Article
IRS simplifies IRA domestic content requirements for renewable energy projects
Notice 2024-41 introduces predefined cost percentages and expands safe harbor provisions
On May 16, 2024, the IRS issued Notice 2024-41, which significantly simplifies the calculations to determine if solar, onshore wind and battery projects qualify for a 2% or 10% bonus tax credit for using enough domestic content under the Internal Revenue Code sections 45, 45Y, 48 and 48E. This notice modifies the existing safe harbor provisions in Notice 2023-38.
What’s changed?
Notice 2024-41 expands the previously announced safe harbor to include hydropower and pumped hydropower storage facilities, clarifying the categorization of project components as either steel and iron or manufactured products. It also introduces a New Elective Safe Harbor that allows developers to use a table of percentages for various project components made in the U.S., simplifying the process of determining compliance with IRA domestic content requirements.
Previously, developers needed detailed cost information from manufacturers to calculate the domestic content percentage for Manufactured Products. This information included wages, payroll taxes and the costs of parts supplied directly to the factory, which manufacturers were often reluctant to disclose. The New Elective Safe Harbor eliminates these requirements by providing predefined cost percentages for different components, making it easier for developers to qualify for the bonus credit.
The Notice does not yet simplify calculations for offshore wind, geothermal or other types of projects. However, the Treasury plans to add these sectors to the safe harbor table and issue proposed rules for projects owned by state and local governments, Tribes, rural electric cooperatives or the Tennessee Valley Authority. These projects, which can apply for direct cash payments instead of tax credits, must meet the domestic content requirements unless U.S.-made equipment would increase project costs by more than 25% or is unavailable in sufficient quantities or quality.
The Inflation Reduction Act of 2022 allows a 2% or 10% bonus tax credit for using a certain portion of domestically produced components (the domestic content bonus credit). Developers must categorize materials as either structural steel and iron or Manufactured Products. Structural steel or iron must be 100% U.S.-made, while Manufactured Products must satisfy a 40%-55% U.S.-made requirement.
The New Elective Safe Harbor lists the tables showing percentages of production costs for solar, land-based wind, and battery electric storage system components, simplifying compliance calculations. For example, under the safe harbor table, the cost of Nacelle would count for 47.5% of the total cost of a wind turbine. Thus, if only the Nacelle is U.S.-made, considering structural steel and iron requirement is met and the Manufactured Product needs to meet the 40% requirement, the domestic content requirement is satisfied.
Developers must certify compliance with the domestic content requirements to the IRS, attaching the certification to their tax returns for the year the project is placed in service. The certificate must include project details, location and the calculated bonus credit. Developers must maintain records to support their qualification for the bonus credit for as long as the IRS can potentially audit the project.
This expanded guidance aims to make it easier for taxpayers to qualify for the domestic content bonus credit, particularly for those using elective pay claiming entities, and sets the stage for further updates, potentially including additional sectors like offshore wind in future guidance.
Where to go from here?
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
