US IRS Notice 2023-38: Domestic Content Bonus Credit Guide

Key Takeaways

• The Domestic Content Bonus Credit adds 10 percentage points to investment tax credits (ITC) or a 10 percent multiplier to production tax credits (PTC).
• All structural steel and iron components must be 100% US-manufactured.
• A minimum percentage of manufactured product costs, starting at 40% and rising to 55%, must be US-sourced.
• Proper documentation, including a formal certification statement, is mandatory for claiming the credit.

What is IRS Notice 2023-38 and the Domestic Content Bonus Credit?

IRS Notice 2023-38 provides official federal tax guidance for the Domestic Content Bonus Credit. This credit was established under the Inflation Reduction Act of 2022. It aims to incentivize domestic manufacturing in clean energy projects. The notice sets forth rules, statutory definitions, and safe harbor procedures for claiming this bonus.

The bonus credit applies to projects eligible for tax credits under Internal Revenue Code Sections 45 (Renewable Electricity Production Credit), 45Y (Clean Electricity Production Credit), 48 (Energy Credit), and 48E (Clean Electricity Investment Credit). For Section 48 and 48E investment tax credits, the bonus provides an additional 10 percentage points. This means a baseline 30% credit can increase to 40%. For Section 45 and 45Y production tax credits, the bonus provides a 10 percent credit increase to the base amount.

Eligibility Requirements for the Domestic Content Bonus Credit

To qualify for the Domestic Content Bonus Credit, a project must satisfy two primary requirements: the Steel or Iron Requirement and the Manufactured Products Requirement. These requirements ensure that a significant portion of the project's components are domestically sourced and produced.

The Steel or Iron Requirement

This requirement mandates that 100 percent of all manufacturing processes for structural steel and iron components must take place in the United States. This applies to items such as structural steel racking, piles, or tracker torque tubes used in projects like utility-scale solar PV. This standard is consistent with Buy America requirements.

The Manufactured Products Requirement (Adjusted Percentage Rule)

Beyond steel and iron, a project must also meet the Manufactured Products Requirement, which is governed by the Adjusted Percentage Rule. This rule specifies that a certain percentage of the total manufactured product costs must be from components mined, produced, or manufactured in the United States.

The required percentage increases over time:

• Before 2025: The adjusted percentage threshold is 40 percent of total manufactured product costs. For offshore wind facilities, this threshold is 20 percent.
• 2025: The threshold increases to 45 percent of total manufactured product costs.
• 2026: The threshold increases to 50 percent of total manufactured product costs.
• 2027 and later: The threshold reaches 55 percent of total manufactured product costs.

This rule applies to components like PV modules, inverters, and battery cells.

Calculating the Domestic Content Bonus Credit

The calculation of the bonus credit depends on the type of underlying tax credit.

• Investment Tax Credits (Sections 48 and 48E): If your project qualifies for an investment tax credit, the Domestic Content Bonus Credit adds 10 percentage points to the base credit rate. For example, a project with a 30% base credit would see it increase to 40% with the bonus.
• Production Tax Credits (Sections 45 and 45Y): For projects claiming production tax credits, the bonus credit is calculated as a 10 percent multiplier applied to the production tax credit amount.

Understanding these distinctions is crucial for accurately projecting project economics and tax benefits. For more details on other clean energy incentives, you can refer to our guides on US IRS Notice 2023-29: Energy Community Bonus Credit Guide and Clean Energy Tax Credits: Section 25D vs Section 48 Guide.

Component Classification: Safe Harbor and Table 2

IRS Notice 2023-38 includes a safe harbor provision regarding the classification of certain components. Table 2 within the notice classifies various solar and Battery Energy Storage System (BESS) components. This table helps taxpayers determine whether a component falls under the Steel or Iron Requirement or the Manufactured Products Requirement.

For example, solar tracker components, racking, PV modules, and inverters are categorized. This classification is vital for correctly applying the 100% domestic manufacturing rule for steel/iron and the Adjusted Percentage Rule for manufactured products.

Certification and Documentation Requirements

Claiming the Domestic Content Bonus Credit requires strict adherence to documentation and certification procedures.

Domestic Content Certification Statement

Taxpayers must attach a formal Domestic Content Certification Statement to their annual tax return. This statement must be signed under penalties of perjury. It attests that the project meets the domestic content requirements. This is typically submitted with IRS Form 3468 or Form 7207.

Record-Keeping

To support the certification, taxpayers must maintain comprehensive records. These include:

• Manufacturer Cost Attestations: Documentation separating direct materials and direct labor costs for US-produced components.
• Cost Fraction Calculation: Evidence of how the Domestic Manufactured Products and Components percentage was calculated using the IRS Notice 2023-38 formula.
• Supply Chain Documentation: Engineering bills of materials (BOM), mill test certificates, and vendor country-of-origin documentation.
• Audit Trails: Retain complete supply chain audit trails for a minimum of six years to support potential IRS verification.

Common Pitfalls and Non-Compliance Risks

Failing to meet the requirements of IRS Notice 2023-38 can result in the loss of the bonus credit. Common issues include:

Compliance Verification and Audit Readiness

While this guide focuses on tax credit eligibility, ensuring the integrity and safety of your project components is also part of overall compliance. For domestic content purposes, this translates to thorough verification of product specifications and manufacturing origins.

• Structural Integrity: For US-manufactured tracker torque tubes, ensure structural integrity and wind-load engineering certification.
• Electrical Safety: Verify electrical safety testing certifications, such as UL 1741 and UL 1973, for all domestic inverters and battery storage modules.
• Record Retention: Retain complete supply chain audit trails for a minimum of six years to support IRS domestic content verification. This is critical for demonstrating compliance during an audit.

For information on prevailing wage and apprenticeship requirements, which can also impact tax credit eligibility, consult our guide on US IRS 26 CFR 1.48-13: Prevailing Wage and Apprenticeship Guide.

When to consult a tax professional

The rules surrounding the Domestic Content Bonus Credit are complex and subject to interpretation. While this guide provides an overview of IRS Notice 2023-38, it is not a substitute for professional tax advice.

You should consult with a qualified tax professional or legal counsel specializing in renewable energy tax credits if you:

• Have complex supply chains with multiple international components.
• Are unsure about the classification of specific project components.
• Need assistance in preparing the Domestic Content Certification Statement.
• Are undergoing an IRS audit related to clean energy tax credits.

Incorrectly claiming the bonus credit can lead to penalties and interest. Professional guidance ensures accurate compliance and maximizes the benefits for your project.