Summary of IRS Guidance on Domestic Content Requirements

Article

The IRS has issued Notice 2023-38 providing guidance on the domestic content requirements. Learn more about the specific requirements for a taxpayer.

5 minute read

May 15, 2023

Dawn Rhea

Partner, National Tax Office

Leanne Sobel

Partner-in-Charge, Motor Fuels and Excise Tax

Jon Pezzi

Partner, Tax Transactions Advisory

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The IRS has issued Notice 2023-38 providing guidance on the domestic content requirements for the additional bonus credit amount of up to 10% for Investment Tax Credit (ITC) or Production Tax Credit (PTC) qualified facilities, energy projects or energy storage technologies.

For qualified facilities that meet the requirements for the PTC, the PTC credit is increased by 10% for meeting the domestic content requirement. For any qualified energy projects or energy storage technologies that the meet the requirements for the ITC, the ITC credit is increased by 2% for meeting the domestic content requirements or by 10% if the domestic content requirements are met and one of the following is also satisfied: (i) the maximum output of the energy facility is less than 1 megawatt as electrical or thermal energy; (ii) construction began before January 29, 2023; or (iii) the energy project satisfies the prevailing wage and apprenticeship requirements.

Taxpayers may rely on the rules in the Notice for qualified facilities, energy projects or energy storage technologies that begin construction before the date that is 90 days after the proposed regulations are published in the Federal Register.

Domestic content requirements apply to any steel, iron or manufactured product that is a component of qualified facilities, energy projects or energy storage technologies.

Steel and Iron Requirement

The steel and iron requirements are met if all manufacturing processes with respect to any steel and iron items that are applicable project components (any article, material, or supply, whether manufactured or unmanufactured, that is directly incorporated into an ITC or PTC qualified facility, energy project or energy storage technology) take place in the United States (except metallurgical processes involving refinement of steel additives). This requirement applies to components that are construction materials made primarily of steel or iron and are structural in function. It does not, however, apply to steel or iron used in manufactured product components or subcomponents. Examples of items that are not deemed structural in nature include 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.

Manufactured Products Requirement

Manufactured products “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.”

For PTC and ITC qualified facilities, energy projects or energy storage technologies that begin construction before January 1, 2025, the adjusted percentage of manufactured products is 40%, reduced to 20% for offshore wind facilities. For PTC and ITC qualified facilities, energy projects or energy storage technologies placed in service after December 31, 2024, the adjusted percentage of manufactured products is 40% if construction begins before 2025, 55% if construction begins after 2026 (for offshore wind facilities the percentage increases to 55% if construction begins after 2027).

The manufactured products requirement is met if all articles, materials, or supplies that are directly incorporated into an ITC or PTC qualified facility, energy project or energy storage technology are produced as the result of manufacturing process in the United States or are deemed to be produced in the United States. These products are deemed to be produced in the United States if the percentages noted above are satisfied. Manufactured products are considered to be produced in the United States if:

(1) all of the manufacturing processes take place in the United States; and

(2) all of the manufactured product components of the manufactured product are of U.S. origin (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).

Adjusted Percentage

The Notice contains the calculation methodology for determining whether the adjusted percentage of manufactured products is met by the qualified facility, energy project or energy storage technology. The adjusted percentage is the cost of the domestic manufactured products and components divided by the total manufactured products costs. The determination of the costs that comprise the numerator and denominator require scrutiny and understanding of all components that comprise the qualified facility, energy product or energy storage technology.

Manufactured Components Requirement Safe Harbor

The Notice provides safe harbors for applicable project components for utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities, and battery energy storage technologies, noting that this is not an exhaustive list of all applicable project components for these projects.

Certification and Recordkeeping

The Notice further provides the specific requirements for a taxpayer to establish that the domestic content requirement has been satisfied by certifying to the Secretary of the Treasury, in the form and manner prescribed including: submitting a certifying statement that any steel, iron or manufactured product that is a component of a completed qualified facility, energy project or energy storage technology was produced in the United States; attaching this statement to Form 8835 or Form 3468 filed with the taxpayer’s annual tax return for the first year of claiming the domestic content bonus credit and include a copy of the initial certifying statement each year thereafter. The taxpayer must certify that the qualified facility, project or energy storage technology meets the domestic content requirements as of the placed in service date. The taxpayer must also maintain records and documentation that supports and substantiates the satisfaction of the domestic content requirement.