Notice 2023-38: Domestic Content Bonus Credit Rules

The Inflation Reduction Act of 2022 introduced a bonus credit for clean energy projects that use American-made components. The Internal Revenue Service issued Notice 2023-38, with subsequent modifications, to clarify the rules for qualifying for this domestic content bonus. This financial incentive is designed to encourage investment in the United States’ manufacturing base by outlining the specific requirements necessary to claim the additional tax benefits.

Understanding the Domestic Content Bonus Credit

The domestic content bonus is an additional credit, or “adder,” that increases the value of certain federal energy tax credits. It applies to the Production Tax Credit (PTC) under Section 45 and the Investment Tax Credit (ITC) under Section 48, along with their successors, Sections 45Y and 48E, for projects placed in service after December 31, 2024. For projects claiming the PTC, the bonus is a 10% increase to the credit amount. For the ITC, the bonus is a 2 percentage point increase, which can rise to 10 percentage points if the project also satisfies prevailing wage and apprenticeship requirements or is exempt from them.

This bonus is available for an “Applicable Project,” which includes qualified facilities like wind and solar farms, energy projects, or energy storage technologies. Examples range from utility-scale solar and onshore wind facilities to battery energy storage systems and hydropower projects. Retrofitted projects can also qualify, provided the value of any used property does not exceed 20% of the project’s total value.

To be eligible, an Applicable Project must satisfy two tests. The first is the Steel or Iron Requirement for structural components. The second is the Manufactured Products Requirement, which covers all other project components and uses a cost-based percentage threshold. Both criteria must be met to claim the domestic content bonus.

The Steel or Iron Requirement

The Steel or Iron Requirement applies to materials made predominantly of steel or iron that serve a structural function. These are foundational elements like steel rebar in concrete, piles for solar racking, and the towers that support onshore wind turbines.

For these components, all manufacturing processes must occur in the United States. This is an all-or-nothing test covering the entire production cycle, from smelting raw materials into steel or iron to the final application of coatings. While the origin of the raw ore is not considered, every subsequent step to create the final structural component must be domestic.

The rule excludes steel or iron items that are not structural. Smaller hardware components, such as nuts, bolts, screws, and washers, are not subject to this requirement. Instead, these items are categorized and assessed under the separate Manufactured Products Requirement.

The Manufactured Products Requirement

The Manufactured Products Requirement applies to all project components not covered by the Steel or Iron Requirement. This category includes items like solar panels, wind turbine nacelles, inverters, battery packs, and electrical transformers.

First, the manufactured product must be “produced in the United States,” meaning all final manufacturing and assembly processes took place within the U.S. This focuses on where the product takes its final, commercially identifiable form. The second part is the Adjusted Percentage Rule, a cost-based threshold. To qualify, the cost of U.S.-made manufactured components must exceed a specified percentage of the total cost of all manufactured components in the project.

For most projects beginning construction before 2025, this threshold is 40%. For projects claiming the PTC, this percentage increases to 45% in 2025, 50% in 2026, and 55% for 2027 and beyond. The phased increase does not currently apply to the ITC under Section 48E, where the threshold is expected to remain at 40%.

Offshore wind projects have a different schedule. The required percentage is 20% for projects beginning construction before 2025, rising to 27.5% in 2025, 35% in 2026, 45% in 2027, and 55% for projects beginning construction after 2027.

Calculating the Adjusted Percentage for Manufactured Products

To calculate the Adjusted Percentage, every manufactured product and its components must be classified as either a “U.S. Component” or a “Non-U.S. Component.” A U.S. Component is one that is mined, produced, or manufactured in the United States. A Non-U.S. Component is any component that does not meet this definition.

Only direct material and labor costs incurred by the manufacturer are included in the calculation. Indirect costs like overhead, profit margins, or transportation to the project site are excluded. Because obtaining direct cost data from suppliers can be difficult, the IRS introduced an elective safe harbor with standard cost percentages for certain components, which simplifies compliance.

The formula is a fraction: the numerator is the total cost of all U.S. Components, and the denominator is the total cost of all manufactured components. The resulting percentage must meet or exceed the required threshold for the year construction begins. For example, a solar project with $1,000,000 in total manufactured product costs, including $350,000 from U.S. components, would have an adjusted percentage of 35% ($350,000 / $1,000,000). If this project began construction in 2024, it would fail the 40% threshold.

Certification and Reporting Requirements

After determining they have met both requirements, project owners must certify their compliance to the IRS by preparing a “Domestic Content Certification Statement.” This document must be signed under penalties of perjury by a person with legal authority to bind the taxpayer.

The statement must include the following information:

• Whether the project is a qualified facility, an energy project, or an energy storage technology
• The specific type of project, its geographic location, and the date it was placed in service
• A clear affirmation that the project has satisfied both the Steel or Iron Requirement and the Manufactured Products Requirement

This signed certification must be attached to the appropriate tax form, such as Form 3468 for the ITC or Form 8835 for the PTC, when filing the return for the first year the bonus is claimed. For projects claiming the PTC over its 10-year lifespan, a copy of the original certification must be attached to the tax return each year.