On May 16, 2024, the Internal Revenue Service (the “IRS”) and the Department of the Treasury (“Treasury”) published Notice 2024-41 (the “Notice”) providing additional guidance on the domestic content bonus credit for certain clean energy tax credits as established by the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”).  The Notice modifies and supplements initial guidance on the domestic content bonus credit in Notice 2023-38 (issued May 12, 2023, the “Original Notice”), discussed by us here.

Key highlights of the Notice include: 

• a new safe harbor (“New Elective Safe Harbor”) for determining whether solar, onshore wind, and battery storage facilities qualify for the domestic content bonus credit without the need to obtain cost data from manufacturers, and
  
  
• changes to the safe harbors in the Original Notice for classifying components of facilities for purposes of testing eligibility for the domestic content bonus credit, including
  
  - revised lists of relevant components of solar, onshore wind, and battery storage facilities, including rooftop solar facilities and associated batteries, and
  
  - a list of relevant components of hydropower and pumped hydropower storage facilities.

We expect the New Elective Safe Harbor to materially simplify the process for establishing eligibility for the domestic content bonus credit for solar, onshore wind, and battery storage facilities.

Taxpayers may rely on the Original Notice, as modified by the Notice, for any project the construction of which begins before the date that is 90 days after the date of publication of forthcoming proposed regulations on the domestic content requirements.  Similarly, taxpayers may rely on the New Elective Safe Harbor provided in Table 1 of the Notice for any project the construction of which begins before the date that is 90 days after any modification, update, or withdrawal of the New Elective Safe Harbor. 

Statutory Background and Prior Guidance

The Inflation Reduction Act amended Sections 45 and 48 of the Internal Revenue Code to provide a domestic content bonus credit amount for certain qualified facilities or energy projects placed in service after December 31, 2022, and added new Sections 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.

The Original Notice sets out complex rules for establishing eligibility for the domestic content bonus credit.  The Original Notice requires, among other things, that taxpayers take into account only the “direct costs” (including direct labor and direct material costs) of the applicable manufacturers.  This requirement has been especially burdensome on taxpayers, who have been required to obtain direct cost data from multiple suppliers and manufactures, including foreign manufacturers.  Moreover, the suppliers and manufacturers often have been unwilling or unable to disclose confidential cost information to taxpayers, and to preserve confidentiality, taxpayers and manufacturers have relied on creative workarounds, including reliance on independent legal or accounting firms to review and analyze the direct cost data.

For additional background on the Original Notice, see our prior alert here.

New Elective Safe Harbor

The Notice amends the Original Notice to permit owners of solar, onshore wind, and battery storage facilities to elect to use the New Elective Safe Harbor in lieu of reliance on a manufacturer’s direct cost data.  We expect eligible taxpayers to rely predominately on this New Elective Safe Harbor to establish their eligibility for the domestic content bonus credit.

Table 1 of the Notice provides for the classification of components of facilities (much like Table 2 of the Original Notice) and, importantly, adds the associated cost percentages for each of the identified manufactured product components with respect to solar, onshore wind, and battery storage facilities.

For example, Table 1 provides that the “cells” of a PV module represent 36.9%, and the “front glass” represents 3.7%, of the costs of all manufactured products in a ground-mount tracking photovoltaic system.  Thus, if the cells and front glass are in each case produced in the United States, then at least 40.6% of the manufactured products in the ground-mount tracking photovoltaic system will be treated as produced in the United States under the New Elective Safe Harbor.  This would be good news if the system begins construction before January 1, 2025, in which case 40.6% would exceed the minimum required percentage of 40%.  (The minimum required percentage ranges from 40%-55%, depending on when construction begins.)

The New Elective Safe Harbor has no impact on the requirement in the Internal Revenue Code and Original Notice that all structural steel or iron be produced in the United States.  In the example above, all steel PV module racking, pile or ground screws, and steel or iron rebar in the foundation would also need to be produced in the United States in order for the ground-mount tracking photovoltaic system to be eligible for the domestic content bonus credit. 

The Notice provides special rules where solar energy property and energy storage technology are part of a single project, or where only some (but not all) of the applicable manufactured product components (like the cells or front glass above) are produced in the United States.

To the extent Table 1 of the Notice is inconsistent with Table 2 of the Original Notice regarding the classification of manufactured product components, Table 1 will control.

We will continue to monitor the Inflation Reduction Act guidance initiatives from the IRS and Treasury and will provide further updates as guidance is released. In the meantime, Baker Botts would be pleased to assist you in your analysis of the Inflation Reduction Act and other clean energy tax incentive matters.

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