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On May 12, 2023, the Department of Treasury and the Internal Revenue Service (IRS) released Notice 2023-38 (Notice), stating that they intend to propose regulations to address the requirements taxpayers must satisfy when claiming domestic content bonus credit amounts provided by the Inflation Reduction Act under Internal Revenue Code (IRC) Sections 45, 45Y, 48, and 48E.

Sections 45 and 45Y provide tax credits for the production of clean energy. Under the statute, taxpayers claiming a clean energy production credit under IRC Sections 45 or 45Y may increase the amount of that credit by ten percent for any qualified facility incorporating domestic steel, iron, and manufactured products as components of the facility. Specifically, the statute requires that all steel and iron products be produced in the United States, as well as an “adjusted percentage” of manufactured products incorporated as components of the qualified facility.

Sections 48 and 48E provide tax credits equal to a percentage of a company’s investment in clean energy producing projects. A Taxpayer may receive a bonus credit amount of either 2 or 10 percent if the domestic content requirements are satisfied. To receive the 10 percent bonus credit, the project must meet additional qualifying requirements beyond the domestic content requirements.

Consistent with the statute, the Notice borrows from pre-existing regulations applicable to infrastructure projects funded by the Federal Transit Administration (FTA).  Similar to the FTA’s approach, structural steel and iron components of a qualified facility will count towards the domestic content bonus credit if all manufacturing processes for the steel and iron, from melting forward, occur in the United States.  A manufactured product incorporated as a component of a qualifying facility will count as domestic if it is manufactured in the United States from U.S.-origin components; components qualify as having U.S. origin if they are manufactured in the U.S. irrespective of the origin of any subcomponents.  Products that are primarily made of steel and/or iron but which do not serve a structural function are considered manufactured products and therefore need only satisfy the less onerous requirements applicable to such products.  To assist taxpayers in distinguishing between steel/iron and manufactured products, the Notice includes a representative list of common project components that it categorizes as steel/iron or a manufactured product.  For example, for terrestrial wind facilities, the tower and rebar for any windmill will constitute steel and iron, whereas the turbine itself will constitute a manufactured product component, meaning items such as the nacelle, blades, and rotor hubs will constitute components of the manufactured product that must be domestically produced.     

The Notice and the existing FTA rules have some important differences.  First, while the FTA rules generally apply to “end products,” the Notice applies to “components” of any qualified facility, which the IRS defines as any article, material, or supply that is directly incorporated into a qualified facility.  Second, because the IRS only requires an “adjusted percentage” of manufactured products be of U.S. origin to qualify for the domestic content bonus credit, Treasury and the IRS propose to permit taxpayers to also count U.S.-origin components of manufactured products towards that adjusted percentage, even where the manufactured product itself does not qualify as domestic.  However, in calculating the cost of those components, taxpayers will only be permitted to claim direct material and labor costs, whereas the FTA rules also include allocable overhead.  By statute, the “adjusted percentage” of manufactured products that a qualified facility must incorporate to claim the credit is currently set at 40 percent of all manufactured products (20 percent for offshore wind facilities), with a phased increase to 55 percent for projects beginning in 2027 (2028 for offshore wind facilities).  For retrofitted facilities, the taxpayer may exclude any used property that remains incorporated into the project.

The forthcoming proposed regulations are expected to apply to tax years ending after May 12, 2023. Taxpayers may rely on the rules for the domestic content bonus credit requirements for any qualified facility, energy project, or energy storage technology if the construction of such facility begins before the date that is 90 days after the date of publication of the forthcoming proposed regulations in the Federal Register.

Taxpayers will be able to submit comments to Treasury and the IRS on the forthcoming proposed regulations for 60 days after publication. Please contact us if you have questions regarding the domestic content requirements or are interested in submitting comments to Treasury and the IRS.

Key Takeaway

The Treasury and IRS’s proposed guidance on the domestic content requirements under IRC Sections 45, 45Y, 48, and 48E generally track the Federal Transit Administration Buy America requirements, which represent a long-standing regime applicable to mass transportation infrastructure projects, with some important distinctions for the clean energy industry to consider when planning new projects.

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Photo of Adelicia R. Cliffe Adelicia R. Cliffe

Adelicia Cliffe is a partner in the Washington, D.C. office, a member of the Steering Committee for the firm’s Government Contracts Group, and a member of the International Trade Group. Addie is also co-chair of the firm’s National Security practice. Addie has been…

Adelicia Cliffe is a partner in the Washington, D.C. office, a member of the Steering Committee for the firm’s Government Contracts Group, and a member of the International Trade Group. Addie is also co-chair of the firm’s National Security practice. Addie has been named as a nationally recognized practitioner in the government contracts field by Chambers USA.

Photo of Carina Federico Carina Federico

Clients trust Carina Federico to advise on wide-ranging, complex tax issues, including transfer pricing, investment tax credits, research and experimentation credits, and energy credits. Carina Federico handles tax disputes at all stages, including IRS audits, IRS Appeals, federal district court litigation, tax court

Clients trust Carina Federico to advise on wide-ranging, complex tax issues, including transfer pricing, investment tax credits, research and experimentation credits, and energy credits. Carina Federico handles tax disputes at all stages, including IRS audits, IRS Appeals, federal district court litigation, tax court litigation, and appellate court litigation across the United States. Her experience includes serving as first chair at trial, taking and defending depositions, briefing a wide range of tax issues, negotiating settlements, and representing clients in IRS Appeals conferences.

Carina previously was a trial attorney at the U.S. Department of Justice, Tax Division, where she represented the IRS as lead counsel in civil actions, contested matters, and adversary proceedings before the U.S. District and Bankruptcy Courts, as well as in bankruptcy appeals before U.S. District Courts. At DOJ, Carina was awarded the Tax Division’s Outstanding Attorney Award in 2014 and a Special Commendation in 2013. She also served as deputy associate counsel for the White House, where she was the tax counsel on the vetting team for presidential nominations and appointments. She was also seconded to Ernst & Young as a legal consultant to the general counsel’s office, where she advised EY engagement teams on tax controversy issues, including requests for penalty abatement and tax advice that could be given to audit clients.

Photo of Agustin D. Orozco Agustin D. Orozco

Agustin D. Orozco is a partner in the Los Angeles office and is a member of the firm’s White Collar & Regulatory Enforcement and Government Contracts groups. As a former federal prosecutor, Agustin is a skilled trial lawyer focused on directing complex white…

Agustin D. Orozco is a partner in the Los Angeles office and is a member of the firm’s White Collar & Regulatory Enforcement and Government Contracts groups. As a former federal prosecutor, Agustin is a skilled trial lawyer focused on directing complex white collar cases and investigations, handling contentious and sophisticated pretrial litigation, and successfully proving highly difficult cases at trial. Agustin’s background as a federal prosecutor and government contracts attorney leaves him uniquely situated to help clients where government contracts and white collar intersect.

Agustin represents clients in criminal and civil government investigations and enforcement actions. He also represents and counsels clients on matters involving federal, state, and local government contracts. Agustin has litigated civil False Claims Act (FCA) matters and other government contracts issues, such as disputes, claims, and terminations. He is also experienced in matters involving the Foreign Corrupt Practices Act (FCPA), including conducting investigations abroad and counseling clients on compliance issues.

Photo of Eric Homsi Eric Homsi

Eric Homsi is a counsel in the firm’s Tax Group, resident in the New York office. Mr. Homsi’s practice concentrates primarily on advising public and private companies with respect to business tax issues associated with structuring, negotiating, and executing domestic and cross-border acquisitions…

Eric Homsi is a counsel in the firm’s Tax Group, resident in the New York office. Mr. Homsi’s practice concentrates primarily on advising public and private companies with respect to business tax issues associated with structuring, negotiating, and executing domestic and cross-border acquisitions, divestitures, and restructurings. Mr. Homsi also counsels clients on tax issues associated with real estate investments and joint ventures, equity and debt securities offerings, and other transactions where tax considerations play an important role. In addition, he assists multinational businesses with inbound and outbound tax planning and strategy.

Photo of William B. O'Reilly William B. O'Reilly

William B. O’Reilly is a counsel in Crowell & Moring’s Washington, D.C. office, where he is a member of the firm’s Government Contracts Group.

Liam assists clients with all phases of government contracting, including contract formation and award controversies, performance counseling, and claims…

William B. O’Reilly is a counsel in Crowell & Moring’s Washington, D.C. office, where he is a member of the firm’s Government Contracts Group.

Liam assists clients with all phases of government contracting, including contract formation and award controversies, performance counseling, and claims and disputes litigation. His practice includes representing clients in bid protests before the Government Accountability Office and U.S. Court of Federal Claims. Liam also regularly advises clients on supply chain risk management, addressing issues such as cybersecurity, country of origin and domestic preferences, and counterfeit part detection and avoidance, as well as conducting internal investigations and mandatory disclosures for performance breaches and potential violations of the False Claims Act (FCA).