The Inflation Reduction Act (IRA), which was signed into law in August 2022, contains more than $369 billion in funding for climate and clean energy, including through tax credits for clean energy projects and investment. On May 12, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released guidance on the domestic content bonus tax credits under the IRA.
These tax credits aim to incentivize clean energy projects and facilities that meet American manufacturing and sourcing requirements. Below is a summary of key details of these new domestic content requirements and their significance for boosting American clean energy manufacturing.
What are the domestic content bonus credits?
The domestic content bonus credits under the IRA are designed to boost American manufacturing, particularly in the iron and steel sectors, by providing an additional bonus credit on top of production and investment tax credits for clean energy projects.
Eligibility and Bonus Incentives
- Facilities meeting domestic content requirements under the Production Tax Credit (PTC) are eligible for a 10% bonus.
- Projects meeting the domestic content requirement under the Investment Tax Credit (ITC) can receive a bonus of up to 10% (which could be as much as a 33% increase in the ITC amount).
- To qualify for the full value of the bonus, projects must meet the domestic content requirement and satisfy specific criteria, such as maximum net output, construction start date, or prevailing wage and apprenticeship requirements.
Domestic Content Requirements
In order to qualify for the bonus credit, a product must be considered an “Applicable Project,” and also meet three additional requirements:
- Steel or Iron Requirement – All steel and iron manufacturing processes must occur within the United States to receive the bonus. This also applies to facilities constructed using domestically produced steel, iron, and manufactured products.
- Manufactured Products Requirement – Beginning in 2023, 40% of the value of manufactured products and components that are mined, produced, or manufactured must come from the United States. This scales up to 55% after 2026. Components incorporated into the manufactured product are considered American-made if their manufacturing processes and all components are based in the United States.
- Certification requirement – To claim the Domestic Content Bonus Credit, taxpayers should include a Domestic Content Certification Statement with Form 8835, Renewable Electricity Product Credit; Form 3468, Investment Credit; or other relevant forms in their annual tax returns.
Safe Harbor and Classification
- To assist taxpayers in determining applicable standards, the Treasury Department and the IRS are providing a safe harbor list of common project components for certain types of clean energy projects. The project component list is categorized for “utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities, and battery energy storage.”
- Treasury remains open to alternative approaches to classification, including a tax-specific, technology-neutral, principles-based approach, as technologies and supply chains evolve.
Clarity and Certainty for Investments
- The guidance released represents the first phase of the Treasury Department’s implementation of the IRA’s clean energy provisions. It also follows previous guidance on the clean vehicle credit and the bonus for clean energy projects in energy communities.
- The Treasury Department will continue issuing guidance on the clean energy provisions in the coming months. Check the IRS webpage for the latest updates and guidance on IRA tax credit provisions.
Conclusion
The new domestic content requirements for the IRA’s bonus tax credits mark a significant step toward boosting American clean energy manufacturing. These tax credits incentivize the use of domestically produced steel, iron, and manufactured products in clean energy projects, supporting American workers and companies. Already in less than a year, the IRA has boosted investment in new manufacturing facilities across the U.S., with nearly 100 new projects announced by May 2023 representing ~$80 billion in new investment.
For more information on what’s in the Inflation Reduction Act, check out CEBN’s Frequently Asked Questions post. We will continue to update and produce new content as more guidance becomes available!
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