The U.S. Department of the Treasury and the IRS continue to provide guidance on implementing the clean energy credits enacted by the IRA. In May, Notice 2024-41 was issued to provide a new elective safe harbor for purposes of domestic content bonus credit under IRC Sections 45, 45Y, 48, and 48E (new elective safe harbor). The new elective safe harbor expands the safe harbor set forth in Notice 2023-38 to determine whether a project component satisfies the domestic component requirement of the domestic content bonus credit.
Background
The IRA amended IRC Sections 45 and 48 to provide a domestic content bonus credit amount for certain qualified facilities or energy projects placed in service after Dec. 31, 2022. The IRA also added IRC Sections 45Y and 48E, which provide a domestic content bonus credit amount for certain investments in qualified facilities or energy storage technologies placed in service after Dec. 31, 2024. Generally, components of an applicable project must satisfy the domestic component requirement to be eligible for the bonus credit.
Notice 2023-38
In 2023, Treasury and the IRS released Notice 2023-38, providing domestic content bonus credit rules under IRC Sections 45, 45Y, 48, and 48E. Specifically, the notice addressed qualification for the domestic content bonus credit, including related recordkeeping and certification requirements, and provided a safe harbor to classify specific components for purposes of determining the credit. Taxpayers could rely on the rules in Notice 2023-38, including a safe harbor for classification of applicable project components in table 2 in the notice (the old safe harbor), for any qualified facility, energy project, or energy storage technology that the construction of which begins before the date that is 90 days after the date of publication of the proposed regulations.
Notice 2024-41
Concerns were raised regarding the complexity of the rules for determining domestic content under Notice 2023-38, including under the old safe harbor. In response, Treasury and the IRS published Notice 2024-41 to provide a new elective safe harbor to more easily classify applicable project components and calculate the domestic cost percentage for purposes of determining whether the domestic content requirement is satisfied.
For purposes of the new elective safe harbor, table 1 in Notice 2024-41 classifies applicable project components and the associated cost percentages for each of the identified manufactured products and manufactured product components. Taxpayers electing to use the new elective safe harbor can use the classifications and cost percentages in table 1 only for the type of applicable project listed in the table. However, the taxpayer can use the new elective safe harbor even if its applicable project does not include all of the items listed in table 1 or includes additional items not listed in table 1.
Crowe observation
Gathering direct cost data from multiple suppliers, including foreign manufacturers, can be challenging for taxpayers. The new elective safe harbor aims to address this complexity by providing more detailed classifications and cost percentages, allowing taxpayers to avoid having to obtain sensitive pricing information from vendors.
Other highlights of Notice 2024-41 include:
- The new elective safe harbor is an expansion of the old safe harbor. For instance, unlike the old safe harbor, the new elective safe harbor can be used to determine whether the steel and iron requirement is met, and, in the case of solar photovoltaic systems (solar panels), wind, and battery energy storage systems (BESS) applicable projects, whether the manufactured products requirement is met.
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The new elective safe harbor clarifies that it can be used to determine a single domestic cost percentage for an applicable project that combines solar panels and BESS applicable projects. How to treat a combined solar and BESS project under the old safe harbor was unclear.
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The utility-scale photovoltaic system category in Notice 2023-38 was replaced in Notice 2024-41 with the ground-mount and rooftop photovoltaic system category, broadening the scope of the old safe harbor to include ground-mounted and rooftop solar projects.
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Table 2 of the notice expands the list of applicable projects eligible for the safe harbor, including hydropower and pumped hydropower storage facilities.
Effective date of Notice 2024-41
Taxpayers can rely on Notice 2023-38, as modified by Notice 2024-41, for domestic content bonus credit requirements for projects that begin construction before the date that is 90 days after publication of the forthcoming proposed regulations.
Taxpayers electing the new elective safe harbor may rely on table 1 of Notice 2024-41 for any applicable project beginning construction before the date that is 90 days after any future modification to the new elective safe harbor.
Looking ahead
Although Notice 2023-38 provided categorization of applicable project components in table 2, Notice 2024-41 goes further by adding the new elective safe harbor to provide a simplified method for determining the domestic content percentage for solar panel, BESS, and wind projects in table 1. This simplified safe harbor helps taxpayers move forward with applicable projects with increased confidence about whether the domestic content bonus will apply to the project. In addition, the safe harbor removes a significant potential obstacle to qualifying for the domestic content bonus by eliminating the need to obtain actual costs from vendors or contractors, which can be difficult.
