On Thursday, May 16, the Internal Revenue Service (IRS) published a notice updating its May 2023 guidance regarding the Domestic Content (DC) bonus adder. The DC bonus adder is available for certain projects qualifying for the PTC and ITC (Section 45 and Section 48) tax credits, including for the tech-neutral 45Y and 48E, which become available beginning in 2025. Projects that demonstrate that they meet the IRS requirements for domestic content sourcing are entitled to a 10% bonus on the value of the project’s tax credit. Comments on the notice are due by July 15, 2024. The notice does not represent final guidance, which is still forthcoming.
The notice introduces a new safe harbor, offering simpler calculations for project developers seeking to qualify for the DC bonus. Previously, the IRS required developers to calculate the manufactured costs for their US suppliers, including the materials costs for goods supplied, the wages paid to workers, and payroll taxes. Some manufacturers were reluctant to supply this information, which made it challenging for projects to qualify for the DC bonus. In the notice, the IRS acknowledged the complexity, saying they “are aware that obtaining a manufacturer’s direct costs of manufacturing may require the taxpayer to gather cost data from multiple suppliers and manufacturers, including foreign manufacturers, and may present challenges for substantiation and verification.”
The new elective safe harbor simplifies the process for certain technology types, including solar photovoltaics, land-based wind, and battery energy storage systems (BESS). In a press release accompanying the notice, the IRS said it plans to issue guidance for other technologies, including offshore wind.
In practice, Crux has observed that some projects which believe they qualify for the DC bonus nonetheless face difficulties monetizing the credits stemming from the bonus. Consequently, the share of projects that indicate they qualify for the DC bonus is relatively low, but is expected to increase substantially over time as more US manufacturing comes online. Reducing the compliance burden by simplifying the process of qualifying for the bonus likely helps more projects transfer these credits and increases the demand for US-made products and components.
Source: Crux database, May 20, 2024
To qualify for the DC bonus, a project must meet two sets of criteria: one for manufactured products and one for steel and iron. Steel and iron construction materials — materials that are integral to the projects’ structure — must be sourced entirely in the US. Manufactured products and components (MPC) must meet the adjusted percentage rule. Calculated based upon the MPC costs, if the share of domestically produced and sourced components relative to total MPC costs is equal to or greater than the required adjusted percentage, then the project can qualify for the DC bonus adder. The adjusted percentage rule increases from 40% for projects beginning construction prior to 2025 (or 20% for offshore wind projects) to 55%, according to the following schedule:
Aggregating data to qualify for the adjusted percentage rule threshold has been a challenge for some projects, and so the new elective safe harbor is meant to offer a simpler pathway for projects to demonstrate that they qualify for the DC bonus. The figure below illustrates how the new safe harbor fits into the overall DC bonus qualification rubric.
Pathways to qualify for the Domestic Content bonus
The safe harbor allows projects to substitute the IRS’s calculated factors for MPCs in lieu of independently calculating the MPC manufactured cost. Projects still have an obligation to purchase domestically produced materials, and would discount the MPC factor proportionally if not all of the supplied product came from a US manufacturer.
The published Table 1 in the notice contains MPC factors for different solar PV installations, onshore wind, and BESS. In order to determine whether a project meets the requirements of the DC bonus it would first need to determine that all structural steel and iron was produced by a US manufacturer. Then, using the factors in Table 1, it could determine whether its share of MPCs exceeds the percentage threshold (40% in 2024 for solar, onshore wind, and storage in 2024).
For each technology type, Table 1 includes a list of MPCs as well as Applicable Project Components (APCs) and the associated factors. For each MPC, developers should determine whether:
For all MPCs which satisfy the above criteria, the project will sum up the factors in Table 1 to arrive at the domestic content percentage. If that value exceeds 40%, then the project can demonstrate that it qualifies for the DC bonus. If all of the components in a given APC category are manufactured in the US, the IRS provides an additional “production” factor that is additive to the domestic content percentage calculation.
For a grid scale battery project which uses US-made cells, packaging, and battery container/housing, the qualifying DC percentage would be: 38+3.3+15.8+6.5 = 63.6%.
For a utility scale tracking solar PV system with US-made cells and torque tubes, the qualifying DC percentage would be: 36.9+9.7 = 46.6%
For an onshore wind facility US-made nacelles and hubs, the DC percentage would be: 47.5+9.9 = 57.4%.
All of these projects would meet the domestic content requirements to claim the DC bonus as long as they are also able to demonstrate that the structural steel/iron used in the facility are 100% domestically sourced as well.
Projects may use the elective safe harbor and the factors in Table 1 to qualify for the DC bonus going forward, including retroactively for projects placed in service in 2023, and until 90 days after a superseding notice or guidance has been issued.
Many projects may find that they are newly able to demonstrate that they qualify for the DC bonus and may wish to take advantage of the opportunity to transfer these credits. Get in touch with us today if you wish to explore the market for clean energy tax credits.
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