Notice 2023-29: Domestic Content Bonus Credit Explained

The Inflation Reduction Act (IRA) introduced a domestic content bonus credit for clean energy projects. Guidance from the Internal Revenue Service (IRS) clarifies how project developers can qualify for this enhancement, which increases the value of the Production Tax Credit (PTC) and the Investment Tax Credit (ITC) for facilities that use American-made materials. To successfully claim the bonus, taxpayers must adhere to specific criteria for what constitutes domestic content, the calculations that must be performed, and the procedural steps for filing.

The Domestic Content Requirement

The domestic content requirement detailed in IRS guidance consists of two independent tests: the Steel or Iron Requirement and the Manufactured Products Requirement. An “Applicable Project,” which includes facilities eligible for credits under sections 45, 48, 45Y, and 48E, must meet both standards to qualify for the bonus credit. These projects encompass a wide range of clean energy technologies, including solar, wind, and energy storage, and the rules apply to both new construction and retrofits.

The Steel or Iron Requirement stipulates that all manufacturing processes for any steel or iron item that serves a structural function within the project must occur in the United States. This rule has no minimum percentage threshold and applies to materials like steel rebar in a foundation or steel piles for mounting structures. The guidance clarifies that this rule does not extend to steel or iron components of a larger manufactured product, such as the nuts, bolts, or internal framing of an inverter.

The second part of the requirement focuses on Manufactured Products, defined as any project component that is not primarily steel or iron and is structural. For a Manufactured Product to be considered produced in the United States, all of its manufacturing processes must be performed in the U.S., and all of its components must be of U.S. origin. To meet the overall Manufactured Products Requirement, the cost of a project’s U.S. Manufactured Products and U.S. Components must equal or exceed a set percentage of the total cost of all Manufactured Products.

This is known as the “Adjusted Percentage Rule.” For projects where construction begins before 2025, this adjusted percentage is 40%. The required percentage increases to 45% for projects beginning in 2025, 50% for projects in 2026, and 55% for projects beginning after 2026. A “component” is any article, material, or supply directly incorporated into a Manufactured Product.

Calculating the Domestic Content Percentage

To meet the Manufactured Products Requirement, taxpayers must show that a certain percentage of their project’s manufactured product costs are domestic. The IRS provides two methods for this calculation: a direct cost calculation or an elective safe harbor.

The first method requires calculating the domestic content percentage based on the direct costs of manufacturing. This includes direct materials and labor costs from the manufacturer’s cost accounting records, while excluding costs like overhead or supplier profit margins. The formula divides the total direct cost of U.S. Manufactured Products and components by the total direct cost of all Manufactured Products in the project.

As an alternative, taxpayers may use the elective safe harbor introduced in 2024. This method allows taxpayers to use a table of IRS-provided cost percentages for various types of clean energy technologies, simplifying the compliance process by avoiding the need to obtain direct cost data from manufacturers.

To help classify project components, the IRS also provides a separate safe harbor table. This table categorizes common parts for technologies like solar, wind, and energy storage as either a Manufactured Product or subject to the Steel or Iron Requirement.

Required Certification and Recordkeeping

A taxpayer cannot claim the domestic content bonus without first preparing and maintaining specific documentation. The primary requirement is a certification statement that serves as a formal declaration, under penalty of perjury, that the project has met both the Steel or Iron Requirement and the Manufactured Products Requirement. This certification must be completed as of the date the project is placed in service.

The certification statement must contain precise information. The taxpayer must identify whether the bonus is being claimed for the Production Tax Credit or the Investment Tax Credit. It must also include specifics about the project, such as its type, geographic location, and the date it was officially placed in service, culminating in an affirmation that both rules have been satisfied.

Beyond the certification, taxpayers must adhere to general recordkeeping requirements to substantiate the claims made. In the event of an IRS examination, the taxpayer must be able to produce documentation proving the domestic origin of the steel, iron, and manufactured products. These supporting documents should include records from manufacturers and suppliers that trace the production process and sourcing of components to validate the adjusted percentage calculation.

Claiming the Bonus Credit

The final step is to file the correct documentation with the annual tax return. To claim the credit, the taxpayer must attach the completed Domestic Content Certification Statement to the tax form used to claim the underlying energy credit for the first taxable year the bonus is claimed.

For taxpayers claiming the Investment Tax Credit, the certification is attached to Form 3468, Investment Credit. Those claiming the Production Tax Credit will attach the statement to Form 8835, Renewable Electricity Production Credit, or an equivalent form for credits under the newer sections 45Y and 48E.

For production-based credits, this is not a one-time action; a copy of the original certification must be attached to the tax return for each year the credit is claimed.