Navigating The New Elective Safe Harbor For The Domestic Content Bonus Tax Credit

The U.S. Treasury Department and the Internal Revenue Service have issued a new safe harbor that will make it easier for U.S. solar, onshore wind and battery storage projects with U.S.-sourced components to qualify for additional "domestic content bonus" tax credits.

The safe harbor, which is included in Notice 2024-41 issued May 16, 2026 (as corrected on May 24, 2024, the "Notice"),greatly simplifies domestic content cost percentage calculations introduced in prior Notice 2023-38 (issued May 12, 2023). It creates a table with an exhaustive list of manufactured products and components, assigning each component a percentage of the project's total cost (an "Assigned Cost Percentage").

Taxpayers can confirm that a project will meet domestic cost requirements by adding the percentages of a project's U.S. components, and comparing the total against the relevant domestic content threshold (initially 40% for non-offshore wind projects). Manufacturer cost data is not required to meet the safe harbor.

In addition to introducing the safe harbor, the Notice modifies Table 2 of Notice 2023-38 to include hydropower and pumped hydropower storage facilities, and distinguish ground-mounted and rooftop photovoltaic systems. The Notice also requests comments on further updates to the classifications in Table 2, the new safe harbor, and Notice 2023-38 and the Notice more generally to inform forthcoming proposed regulations and other future domestic content guidance.

Below is a more detailed summary of the key provisions in the Notice and our initial observations. Taxpayers may continue to rely on Notice 2023-38 as modified by the Notice until 90 days after the publication of the forthcoming proposed regulations. Taxpayers may rely on the safe harbor for any project that began construction 90 days before any future modification, update, or withdrawal of the safe harbor.

Background on the Domestic Content Requirements

To be eligible for the domestic content bonus credit (worth a 2% or 10% tax credit uplift), a project must satisfy the domestic content requirements described below and the project's owner must submit a certification statement with its tax return.

The domestic content requirements are met if (i) the manufacturing processes for all structural steel or iron items take place in the U.S. (the "Steel or Iron Requirement"), and (ii) at least a minimum percentage (beginning at 40% and increasing over time to 55%) of the total costs of a project's manufactured products are attributable to manufactured products (including components thereof) that are mined, produced, or manufactured in the U.S.. ¹ Manufactured products are items (other than structural steel or iron) that are directly incorporated into a project and that are produced as part of a "manufacturing process." ²

Notice 2023-38 clarified that project owners had to determine the cost of manufactured products by reference to the manufacturer's direct costs.

In practice, this has proven very difficult to manage as many manufacturers fear that disclosing cost data will reveal their supply chains and profit margins, weakening their ability to compete in the market.

The new elective safe harbor

Treasury and the Internal Revenue Service acknowledge in the Notice the difficulties taxpayers have been experiencing in gathering data to support a domestic content analysis. The safe harbor is a direct response to those concerns. The safe harbor addresses solar photovoltaic projects, onshore wind projects, and battery storage projects. All other types of domestic content eligible assets (e.g., offshore wind, fuel cells) will have to rely on the general Notice 2023-38 framework until the list is expanded.

The Department of Energy generated the safe harbor table's Assigned Cost Percentages from various sources, including data sets of system characteristics, price indices, U.S. survey data from the government and private sector, public filings from corporations, and comprehensive interviews of manufacturers, installers, developers, and owners of representative technologies.

Calculating domestic cost percentages for listed projects

• Taxpayers using the safe harbor must apply its categorizations of steel or iron, manufactured products, manufactured product components, and Assigned Cost Percentages as the exclusive and exhaustive set of classifications and costs with respect to a listed project type.

Taxpayers may not partially use the safe harbor.

Observation: Projects relying on the safe harbor are still subject to the Steel or Iron Requirement. However, the requirement for safe harbor projects is limited to the steel or iron items enumerated in the Notice's table. For example, a ground-mount (tracking) system is required to have 100% U.S.-produced pile or ground screw and steel or iron rebar in foundation. Any steel or iron outside of those categories can be ignored for safe harbor purposes.

• To calculate a project's domestic cost percentage, a taxpayer must add the Assigned Cost Percentages for each of the project's manufactured product components that is (i) listed in the safe harbor, and (ii) produced or manufactured in the U.S.

• If all manufactured product components of a manufactured product and the manufactured product itself are produced or manufactured in the U.S., then the taxpayer may include an additional Assigned Cost Percentage for "production cost."
• For example, a U.S.-manufactured wind turbine with U.S.-produced blades (31.2%), rotor hub (9.9%), nacelle (47.5%) and power converter (8.9%) can take an additional 0.9% into account as production because all the listed components are U.S.-produced. The U.S.-produced wind turbine would result in a total 98.4% Assigned Cost Percentage, easily qualifying for the domestic content bonus.

Observation: Key issues for taxpayer diligence under the safe harbor framework include confirming (i) which manufactured products and components listed in the Notice are included in the relevant project, and (ii) the countries in which those manufactured products and components are produced. These more fundamental data points should be easier for taxpayers to obtain from manufacturers than direct costs.

• If a project utilizes a manufactured product or manufactured product component that is both domestic- and foreign-sourced (a "Mixed Source Item"), then the taxpayer must determine the Assigned Cost Percentage of the Mixed Source Item using a weighted average formula.

• For Mixed Source Items with a nameplate capacity, the weighted average formula is the Assigned Cost Percentage multiplied by the proportion of the Mixed Source Item's nameplate capacity that is domestically sourced.
• For Mixed Source Items without a nameplate capacity, the weighted average formula is determined using the domestically sourced proportion of the total nameplate capacity of the project's modules, wind turbine(s), or battery pack(s), as applicable.

• Taxpayers claiming the investment tax credit for projects that use both solar and battery energy storage technology must determine the project's overall domestic cost percentage using a weighted average formula that includes a storage multiplier for each listed ground-mount or rooftop solar project.

Observation: Domestic content eligibility for multiple ITC-eligible properties that are properly treated as a single "energy project" is calculated on an aggregate basis, which is why a weighting formula is needed where the energy properties involve different technologies.³

• A manufactured product or manufactured product component utilized in a listed project but not included in the safe harbor (e.g., an interconnection transformer and substation) is disregarded when calculating the project's domestic cost percentage.
• A manufactured product or manufactured product component listed in the safe harbor but not used in the taxpayer's project is assigned a value of 0.
  
  

Electing the new safe harbor

• To rely on the safe harbor, a taxpayer must include a statement to that effect in its domestic content certification.
• The domestic content certification must be attached to the applicable form for reporting the domestic content bonus credit amount, and filed with the taxpayer's return for the first taxable year reporting the domestic content bonus credit amount for a project.

Takeaways from the safe harbor—Who benefits? Who doesn't?

• The safe harbor greatly simplifies the domestic cost calculation for solar, onshore wind and battery projects and alleviates concerns over both taxpayer data-gathering and manufacturer supply chain confidentiality for these asset classes.
• The most obvious beneficiaries are:

• solar projects with U.S.-produced cells, where the Assigned Cost Percentage for the cells alone ranges from 21.5% - 49.2%, depending on whether the project is rooftop or ground-mount, and whether it is fixed tilt or uses trackers, and;
• onshore wind projects with U.S.-produced nacelles, which alone account for a 47.5% Assigned Cost Percentage.

• We expect the domestic content bonus's bankability to greatly increase for projects that can rely on the safe harbor. Diligence will largely focus on confirming specific manufactured product components and their countries of origin.
• Projects that do not include U.S.-produced components with high Assigned Cost Percentages (e.g., solar cells or wind nacelles) may not have sufficient other U.S. components to be able to rely on the safe harbor. These projects can still rely on the general framework from Notice 2023-38, but will be subject to a more complicated test, both in terms of math and manufacturer-related diligence.
• The non-safe harbor framework may also be preferable for developers who think that the Assigned Cost Percentages in the Notice are too low for their project.
• Projects outside of solar, onshore wind and energy storage cannot currently use the safe harbor.

Footnotes

1. The minimum required percentage for offshore wind projects is 20%.

2. A "manufacturing process" involves altering the form or function of materials or of elements of a product in a manner adding value and transforming those materials or elements so that they represent a new item functionally different from that which would result from mere assembly of the elements or materials.

3. See our article here for additional analysis on "energy project" determinations

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.