IRS Notice 2023-44: Domestic Content Credit Requirements

The Internal Revenue Service (IRS) and the Treasury Department have released guidance to help taxpayers understand the domestic content bonus credit requirements. Introduced by the Inflation Reduction Act (IRA), the bonus credit is designed to encourage the use of American-made materials and components in the construction of clean energy projects. By satisfying the domestic content requirements, taxpayers can increase their production tax credit (PTC) or investment tax credit (ITC). The guidance provides the initial rules, definitions, and safe harbors necessary for taxpayers to begin assessing their eligibility for these credits.

The Domestic Content Requirements

To qualify for the domestic content bonus credit, a project must satisfy two distinct tests established by the IRS. The first is the Steel or Iron Requirement, which mandates that all steel or iron used for structural components within a project must be manufactured in the United States. This applies to materials that are primarily made of steel or iron and serve a structural function, forming the skeleton of the facility.

The second test is the Manufactured Products Requirement. This condition requires that a specified percentage of the manufactured products incorporated into the project must be of U.S. origin. A manufactured product is considered produced in the U.S. if all of its manufacturing processes occurred domestically and all of its components are of U.S. origin. The required percentage varies depending on the type of project and when construction begins.

The guidance defines an “Applicable Project” as a qualified facility eligible for energy tax credits, such as a solar farm or energy storage system. A “Project Component” is any manufactured product, or steel or iron item that is part of the larger project. For most projects beginning construction before 2025, the threshold for the Manufactured Products Requirement is 40%. For offshore wind facilities, this initial threshold is 20%, with these percentages scheduled to increase in subsequent years.

Calculating the Adjusted Percentage for Manufactured Products

The Manufactured Products Requirement uses an “Adjusted Percentage Rule,” a specific calculation to determine the domestic content percentage. This calculation focuses on the direct costs of manufacturing the components of a project. The first step is to identify all manufactured products that are components of the energy project. Each of these is then broken down into its own set of components, which are classified as either U.S. components or non-U.S. components.

Once components are classified, the next step is to determine the direct costs, which includes direct material and direct labor costs for manufacturing each component. The sum of all direct costs for U.S. components creates the numerator of the domestic content fraction. The denominator is the total direct cost of all manufactured products, which is the sum of costs for both U.S. and non-U.S. components. The resulting percentage must meet the required threshold.

Consider a utility-scale battery energy storage system as an example. The battery packs, inverters, and control systems are manufactured products. The taxpayer would need to determine the direct labor and material costs for every component within these systems, such as battery cells and wiring, classifying each as U.S.-made or foreign-made. By aggregating the costs of all U.S.-made components and dividing by the total manufacturing cost of the entire system, the taxpayer can determine if it meets the 40% domestic content threshold.

Safe Harbor Provisions

To assist taxpayers, the IRS has established optional safe harbors that simplify compliance. The initial guidance in Notice 2023-38 provides a table that classifies common project components for certain types of facilities as either steel/iron items or manufactured products. For example, for a ground-mount photovoltaic system, the table clarifies that items like steel racking and piles fall under the Steel or Iron Requirement, while components like photovoltaic modules and inverters are classified as Manufactured Products.

In 2024, the IRS issued Notice 2024-41, which introduced a new elective safe harbor to simplify the Adjusted Percentage Rule calculation. Instead of obtaining direct cost information from manufacturers, taxpayers can elect to use a set of IRS-provided cost percentages for various components. This notice also updated the safe harbor tables to include components for hydropower and pumped hydropower storage facilities. A taxpayer can use the classification table and then choose to either calculate the domestic content percentage using the direct cost method or elect to use the cost percentage safe harbor.

Certification and Recordkeeping

After determining that a project satisfies the domestic content requirements, the taxpayer must formally certify this compliance to the IRS. This is accomplished by attaching a specific certification statement to their annual tax return for the first year the domestic content bonus credit is claimed. The statement must include the following information:

• The type of project and its geographic location
• The date it was placed in service
• Whether the taxpayer is claiming the production tax credit or the investment tax credit
• An explicit statement that the project meets the domestic content requirements

Beyond the initial certification, taxpayers must maintain records that substantiate their claim. These records must be sufficient to prove the domestic content claim upon examination by the IRS. This includes documentation detailing the sourcing of all steel and iron, as well as the cost breakdowns and manufacturing locations for all components used in the adjusted percentage calculation. These records must be kept for as long as they may be relevant for the administration of any internal revenue law.