IRS Releases New Domestic Content Guidance with Optional Safe Harbor

On May 16, the IRS issued Notice 2024-41, providing additional guidelines on the domestic content bonus credit, a key component of the Inflation Reduction Act of 2022 (IRA). This notice updates previous guidance from Notice 2023-38, detailing the classification of project components and introducing a new elective safe harbor to help taxpayers calculate domestic content percentages more easily.

Understanding the Domestic Content Bonus Credit

The IRA encourages the use of American-made materials in renewable energy projects through the domestic content bonus credit, offering an additional 10% on top of existing investment or production tax credits. Furthermore, organizations utilizing the IRA’s direct pay program may see a reduction in their credits starting in 2024 if they fail to meet domestic content requirements.

To qualify for this bonus credit, projects must meet two criteria:

  1. 100% of the structural steel and iron components must be produced in the U.S.
  2. At least 40% of the project's manufactured products must be produced in the U.S.

Since the IRA's implementation, these domestic content rules have presented challenges for project owners in identifying relevant components and obtaining necessary information from manufacturers.

Key Aspects of Notice 2024-41

Expanded Project Tables: Notice 2024-41 broadens the project categorization tables from Notice 2023-38. The updated tables now include hydropower and pumped hydropower storage facilities as eligible projects. Additionally, "utility scale photovoltaic system" projects have been reclassified as "ground-mount and rooftop photovoltaic system" projects, thus expanding the range of solar projects covered.

Elective Safe Harbor: The most notable update in Notice 2024-41 is the introduction of an elective safe harbor that provides "assigned cost percentages" to simplify the qualification process for the domestic content rules. Taxpayers can choose to apply this safe harbor instead of the cost-based provisions of Notice 2023-38, which required the use of a manufacturer’s direct costs for producing components and manufactured products for eligible projects.

By opting for the safe harbor, taxpayers must use the new assigned cost percentages exclusively to determine compliance with domestic content requirements for that project. Currently, the cost percentage tables cover solar/PV, land-based wind, and battery energy storage systems. The IRS is seeking comments on whether and how to include new technologies in these safe harbor tables.

This new safe harbor is expected to be beneficial for many project owners who otherwise would need to acquire sensitive product cost data that manufacturers have been hesitant to share.

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