, and ultimately the Adjusted Percentage Rule, taxpayers can elect to use the classifications and cost percentages in the New Elective Safe Harbor.

Taxpayers who elect to use the New Elective Safe Harbor for any Applicable Project must use the classifications and cost percentages provided and may not use a different method or substitute any cost percentages. To meet the New Elective Safe Harbor, taxpayers must complete the following steps in addition to what is required under Notice 2023-38:

• Refer to the section of Table 1 that describes the Applicable Project;
• Sum the Assigned Cost Percentages for each listed U.S. Manufactured Product and U.S. Component of the Applicable Project;
• Include safe harbor production cost values if the Manufactured Product is a U.S Manufactured Product; and
• Apply a battery energy storage multiplier as defined in section 4.05 of the notice, as applicable.

To be eligible for the New Elective Safe Harbor, Applicable Projects are not required to include the full list of Applicable Project Components provided in Table 1 of Notice 2024-41. Conversely an Applicable Project Component or Manufactured Product Component contained in a taxpayer’s Applicable Project but not listed in Table 1 will not disqualify the taxpayer from using the New Elective Safe Harbor. Special rules, do however, apply under both scenarios that the taxpayer must consider when calculating the Domestic Cost Percentage.

Notice 2024-41 provides several helpful examples applying the New Elective Safe Harbor. Treasury has requested comments to Notice 2024-41 by July 15, 2024. Treasury and IRS also indicated their intent to consider comments received on other sections of Notice 2023-38 in the context of forthcoming proposed regulations or any further guidance regarding the domestic content bonus requirements.

Washington National Tax takeaways

Notice 2024-41 was announced along with other Administrative provisions to support the domestic solar manufacturing industry including implementing certain trade policies regarding imported solar panels and announcing Department of Energy research and development funding selections for developing new technologies across the solar supply chain.

Notice 2024-41 reflects the administration’s goal to strengthen the county’s domestic solar supply chain and provides a concrete safe harbor to taxpayers who own solar, as well as land-based wind, and battery electric storage systems in calculating the Domestic Cost Percentage. Some key observations are as follows:

• The New Elective Safe Harbor simplifies the calculating of the Domestic Cost Percentage.  There are still other significant steps that must be taken in analyzing whether a project will meet the domestic content rules in its entirety. Further, to comply with the New Elective Safe Harbor, it must be followed in its entirety; there is no partial safe harbor reliance.
• In calculating the Domestic Cost Percentage under the New Elective Safe Harbor, Production Costs, which are intended to reflect domestic labor incurred in producing the Manufactured Products, remains excluded for any Non-U.S. Manufactured Product. Similar to Notice 2023-38, this means even if a Manufactured Product is produced in the United States, domestic labor will be excluded from the numerator if the Manufactured Product has any Manufactured Product Component, regardless of materiality, which is foreign source.
• Notice 2024-41 did not add other technologies in clean energy development such as biogas, combined heat and power, open-loop biomass, or geothermal to the safe harbor under Notice 2023-38. In the absence of these technologies being added to Table 2 of Notice 2023-38, the categorization of Manufactured Products and Manufactured Product Components on these technologies could be an item of dispute upon audit.
• For the technologies not covered by the New Elective Safe Harbor, including hydropower and off-shore wind, obtaining key data to ultimately perform the Adjusted Percentage Rule calculation, remains challenging.  Taxpayer should consider whether Notice 2024-41 opens the door to utilizing other methodologies.

For more information, please consult with your RSM US tax advisor.