On May 10, 2023, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury (Treasury) released guidance on the Domestic Content Bonus Credit (Bonus Credit) in the Inflation Reduction Act (IRA). The guidance discusses forthcoming proposed regulations concerning the Bonus Credit.
Domestic Content Requirements
The IRA provides a Bonus Credit of 10% for qualifying projects that meet the domestic content requirements. To qualify for the Bonus Credit, manufacturers must meet the following requirements:
- Steel or Iron Requirement – 100% of any steel or iron that is a component of the facility must be “produced in the United States.”
- Manufactured Products Requirement – a certain percentage of the total cost of the “manufactured products” that are components of the facility must be “mined, produced, or manufactured in the United States.”
The IRA provides that the Bonus Credit’s Steel or Iron Requirement “shall be applied in a manner consistent with section 661.5 of title 49, Code of Federal Regulations.” As such, the Federal Transit Administration’s (FTA) Buy American regulation provides the framework for this requirement. The FTA’s regulation states that “[a]ll steel and iron manufacturing processes must take place in the United States, except metallurgical processes involving refinement of steel additives.”
The new guidance clarifies that “[t]he Domestic Content Requirement for Steel or Iron…applies to Applicable Project Components that are construction materials…and are structural in function.” That said, the requirement “does not apply to steel or iron used in Manufactured Product Components or subcomponents of Manufactured Product Components.” For example, items such as nuts, bolts, screws and door hinges—which are not structural in function—are not subject to the Steel or Iron Requirement.
A manufactured product is considered produced in the United States if:
- All of the manufacturing processes for the product “take place in the United States.”
- All of the products components “are of U.S. origin.” A product, however, can be considered manufactured in the United States “regardless of the origin of its subcomponents.”
Section 45(b)(9)(C) provides that the adjusted percentage is 40%, which decreases to 20% if the qualified facility is an offshore wind facility. The required percentages, however, adjust based on the date of construction.
For the majority of qualifying projects, the percentages adjust as follows:
|Beginning in 2025||40%|
|Beginning in 2026||55%|
For qualifying offshore wind facilities, the percentages adjust as follows:
|Beginning in 2025||20%|
|Beginning in 2027||55%|
To calculate the manufactured product percentage, the guidance indicates that taxpayers must divide the total costs of the products manufactured in the United States by the total cost of all manufactured product.
Certification and Recordkeeping Requirements
The guidance also indicates that taxpayers must keep detailed records that meet the requirements under IRC section 6001 to evidence how they have satisfied the domestic content rules. The IRS explained that “[a] taxpayer must submit . . . a statement certifying . . . that any steel or iron items subject to the Steel or Iron Requirement or Manufactured Product that is a component of the Applicable Project . . . was produced in the United States.”
As such, to claim the Bonus Credit, taxpayers must attach a statement to Form 8835 certifying that they have met the domestic content requirements.
Safe Harbor Classification
The guidance also establishes safe harbor for several components because the IRS and Treasury are still determining how to classify many parts and are seeking further public input. In a statement, the Treasury stated that it “is open to considering alternative approaches to classification, including a tax-specific, technology-neutral, principles-based approach.”
The safe harbor applies to more than 20 parts in utility-scale photovoltaic systems, land-based and offshore wind facilities, and battery energy storage technologies. These parts include wind towers, inverters, certain cables and ground screws.
Most of the requirements, which will be adopted as part of a forthcoming official proposed regulation, will apply to tax years ending after May 12, 2023. The IRS and Treasury have not provided a timeline regarding the unveiling of the official proposed regulations. Phillips Lytle will continue to monitor the shifting legal landscape surrounding the IRA and provide updates to our clients.