On May 12, 2023, the Treasury and the IRS released guidelines, detailed in Notice 2023-38, regarding the domestic content bonus tax credit. This credit, an additional amount that can be claimed, applies to certain energy projects as outlined in sections 45, 45Y, 48, and 48E of the Internal Revenue Code. Projects adhering to the U.S. domestic content standards could see up to a 10% increase in their credit rate.
The guidelines specify that these rules will be relevant for tax years ending after May 12, 2023, and will be included in future proposed regulations. Until then, taxpayers can rely on Notice 2023-38 for projects begun within 90 days prior to the publication of the new regulations.
Key areas covered in the guidance include:
- Domestic Content Requirements
- Definitions
- The Adjusted Percentage Rule
- Guidelines for Retrofitted Projects
- Certification Needs
The criteria for the domestic content requirement include the use of U.S.-produced steel or iron in structural components, and a stipulated percentage of the total cost of all manufactured products must be U.S.-sourced. For projects starting before January 1, 2025, the requirement is set at 40% (20% for offshore wind facilities).
Notice 2023-38 outlines two main sub-requirements:
- Steel or Iron Requirement: Pertains to structural materials made primarily of steel or iron.
- Manufactured Products Requirement: Applies to products considered as manufactured in the U.S., including all manufacturing processes and components.
The notice introduces an adjusted percentage rule to determine the U.S. origin of manufactured products and components.
For retrofitted projects, the notice aligns with previous guidance, allowing a project to qualify if it adheres to the 80/20 rule, where the value of used property does not exceed 20% of the total project value.
Certification and Substantiation Requirements: Taxpayers must submit a certification statement for each project claiming the bonus credit, confirming U.S. production of steel, iron, or manufactured products. This statement, accompanied by the taxpayer’s annual return, must detail the project type, location, service date, and credit amount.
Considerations for Taxpayers: The notice serves as a useful resource for project developers and highlights the importance of construction start dates due to phased changes in the domestic content requirement. Taxpayers should also be aware of potential new forms, additional compliance requirements, and the need for detailed contracts with manufacturers to substantiate credit claims.
In conclusion, taxpayers are advised to consult with tax professionals to ensure adherence to these guidelines and to fully benefit from the domestic content bonus credit opportunities.
