Energy Makers Find Limited Answers in Bonus Tax Credit Guidance

The Treasury Department and IRS released Notice 2024-41—supplemental guidance aiming to clarify how taxpayers can qualify for the bonus—in May, and it includes a new elective safe harbor. But numerous tax issues and complex analysis remain when considering its application.

Challenge for Taxpayers

The domestic content bonus provides a bonus credit of up to 10% of credits under Section 45/45Y and Section 48/48E of the tax code.

To qualify for the bonus, a project or facility must satisfy two requirements:

• All steel or iron that is a component of the project must be produced in the US
• No less than the adjusted percentage of the total costs of all manufactured products of the project must be attributable to manufactured products —including components—that are mined, produced, or manufactured in the US

The steel and iron requirement is straightforward, but the manufactured product requirement is proving more complicated. Under prior Treasury and IRS guidance, taxpayers had to calculate the adjusted percentage described above using direct costs—which aren’t a taxpayer’s costs, but the direct costs of the taxpayer’s manufacturers or suppliers.

In other words, taxpayers must obtain actual material and labor costs from their manufacturers or suppliers. It’s a complex, challenging task that has required many taxpayers to hire third-party consultants to act as confidential repositories of data.

More Guidance Needed

Numerous stakeholders have asked the Treasury and IRS to revise their earlier guidance by allowing taxpayers to rely on their own costs to satisfy the manufactured product requirement.

Instead of providing that relief, the notice includes a safe harbor table that taxpayers can rely on—that is, if they’ve developed one of the preferred project types described in the table (currently PV solar, onshore wind, and battery storage).

This table assigns cost percentages for each of the manufactured products and manufactured product components. To calculate whether their project or facility meets the manufactured product requirement, taxpayers can add the percentage values from the table that apply to domestically produced or manufactured products and components.

It sounds easy enough, but the notice does little to help taxpayers determine whether a product or component is in fact domestically manufactured. Given that the domestic content bonus aims to encourage domestic manufacturing, detailed guidance on this topic is desperately needed.

Without it, taxpayers aiming to qualify should expect to perform detailed diligence on the manufacturing activities of any domestic manufactured products or components they intend to count.

Holistic View

Thankfully, the bonus credit guidance at least cross-references rules under the Buy America statute. There also are concepts from other areas of the tax code we can look to, including Section 263A, Section 954, and former Section 48.

Relying on these areas of law, taxpayers may consider several questions to help determine whether domestic manufacturing has occurred for the domestic content bonus:

• What is the type of work that occurs in the US?
• Does it involve a complicated process including multiple steps and components?
• How long does it take, and are there multiple work stations?
• Does the process involve more than joining a few pieces together?
• Is the worksite specially designed for this process?
• Are the people responsible for the process (if any) highly trained?
• Can they exercise professional discretion and use their expertise in the process?
• What kind of testing or quality control takes place?
• What is the value of the US work in relation to the cost or value of the constituent parts?

Each question may not need to be answered, nor may each hold equal importance. But in thinking through whether their project or facility meets the manufactured product requirement, these questions are important to ask.

Answering them is a high bar. But taxpayers will likely need to clear it to unlock the value of the domestic content bonus, unless and until the Treasury and the IRS create a true safe harbor that eliminates the need to independently and individually determine whether domestic manufacturing has occurred.