The month of May was a busy one for the IRS, as the agency has been hard at work releasing new guidance and rules regarding energy tax credits. In Notice 2023-38, the IRS provides detail on how the “domestic content” tax credit rate adder can be satisfied. Notice 2023-44 offers guidance on the application process for the advanced energy project tax credit outlined in Section 48C. These notices are both intended to provide interim guidance until the IRS can publish proposed regulations on these topics. Finally, proposed rules (REG-110412-23 RIN 1545-BQ81) have been introduced to further clarify the procedures and criteria for applying for allocations to receive increased tax credits for solar and wind facilities in low-income communities. Despite the push, there are still a number of energy tax credit issues that remain outstanding, which range from the ministerial (e.g., publication of unemployment rates for the purposes of complying with the “energy community” adder) to those issues that are highly material to the success of the legislative goals intended by the Inflation Reduction Act (e.g., publication of guidance as to transferability of tax credits).
Domestic Content Adder – Additional Guidance via Notice 2023-38
Notice 2023-38 addresses the “domestic content” tax credit rate adder, which allows taxpayers to increase the base energy tax credit by 2% or 10% — assuming certain prevailing wage and apprenticeship requirements are met — for certain energy-related production and investment tax credits under Section 45, 45Y, 48, and 48E. Generally speaking, the domestic content adder is satisfied if (1) 100% of any steel or iron used in a project and at least 40% — or 20% if off-shore wind projects — of any manufactured product which is a component of a project, as of the completion of construction, was produced in the U.S. (the “Domestic Content Requirement”) and (2) certification as to compliance with the Domestic Content Requirement is timely and properly filed with the IRS. The notice provides guidance on the specific criteria that must be satisfied to meet the Domestic Content Requirement, with some of the more notable clarifying items listed below:
- Clarification as to what types of components qualify for the Steel or Iron Requirement (e.g., steel/iron materials that are structural in function, as opposed to non-structural functions of manufactured product components such as nuts and bolts).
- Clarification and examples as to how the “Adjusted Percentage Rule” applies with respect to the Manufactured Product Requirement when an applicable project contains both U.S. Manufactured Components and Non-U.S. Manufactured Components — and how to determine if a manufactured product is of U.S. origin.
- A Safe Harbor for categorizing common project components is subject to either the Steel or Iron Requirement or the Manufactured Product Requirement.
- Guidance as to how retrofitted projects can nonetheless satisfy the Domestic Content Requirement by following the “80/20 Rule” (i.e., the fair market value of the used property is not more than 20% of total value and the new property otherwise satisfies the Domestic Content Requirement).