The US Treasury greatly simplified the calculations yesterday to determine whether solar, onshore wind and battery projects have enough domestic content to qualify for a 10% bonus tax credit.

The new calculations are in Notice 2024-41.

They are as simple as adding up percentages in a table for the various components of a project that are US-made.

The new calculations should allow the tax equity and tax credit sale markets to start pricing domestic content bonus credits into deals. Domestic content provisions in existing equipment procurement and construction contracts may need to be revisited.

Simpler calculations were not provided for offshore wind, geothermal, hydropower and other types of projects.

The Treasury said in a press release that it plans to add other sectors, "including offshore wind," to the table with the simpler calculations as well as to issue proposed rules for projects that are owned by state and local governments, Indian tribes, rural electric cooperatives or the Tennessee Valley Authority and that can apply to the Internal Revenue Service for direct cash payments in place of tax credits. Domestic content is mandatory for such projects to receive full direct cash payments, but it is waived where use of US-made equipment would increase the project cost by more than 25% or such equipment is not produced in sufficient and reasonably available quantities or is not of satisfactory quality. Treasury did not provide a timeline for the additional guidance.

Basics

The Inflation Reduction Act allows a 10% bonus tax credit for using enough domestic content.

Developers must divide the equipment and other materials brought to the project site for incorporation into a project into two categories: construction materials and manufactured products.

Construction materials are items that are primarily steel or iron and are structural in nature. They must be 100% US-made. Examples are rebar and steel foundation posts at solar projects.

The rest of the materials used in the project are "manufactured products" that, as a group, must be at least 40% US-made initially, increasing to 55% over time. (The starting percentage for offshore wind is only 20%.)

The Treasury said in May 2023 that developers must collect three "direct costs" from factories from whom they procure equipment in order to do the manufactured product calculation. The direct costs are the wages paid to workers to make the equipment, payroll taxes on those wages, and the amount paid to suppliers for parts supplied directly to the factory. (For more details, see "Domestic Content Bonus Credit".)

Manufacturers have been reluctant to disclose this information. In some cases, costs have been disclosed on a confidential basis to neutral third parties to do the calculations.

Safe Harbor Table

Developers of solar, onshore wind and battery storage projects will no longer have to press equipment suppliers for their costs. Instead, there is an option to use a "safe harbor" table that shows the equipment that should be factored into the calculation and that provides percentages to assume for the different components. The calculation is as simple as adding up the percentages.

For example, for batteries, the table shows three manufactured products -- battery packs, inverters and the battery container or housing -- and one type of steel or iron construction material -- the rebar in the concrete foundation.

Each manufactured product consists, in turn, of a number of components.

The table below shows this breakdown for a grid-scale battery that has more than one megawatt hour of storage capacity. Taxpayers using the table to calculate domestic content do not have to take any other equipment into account than what is shown in the table. Thus, for example, the project substation and main power transformer can be ignored.  

To calculate the domestic content percentage for the manufactured products, the taxpayer simply adds together the percentages next to the manufactured product components that are manufactured, as opposed to assembled, in the United States. The United States for this purpose means not only the 50 US states and District of Columbia, but also Puerto Rico, Guam, the US Virgin Islands, American Samoa and the Northern Mariana Islands. Manufacturing involves altering the form or function of parts and raw materials by "adding value and transforming" them into a new product "functionally different from that which would result from mere assembly." 

Thus, if the cells, packaging and thermal management system are made in the United States, but everything else is imported, the domestic content percentage is 38.0 + 3.3 + 4.9 = 46.2%.

If not only the battery packs, but also all four components used to make them are manufactured in the United States, then the "production" number is also added to the percentage. In that case, the domestic content would be 38.0 + 3.3 + 4.9 + 5.2 + 21.1 = 72.5%.

If a component is not used in the product, then it is ignored.

If some of the cells are made in the United States and some are imported, then only a fraction of the 38.0 for cells counts. For example, if 60% of the cells are US-made and 40% imported, then 38.0 x 60% = 22.8% would be credited to domestic content.

Notice 2024-41 is unclear about whether a project is credited with any domestic content where manufactured product components are made in the United States and shipped to a factory in a place like Vietnam to be made into the manufactured product. The better answer is no.

A standalone grid-scale battery will not qualify for a bonus credit using the percentages in the safe harbor table unless the cells plus at least one other component are US-made. In contrast, a battery with a nameplate capacity of one megawatt hour or less can qualify if, for instance, the packaging and printed circuit board assemblies are US-made.

Utility-scale solar projects using trackers are unlikely to qualify unless the cells and one other type of equipment, like the inverters or torque tubes, are US-made, although it is possible in theory to get to 40% without US-made cells.

For onshore wind projects, US-made nacelles alone get to 47.5%. If the nacelles are not US-made, then the blades plus either the rotor hubs or power converters must be US-made to get to 40%.

Solar + Storage

The calculations are more complicated for a solar-plus-storage project.

The project is treated as a single project -- with a single domestic content percentage -- if the generating facility and battery have the same owner and check at least two of seven other boxes at any time during construction. (Related companies with more than 50% overlapping ownership are treated as the same owner.)

The seven boxes are the separate facilities are constructed on contiguous pieces of land or they have a common offtake agreement, common intertie, common substation, common environmental or regulatory permits, are built under a common master construction contract or are financed under a single construction loan agreement. A common tax equity financing is not one of the factors. 

An investment tax credit must be claimed on both parts in order for them to be combined for domestic content purposes.

If all of these factors align, then the single domestic content percentage is a fraction.

The numerator is the domestic content percentage of the solar facility multiplied by the solar nameplate capacity in MWdc plus the domestic content percentage of the battery multiplied by the storage capacity in MWh and multiplied further by a "BESS multiplier."  The BESS multiplier varies from 0.57 to 0.99 depending on whether the solar facility is utility-scale and uses trackers or fixed-tilt mounting or rooftop and uses string inverters or some other means to convert the electricity from direct current to alternating current. The battery multipliers assume the battery has cells.

The denominator is the sum of the solar nameplate capacity and the battery storage capacity.

Otherwise, the generating facility and battery have separate domestic content percentages, and one part may qualify for a bonus credit while the other does not.

Other

There is no point is calculating the domestic content percentage for the manufactured products unless the steel and iron materials that are structural in function are entirely US-made. All of the manufacturing processes must take place in the United States, except for the mining of raw ore and metallurgical processes involving refinement of steel additives.

The safe harbor table can only be used for three types of projects: solar, onshore wind and batteries that store electricity.

Other types of projects must collect cost information from manufacturers to do the manufactured products calculation. (For more detail about such calculations, see "Domestic Content Calculations".)

The Treasury provided a separate table for pumped-storage and other hydropower projects to help identify which parts of such projects are steel or iron and which are manufactured products, but it did not provide domestic content percentages for the different components.

The Treasury asked for comments by July 15, 2024 about other types of projects that it should add to the safe harbor table.

It also asked how often the safe harbor table should be updated. If the percentages can change during construction, it would complicate financings.

The safe harbor table shows a "wind turbine" as the manufactured product, made from "manufactured product components" consisting of a nacelle, blades, rotor hub and power converter. The government appears to read this to mean that whoever puts the equipment together to make the turbine is the manufacturer. Since this occurs at the project site, that makes the construction contractor the manufacturer, notwithstanding what the contractor does seems closer to assembly than manufacturing.

The table lists a "PV tracker" as a manufactured product. Trackers are put together on the project site using components from various companies.  The tracker company basically assembles a kit that goes to the project site. The government appears to say that the construction contractor pulling the kit together is the manufacturer.

Project owners must certify to the IRS that they are entitled to the bonus credit.

The certificate must be signed by a person with authority to bind the taxpayer. It must be attached to the annual tax return filed for the year the project is placed in service. A copy must be included with subsequent tax returns in cases where production tax credits are claimed on a project over time.

The certificate must identify the project and project type, location, when it was placed in service and total bonus credit calculated.

The bonus calculations are done as of the date the project is placed in service. For taxpayers not using the safe harbor table, only costs that have been "incurred" by that date by manufacturers for US tax purposes count in the calculations.

Taxpayers will have to keep records to prove qualification for the bonus credit for as long as a project is exposed to a potential back tax assessment. The IRS usually has three years after the tax return is filed to audit, but taxpayers often consent to an extension where the IRS has come up against the deadline and is not yet ready to close the audit.