The IRS has created a safe harbor (Notice 2024-21) that will significantly simplify the calculation for claiming the 10% bonus energy credit available for domestic sourcing wind, solar, and energy storage projects.
The bonus credit amounts are generally available for projects that source 100% of steel and iron components from the U.S. and ensure that 40% of the costs of all manufactured products are sourced domestically. Qualifying projects are generally eligible for an additional 10% investment tax credit (ITC) under Section 48 or a 10% increase in the rate for the production tax credits (PTCs) under Section 45. The bonus credits will also apply to the Section 45Y PTC and Section 48E ITC when they replace the current credits for projects beginning construction in 2025 or later.
The IRS released initial guidance for complying with the sourcing rules in Notice 2023-83, which provides a complex calculation that requires obtaining significant (and potentially proprietary) information from suppliers. The rules generally require classifying components into either manufactured products or steel and iron components. Components that are manufactured must be further classified into those that are themselves considered manufactured products (MPs) or are a component of another manufactured product (“manufactured product components” or “MPCs”), or are subcomponents of an MPC (see our prior alert).
The cost of an MP can be considered a qualifying domestic cost only if it is produced in the U.S. and all its MPCs are produced in the U.S. If some of its MPCs are produced outside the U.S., then only the costs of those U.S. MPCs can qualify. The sourcing of subcomponents of an MPC are essentially irrelevant.
Grant Thornton Insight:
The classification of any component as an MP, MPC, or MPC subcomponent is critical. The domestic production costs of an MP are includable as a qualified cost only if all its MPCs are produced in the U.S. The domestic production costs of an MPC are always includable regardless of the origin of its subcomponents. The classification analysis on large projects can be complex, and the full calculation requires obtaining detailed cost and sourcing information from suppliers.
Notice 2024-21 provides a safe harbor with simplified calculations for ground solar, rooftop solar, land-based wind, and electric battery storage projects. The notices offers a safe harbor classification for all components as either MPs or MPCs and then assigns each a set cost percentage. So instead of determining the actual direct costs of domestic- and foreign-sourced components for purposes of the 40% calculation, the safe harbor allows taxpayers to assign each component a set cost as an overall percentage of total cost. Essentially, taxpayers can determine which products are considered domestic- or foreign-sourced and assign the standard percentage values to perform the calculation without any cost information from suppliers.
Taxpayers are not required to use the safe harbor, but if they do, they must apply it in its entirety. If the project doesn’t include some of the components identified in the safe harbor table, then the taxpayer must assign that category a zero value without adjusting any other percentages. Projects with additional components not covered in the table must disregard the costs of those components for purposes of the test.
Grant Thornton Insight:
The safe harbor can significantly simplify qualification for the projects it covers. Projects that would not qualify for the bonus credit under the safe harbor but could qualify under an application of the general rules can ignore the safe harbor. The safe harbor is also unavailable for many types of projects, including offshore wind, combined heat and power and geothermal. These projects will still require significant work to determine and substantiate bonus credit amounts. While the guidance does offer safe harbor component classifications for hydropower and offshore wind, it does not provide cost allocation safe harbor for either.
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