10 minute read | May.15.2023
New tax guidance explaining how renewable energy projects can qualify for “bonus credits” if they meet U.S. domestic content rules answers significant questions, but also creates a qualification framework that will be complicated for project developers to navigate. The guidance in Notice 2023-38 (the “Notice”) was released by the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) on May 12, 2023. Treasury and the IRS signaled that they intend to issue proposed regulations on domestic content that will be effective for taxable years ending after May 12, 2023. In the meantime, taxpayers will be entitled to rely on the Notice for projects that begin construction before the date that is 90 days after the proposed regulations are published.
Highlights of the Notice include:
Observation: Meeting the domestic content requirements can add significant value, especially for projects qualifying for the investment tax credit, where the investment tax credit amount can be increased from 30% of qualifying project costs to 40%. Projects qualifying for domestic content are eligible for additional bonus credits if they are located in an energy community, and sub-five megawatt solar and wind projects can apply for further additional bonus credits if they are located in certain low-income communities.[2]
Construction Begins |
Adjusted Percentage Generally |
Offshore Wind |
Before 2025 |
40% |
20% |
2025 |
45% |
27.5% |
2026 |
50% |
35% |
2027 |
55% |
45% |
2028 or later |
55% |
55% |
Observation: A concern in the industry has been whether the presence of a single nut, bolt, washer or screw of non-U.S. origin would mean that an entire renewable energy project would fail to qualify for the domestic content adder. The Notice is helpful from that perspective but requires an analysis of whether a nut, bolt, washer, screw or other similar part is “structural in function.”
Observation: The 100% rule for steel or iron is embedded in the IRA and not likely something Treasury and the IRS could change by administrative guidance. Nevertheless, it can result in somewhat draconian consequences. As the safe harbor table illustrates, a single piece of non-U.S. rebar in a solar project or a non-U.S. tower in a wind farm could cause a project to fail the test.
Observation: Although the Notice’s safe harbor tables are incomplete in that they do not address the treatment of every single potential project component, they provide a much-needed starting point to analyze how the domestic content rules should apply to a renewable energy project. Prior to the Notice there had been significant market uncertainty regarding whether items like modules and inverters should be considered manufactured products or components.
Observation: The Notice’s confirmation that components must be of U.S. origin (a requirement which comes from the pre-IRA Department of Transportation regulations for “Buy America Requirements,” on which the domestic content rules are based) adds significant complexity to the domestic content analysis. It will require project developers to dig into the origin of components of equipment they are buying and also determine which portions of those components should be treated as subcomponents that do not need to be from the U.S.
Observation: The inclusion of U.S.-produced components of non-U.S. manufactured product in the numerator of the adjusted percentage test is helpful in that it allows taxpayers to partially benefit from manufactured products with some U.S. components. The downside is that it further increases the test’s complexity because taxpayers who want to take advantage of the rule will need to track components of non-U.S. sourced manufactured products. It is unclear how easy it will be to obtain this information from manufacturers.
Observation: Proving that the domestic content test has been met will require information from manufacturers about their direct costs. This will likely be a source of tension between developers who are being asked to pay a premium for U.S.-produced equipment and manufacturers who are generally reluctant to provide details about their actual costs. This method appears intended to isolate true cost as much as possible without taking into account the increased value (or markup) associated with domestic content qualification.
[1] For a detailed discussion of the prevailing wage and apprenticeship requirements and applicable grandfathering rules, please see our previous client alert [https://www.orrick.com/en/Insights/2022/12/Initial-Guidance-On-Prevailing-Wage-And-Apprenticeship-Requirements]. The same prevailing wage and apprenticeship and grandfathering rules apply to each of the tax credits that are eligible for the domestic content adder. For a detailed discussion of how for-profit entities, tax-exempt entities, state and local government entities and tribal government entities can take advantage of the “direct pay” feature associated with the tax credits and the domestic content adder, please see our previous client alert [https://www.orrick.com/en/Insights/2022/08/Inflation-Reduction-Act-Levels-Renewable-Energy-Playing-Field-for-Tax-Exempt-Entities.]
[2] For a detailed discussion of the energy community bonus credit, please see our previous client alert [https://www.orrick.com/en/Insights/2023/04/IRA-Energy-Communities-and-Brownfields-Tax-Guidance-What-Companies-Need-To-Know].
[3] Cells, mounting frame or backrail, glass, encapsulant, backsheet, junction box (including pigtails and connectors), edge seals, pottants, adhesives, bus ribbons and bypass diodes) are identified as components of modules for purposes of the manufactured product analysis.
[4] Nacelles, blades, rotor hub and power converters are identified as components of wind turbines for purposes of the manufactured product analysis.
[5] Cells, packaging, thermal management systems and battery management systems are identified as components of battery packs for purposes of the manufactured product analysis.