The IRS issued Notice 2024-41 on May 16, 2024, which provides updated guidance on the domestic content bonus credit under Sections 45, 48, 45Y, and 48E of the Internal Revenue Code. The new notice modifies the previously issued one Notice 2023-38, which provided initial safe harbor classifications for applicable project components for certain technologies eligible for a production tax credit (PTC) or investment tax credit (ITC). (See Holland & Knight's previous alert, "Use Your Calculator: IRS Releases National Content Bonus Credit Guide", May 17, 2023.) Notice 2024-41 modifies and adds previously issued safe harbor classifications and establishes a new elective cost safe harbor for purposes of calculating the domestic content percentage.
This alert from Holland & Knight breaks down the status of the domestic content bonus credit following the publication of Notice 2024-41.
Safe harbor for classification
Notice 2023-38 previously provided safe harbor classifications for applicable project components as subject to the Steel and Iron Rule or the Manufactured Project Rule. Notably, Notice 2023-38 provided safe harbor classifications for solar, wind, and battery energy storage projects. Notice 2024-41 modifies the classifications provided above by identifying additional Manufactured Product Components with respect to the Manufactured Projects listed above.
In addition to the classifications previously provided in Notice 2023-38, Notice 2024-41 provides a safe harbor classification for hydroelectric and pumped energy storage facilities. There remain other PTC- and ITC-eligible technologies for which the IRS has not yet provided a safe harbor classification.
|
Holland and Knight Insight Notice 2024-41 states that "Taxpayers may rely on Notice 2023-38, as modified by this notice, for domestic content bonus credit requirements for any Applicable Project whose construction begins before the date that is 90 days after of the date of publication". of upcoming proposed regulations on domestic content bonus credit requirements in the Federal Register." Taxpayers relying on Notice 2023-38 for safe harbor classification of Applicable Project Components should consult the updated tables provided in Notice 2024-41 to determine what is steel and iron, a Manufactured Product and a Manufactured Product Component. |
Elective Safe Harbor for Internal Costs
For purposes of calculating the National Cost Percentage, Notice 2023-38 requires that the costs included in the numerator and denominator be the direct materials and direct labor costs paid or incurred by the manufacturer of the Manufactured Product. Notice 2024-41 provides an elective safe harbor for wind, solar, and battery storage projects to calculate the internal cost percentage. If a taxpayer chooses to apply the safe harbor, it must be used for the entire Applicable Project.
Under the elective safe harbor, a taxpayer should refer to Notice 2024-41, Table 1, and choose the appropriate Applicable Project. Second, the taxpayer must confirm that all items identified as steel and iron were produced in the U.S. Third, the taxpayer must determine with respect to each component of the listed manufactured product whether it was manufactured in the U.S. Next, the allocated cost percentages (provided in Table 1) for each Made in USA Product listed for the Applicable Project must be added up to the total. This total value is the National Cost Percentage for purposes of the New Elective Safe Harbor.
For Manufactured Products or Components of Manufactured Products that are from domestic and foreign sources, a portion of the Allocated Cost Percentage is available based on the rated capacity of such item or, if not available for such item, for the associated Applicable Project Components . Notice 2024-41 also provides similar rules for energy properties comprising solar and battery energy storage to determine a single internal cost percentage.
The cost percentage allocated for production costs is available only if all components of a manufactured product are domestically produced.
When summing the allocated cost percentages, if a taxpayer's applicable project does not include all of the applicable project components or manufactured product components provided in Table 1, the taxpayer must treat the missing component as "zero" in the numerator. If a component of the applicable project or a component of the product manufactured in the applicable project is missing from the list in Table 1, the unlisted item is not taken into account for the purposes of calculating the internal cost percentage.
The Rule of Steel and Iron must still be met under the elective safe harbor.
|
Holland and Knight Insight Although the elective safe harbor is useful for those who cannot obtain information on direct costs, it only applies to certain types of energy projects. Additionally, taxpayers who are at an advanced point of domestic component sourcing may be better off using actual direct costs (to the extent such costs can be obtained) if they have U.S. manufactured products or components of manufactured products. in the US not listed in Table 1. The additional guidance is good news by providing additional guidance for certain industries. More guidance is still needed for PTC- and ITC-eligible technologies that are not addressed in these notices under the safe harbor for classification and/or the elective safe harbor for direct costs. Additionally, even for PTC- and ITC-eligible technologies addressed in these notices, taxpayers should consider whether such guidance needs to be revised to reflect the realities of such technology or the development of such projects. |
Request for comments
The IRS has requested comments, which must be submitted by July 15, 2024, although the IRS will consider comments submitted after that date.
The IRS has specifically requested comments on the following questions:
- Are there other technologies or subsets of technologies that should be addressed in Table 1 of this notice and what criteria should be used for new additions? How often should these tables be updated?
- Are there cases where the nameplate capacity allocation method in Section 4.03 of this notice for calculating the domestic content of a combination of components of domestic and foreign manufactured products needs to be clarified, either for current technologies or technologies that can be addressed in the future? In those cases, how should the cost percentages assigned to applicable project components be allocated with a mix of domestic and foreign manufactured product components?
|
Holland and Knight Insight Contributors should consider providing comments regarding the questions above, in addition to other comments related to technologies that have not been fully addressed by existing guidance. The availability of safe harbor classification guidance, and the elective safe harbor for domestic costs, for each ITC and PTC eligible technology is essential to ensure that taxpayers are appropriately incentivized to use domestic content as intended by Congress. Additionally, such guidance should reflect the realities of the development of each technology, so comments reflecting concerns regarding existing guidance should also be provided. |
Holland & Knight's energy tax team is reviewing the guidance and can provide additional analysis. For more information or questions, please contact the authors or subscribe to our alerts.
The information contained in this alert is for the education and general knowledge of our readers. It is not designed to be, nor should it be used as, the sole source of information when analyzing and resolving a legal problem, and it should not substitute legal advice, which is based on specific factual analysis. Additionally, the laws of each jurisdiction are different and constantly changing. This information is not intended to create, and its receipt does not constitute, an attorney-client relationship. If you have specific questions about a particular factual situation, we recommend that you consult the authors of this publication, your Holland & Knight representative, or other competent legal counsel.
