New IRA Domestic Content Guidance: New Safe Harbor and Revised Guidance

Client Alert: New IRA Domestic Content Guidance: New Safe Harbor and Revised Guidance

Yesterday, Treasury and the IRS released Notice 2024-41 modifying Notice 2023-38 which provides for material updates in how taxpayers could qualify for Domestic Content Bonus Credit amounts. 

 One significant issue in the prior guidance that taxpayers faced when deciding whether to seek the Domestic Content Bonus Credit adder was obtaining each manufacturer’s direct costs in producing key components of a project. This led to handwringing in the industry over the use of third-party “auditors” who would confidentially obtain manufacturer’s direct costs and provide reports to taxpayers (and tax equity investors) as evidence and comfort that a given project satisfied the Domestic Content requirements.  In Notice 2024-41, Treasury and the IRS directly addressed this challenge, stating they “are aware that obtaining a manufacturer’s direct costs of manufacturing may require the taxpayer to gather cost data from multiple suppliers and manufacturers, including foreign manufacturers, and may present challenges for substantiation and verification”.

 The guidance provided yesterday tackles this issue by creating a “New Elective Safe Harbor,” which is described in more detail below. Notice 2024-41 also adds further guidance for Hydropower Facilities or Pumped Hydropower Storage Facilities, clarifies the applicability of its guidance to “Ground-mount and rooftop photovoltaic systems”, and updates a key table from the prior guidance with respect to Manufactured Product Components. 

 A new Safe Harbor.

 Notice 2024-41 creates an exclusive “New Elective Safe Harbor” that a taxpayer may elect when submitting its Domestic Content Certification Statement to the IRS. This new safe harbor applies to both the Steel or Iron Requirement and the Manufactured Products Requirements, and specifically replaces how the Adjusted Percentage Rule is calculated to avoid requiring developers to obtain manufacturer and supplier direct costs.

If elected, only components listed in a new Table 1 introduced in Notice 2024-41 are counted when determining the Adjusted Percentage. A project could therefore be made up of some (but not all) of the components listed, but only the “Manufactured Products” and “Manufactured Product Components” listed in Table 1 may be considered if the New Elective Safe Harbor is used.

 Once elected, the new safe harbor provides an entirely new way to calculate the Domestic Cost Percentage by adding up the percentages for each Manufactured Product and Manufactured Product Component listed in Table 1 to arrive at the project’s Domestic Cost Percentage. This bypasses the previous difficulties of obtaining direct costs from manufacturers and suppliers.

By way of example, suppose 100% of the Cells in the PV Module for a solar project are domestically produced. Looking at Table 1, that project starts off with a 36.9% Domestic Cost Percentage that is used toward meeting the overall Adjusted Percentage of 40% (assuming this hypothetical solar project began construction before 2025).

 To continue our example, in addition to the Cells, 100% of the torque tubes used in the PV Tracker system are domestically produced. This added 9.7% to the Domestic Cost Percentage.

The result of combining 36.9% (Cell) + 9.7% (Torque tubes) =  46.6% for the project’s Domestic Cost Percentage. Here, the example project would exceed the required Adjusted Percentage of 40% and therefore qualify (assuming all other obligations are met) for the Domestic Content adder.

Note that all other requirements of Notice 2023-38 must still be satisfied to qualify for the Domestic Content Bonus (most notably the Steel or Iron Requirement), but nothing in Notice 2024-41 requires the collection of direct cost information to calculate or verify the Domestic Cost Percentage if the new safe harbor is elected. Instead, the IRS worked with the Department of Energy utilizing cost data from “a variety of sources, including datasets of system characteristics, price indices, … and private sector, public filings from corporations, and comprehensive interviews of manufacturers, installers, developers, and owners of the representative technologies”.

In addition to listing percentages for each Manufactured Product Component, Notice 2024-41 adds a new kicker called “Production” in Table 1. This percentage adder is applied if all of the Manufactured Product Components for a Manufactured Product are mined, produced or manufactured in the United States.

As an example, if all of the Manufactured Product Components for the PV modules are mined, produced or manufactured in the Untied States, then an additional 11.5% is added for purposes of determining compliance with the Adjusted Percentage.

To account for Manufactured Products comprised of both foreign and domestic sources, the New Elective Safe Harbor provides a weighted-average formula. Notice 2024-41 calls such components “Mixed Source Items” and provides a formula that is tied to the nameplate capacity of the Applicable Project. 

The easiest example (and one provided in the notice) is PV modules – which have a nameplate capacity associated with each PV module. The guidance provides an example of a 100MWdc solar project in which 60MWdc of the PV modules are domestically produced, and 40MWdc of the PV modules are not. Looking at Table 1 and only in respect of the 60MWdc PV modules that are domestically produced, we add up all of the percentage figures (including the Production adder) under the PV module Applicable Product Component, which results in a figure of 66.3%.

Because this represents only 60% of the total nameplate of the project, however, we multiply that figure by an amount equal to the nameplate of the domestically produced Manufactured Products over the total nameplate of the Applicable Project. Here it’s easy: 66.3% x 60/10 = 39.8%, which is the Domestic Cost Percentage attributed to the PV modules for this project.

Notice 2024-41 also provides more complex examples to account for other kinds of components that are both domestically and foreign produced.

Notice 2024-41 also provides specific rules in connection with a project comprised of solar PV and battery energy storage system(s). Substantiation requirements cite to typical record-keeping requirements, but if the New Elective Safe Harbor is elected, then securing and maintaining direct cost information is no longer necessary.

Finally, Notice 2024-41 provides for a separate reliance period for the New Elective Safe Harbor; taxpayers may rely on the New Elective Safe Harbor for a project that began construction before the date that is 90 days after “any future modification, update, or withdrawal of the New Elective Safe Harbor”.  

Next Steps

 It remains to be seen whether this New Elective Safe Harbor is here to stay or will be replaced with something else. In the meantime, this guidance is a welcomed change and has already helped simplify negotiations from suppliers to tax equity providers. Treasury and the IRS are requesting written comments be submitted by July 15, 2024.

We will continue to monitor Treasury and IRS guidance for any new developments, and work with suppliers, EPCs, owners and investors as this new guidance and safe harbor is implemented in the market.

Questions? Please reach out to:

Gary Stapleton (771) 772-2766 or Zach Crowley (831) 200-9158