The Internal Revenue Service (IRS) and the Treasury Department have recently released updated guidance under the Inflation Reduction Act of 2022 (IRA). As covered in a prior SPR Blog Post, the IRA allows taxpayers to deduct a percentage of the cost of eligible renewable energy systems from their federal taxes through an Investment Tax Credit (ITC) and Production Tax Credit (PTC). The PTC and the ITC are subject to various multipliers that increase the available tax credit if certain criteria are satisfied. As relevant to the IRS's recent guidance, a project receives up to a 10% (or ten percentage points) bonus credit if the taxpayer certifies that any steel, iron, or manufactured product used in construction was produced in the United States (known as the Domestic Content Bonus Credit). A project located in an "energy community" also receives up to a 10% bonus credit (the Energy Community Bonus Credit).
Recently, the IRS released Notice 2024-41 on May 16, 2024, which expands the types of projects that qualify for the Domestic Content Bonus Credit, and Notice 2024-30 and Notice 2024-48, released on March 22, 2024 and June 7, 2024, respectively, which update guidance on qualifying for the IRA's Energy Community Bonus Credit.
Notice 2024-41: Domestic Content Bonus Credit
The Domestic Content Bonus Credit is available for certain qualified facilities or energy projects placed in service after December 31, 2022 under Internal Revenue Code Sections 45 and 48, and for certain investments in qualified facilities or energy storage technologies placed in service after December 31, 2024 under Internal Revenue Code Sections 45Y and 48E, which apply to facilities for which the greenhouse gas (GHG) emissions rate is zero or less. Under IRS guidance issued in May 2023, Notice 2023-38, taxpayers seeking bonus credit must construct a qualifying project with 100% U.S. content structural steel and iron and incorporate the appropriate "adjusted percentage" of domestically manufactured products. Manufactured products are considered domestically produced if not less than an adjusted percentage of the total costs of such manufactured product is mined, produced, or manufactured in the United States. The adjusted percentage starts at 40% for projects on which construction begins before 2025 (20% for offshore wind facilities) and increases gradually over time to 55% thereafter.
Calculating the adjusted percentage requires the taxpayer to take the sum of direct labor and materials costs for U.S. manufactured products and any non-U.S. manufactured products that are mined, produced, or manufactured in the United States and divide that number by the total manufactured products cost for the qualifying project. Such an exercise could cause great difficulty for taxpayers in gathering the data necessary for these calculations, as they often have to rely on input from manufacturers overseas.
To mitigate this hardship, Notice 2023-38 provided a non-exhaustive safe harbor list of common project components for classification as either a "steel/iron" component or a "manufactured product." The safe harbor list is categorized by (i) utility-scale photovoltaic systems, (ii) land-based wind facilities, (iii) offshore wind facilities, and (iv) battery energy storage.
The recently issued Notice 2024-41 provides several additional safe harbors for taxpayers to qualify for the bonus credit if their projects would not otherwise satisfy the guidance established in previous years. First, the new guidance expands the safe harbor to include hydropower and pumped hydropower storage facilities. Notice 2024-41 also renamed "utility-scale photovoltaic systems" as "[g]round-mount and rooftop photovoltaic systems" subject to the safe harbor.
Additionally, the new guidance introduces a "New Elective Safe Harbor" that allows developers to use a table of percentages for various project components made in the United States as an alternative to the methodology set out in the 2023 guidance, further simplifying the process of determining compliance with IRA domestic content requirements. Previously, taxpayers needed detailed cost information from manufacturers, including wages, payroll taxes, and 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. Note, however, that once a taxpayer elects to use the New Elective Safe Harbor, the taxpayer must apply the percentages in Notice 2024-41 exclusively and without substitutions.
For those taking advantage of the New Elective Safe Harbor, any manufactured product or component listed in Table 1 of Notice 2024-41 not utilized in the project shall be deemed to have zero value in calculating the domestic cost percentage. On the other hand, any steel or iron component or manufactured product utilized in the project but not listed in Table 1 of Notice 2024-41 will not disqualify the taxpayer from using the New Elective Safe Harbor, but such unlisted items will be excluded from consideration in determining the adjusted percentage of domestically manufactured products.
Mixed Source Items – Notice 2024-41 also introduces the concept of mixed source items (MSI), which is when a taxpayer sources the same type of product from both foreign and domestic sources. Notice 2024-41 permits such taxpayers to use the New Elective Safe Harbor to determine a single assigned cost percentage for each separate type of MSI in a particular project by establishing a weighted average mathematical formula to determine the project's U.S. manufactured costs percentage for such components that are sourced from multiple manufacturers.
BESS Multiplier – Under the new guidance, projects comprised of a solar photovoltaic system and a battery energy storage system (BESS) may use the New Elective Safe Harbor and a BESS multiplier, which is based on the energy project's nameplate capacity, to calculate a single domestic cost percentage for a single renewable energy project.
The Treasury Department and the IRS continue to consider updates to the New Elective Safe Harbor and are requesting comments on several of its provisions. Written comments should be submitted by July 15, 2024 via the Federal eRulemaking Portal.
Notice 2024-30 and 2024-48: Energy Community Bonus Credit
As previously covered by the SPR Blog, qualified projects or facilities located or placed in service in "energy communities" are eligible for bonus credits under the IRA. Energy communities include: (i) brownfield sites, (ii) certain metropolitan and non-metropolitan statistical areas (MSAs and non-MSAs) with high fossil fuel industry employment or high fossil fuel industry tax revenue but higher than average unemployment rates (the Statistical Area Category), and (iii) census tracts on or near areas with a closed coal mine or coal-fired powerplant (the Coal Closure Category). A project is treated as "located in" or "placed in service" in an energy community if the project satisfies either the nameplate capacity test or the square footage test set forth in IRS guidance. Under the nameplate capacity test, a project is considered located in or placed in service within an energy community if 50% or more of the project's nameplate capacity is in an area that qualifies as an energy community.
Notice 2024-30 recently expanded the nameplate capacity attribution rule, which allows projects with offshore generating units not located in a census tract to attribute their nameplate capacity to the land-based power conditioning equipment that is closest to the point of interconnection (or, in the case of a project with multiple points of interconnection, any land-based power conditioning equipment that conditions energy generated by the project for transmission, distribution, or use before the energy is transmitted to one of the multiple points of interconnection). Alternatively, offshore projects may attribute their nameplate capacity to the project's supervisory control and data acquisition (SCADA) equipment located in a project port (an EC Project Port).
The definition of an EC Project Port has three components. First, the port must be used to facilitate maritime operations that are necessary for project installation or operation and maintenance. Second, the port must have a significant long-term relationship with the project, which means that the project owner must also own or lease (with a term of at least ten years) the port in which the project's SCADA equipment is located. Third, the staff working at the port and employed by, or working as independent contractors for, the project owner must perform functions essential to the project's operations, which means the staff must perform all of the following functions: management of marine operations, inventory and handling of spare parts and consumables, and berthing and dispatch of operation and maintenance vessels and associated crews and technicians.
Notice 2024-30 also added additional MSAs and non-MSAs that qualify as energy communities. Finally, Notice 2024-48, released June 7, 2024, provides updated data from 2023 and 2024 that taxpayers may use to determine whether they qualify as an energy community under the Statistical Area Category or the Coal Closure Category.
SPR will continue to monitor these developments and provide updated information on the SPR Blog.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.