Let’s Talk About Tax

Since the passage of the Inflation Reduction Act (IRA) in August 2022, the U.S. Department of the Treasury and the IRS have issued seemingly nonstop guidance. Even with the Supreme Court’s recent reversal of the Chevron deference principle, Treasury and the IRS continue their work. The two federal agencies have gone to great lengths to listen, respond, and even occasionally adopt public comments. However, one piece of IRA-related guidance that should be reconsidered is the unexpectedly limited “New Elective Safe Harbor” for claiming a Domestic Content Bonus.

If applicable, a Domestic Content Bonus can increase an investment tax credit by up to 10 points under Section 48(a)(12) (e.g., from 30% to 40% of cost basis) or increase a production tax credit up to 10% under Section 45(b)(9) (e.g., from $.15/kWh to $.165/kWh). The bonus is meant to incentivize purchases of domestically sourced iron and steel and of domestically manufactured products. However, prior guidance from the IRS, Notice 2023–38, makes it challenging to meet the Domestic Content Bonus requirements by requiring that manufacturers and suppliers disclose sensitive cost information. In an attempt to address this problem, Notice 2024–41 includes a New Elective Safe Harbor, making it easier for a few fortunate taxpayers to claim the Domestic Content Bonus.

Domestic Content Bonus Requirements

In general, to qualify for the Domestic Content Bonus, a taxpayer’s project must satisfy two conditions:

1. 100% of steel or iron used for an “Applicable Project Component” must be produced in the U.S., and
2. A specified percentage of a project’s “Manufactured Products” must be manufactured in the U.S.

(Both “Applicable Project Component” and “Manufactured Products” are defined terms under the original notice, Notice 2023–38.) To satisfy the second requirement, taxpayers must obtain the manufacturers’ material and labor costs. Understandably, manufacturers are reluctant to disclose such sensitive and often confidential information, making it very challenging for taxpayers to verify which of their project’s Manufactured Products actually meet the required percentage for manufactured in the U.S.

New Elective Safe Harbor

To address these concerns, Notice 2024-41 allows taxpayers to use predetermined cost percentages to satisfy the Manufactured Products requirement in lieu of obtaining actual costs from manufacturers. These predetermined cost percentages, provided in Table 1 of Notice 2024–41, may be used to calculate a project’s eligibility for the Domestic Content Bonus. However, Table 1 only identifies predetermined cost percentages for three types of projects: solar PV, land-based wind, and battery energy storage technology. The result is that many projects or facilities that should qualify for tax credits under the IRA cannot take advantage of this safe harbor, such as geothermal or biogas projects. And, because manufacturers remain reluctant to disclose their cost data, many of these other projects will struggle to obtain the data necessary to prove they could qualify for the bonus.

In recognition of this limitation, Notice 2024–41 specifically requests comments on what other technologies should be included in the New Elective Safe Harbor. As of September 4, 2024, 80 comments have been submitted to the IRS. While it remains to be seen whether Treasury and the IRS will continue their pattern of heeding public commentary, it is clear that without a broader, more inclusive safe harbor option, many taxpayers eligible for IRA-related tax credits will nonetheless be unable to comply with the Domestic Content Bonus requirements. At a minimum, taxpayers who do not own one of the few existing project types for which there is a safe harbor will be at a distinct disadvantage.