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CLIENT ALERT: IRS Issues Guidance on “Domestic Content” Requirements for Tax Credits

May 2023
Eduardo Cukier, K.C. Chiang, and Alexander Sánchez-Figueroa (Law Clerk)

On May 12, 2023, the Internal Revenue Service (“IRS”) issued initial guidance in Notice 2023-38 (the “Notice”) to clarify the “domestic content” qualification requirement for certain increased tax credits, known as “domestic content bonus credits,” that may be sought under the Inflation Reduction Act of 2022. These domestic content bonus credits are intended to incentivize developers to use U.S.-produced steel, iron and components (the “Domestic Content”) to build certain qualified renewable electricity facilities or energy projects placed in service after December 31, 2022, as well as certain qualified clean electricity facilities or energy storage technologies placed in service after December 31, 2024.

Under these rules, the production tax credits for certain qualified facilities or projects can be increased by an amount equal to 10% of the credit amounts otherwise allowed. The investment tax credits for certain qualified facilities or projects can be increased by either 2% or 10%, in each case if several requirements are satisfied, including the “Domestic Content” requirement.

Generally, the Domestic Content requirement is met if (i) each component in the facility or project that is made primarily of steel or iron is manufactured in the U.S., and (ii) each other component that is a manufactured product is comprised of at least a specified percentage of U.S.-manufactured materials. The required minimum percentage in clause (ii) above is currently 40% (or 20% for offshore wind facilities), and may increase for certain facilities that are constructed in future years.

The Notice announces that regulations will be proposed to provide guidance on how to comply with the Domestic Content requirement, as well as how a retrofitted project can also qualify for bonus credits. The Notice further includes a limited safe harbor to categorize certain components as either “steel/iron” or a “manufactured product” in certain types of facilities, energy projects or energy storage technologies. Taxpayers can rely on the rules described in the Notice for the facilities, projects or technologies the construction of which begins before the date that is 90 days after the date the proposed regulations are published in the Federal Register. However, for items that are excluded from the safe harbor, it remains unclear under certain circumstances if a component should be categorized as either steel/iron or a manufactured product. The Notice states that the forthcoming proposed regulations will apply to tax years that end after May 12, 2023.

Please contact the Olshan attorney with whom you regularly work or one of the attorneys below if you would like to discuss further or have any questions.

This publication is issued by Olshan Frome Wolosky LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising.
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