A few weeks ago, I attended a webinar – hosted by PV Magazine in conjunction with Clean Energy Associates – about the Domestic Content Bonus Credit in the Inflation Reduction Act. The webinar discussed Notice 2023-38, which is guidance released by the IRS and US Treasury in May regarding the IRA, and some of the challenges associated with accessing the bonus as well as some strategies to achieve the minimum domestic content levels needed to access the credit.
Before diving any deeper, this article is covering current discussion points for the IRA, which assumes a basic knowledge of the act as a whole. For an IRA primer, I recommend consulting here for a broad overview or here for information on specific credits . For a quick refresher, there is a short glossary at the end of the post with explanations of credits specifically mentioned here.
There are two sections of the IRA that deal with domestic content: the Domestic Content Bonus (DC Bonus), and the Domestic Content Requirement (DC Requirement) for direct payment. The DC Bonus Credit encourages solar and other developers to support US manufacturing in clean energy industries. Currently, the bonus can be applied to the Production Tax Credit (PTC) and Investment Tax Credit (ITC). The DC Requirement applies to places that are non-taxable, like hospitals or schools, and allows them to be paid directly for meeting the requirements.
The first part of the webinar confirmed that the guidance clarified many questions, including:
- Distinction between components: The guidelines identified project components as either ‘Manufactured Products’ or ‘Steel or Iron components.’ Steel or Iron components tend to be related to the physical structure of facilities, while Manufactured Products include technologies like inverters and photovoltaic modules. Each category has different requirements to determine what constitutes domestic content.
- Manufactured Product Components: The guidelines outlined what are considered ‘Manufactured Product Components’ (MPCs), which are parts of Manufactured Products. MPCs are made of subcomponents, and the guidelines further clarified that the origins of subcomponents will not be considered in the calculation of the domestic content percentage.
- Labor costs clarification: The guidelines confirmed that for MPCs not built in or originating in the US, the labor costs associated with building them would not count towards domestic content.
It also discussed a major sticking point in the process: direct costs, defined as the sum of direct material costs and direct labor costs. These costs need to be known to calculate a project’s domestic content, and the easiest way to do so is with an itemized list from the manufacturer. Unfortunately, manufacturers often consider this information sensitive, making them hesitant to share it with customers and direct costs difficult to calculate.
Additionally, there were a few more shortcomings in the new guidance, the biggest being that it (understandably) failed to address everything, leaving some vagueness that needs to be tackled before the final rules are released. For example:
- Aluminum racking: Technically not iron or steel but since it acts more as a support structure, it does not really ‘fit’ into the definition of Manufactured Products.
- Inverters: There is no bill of materials for inverters, which makes it difficult to get direct costs and to figure out what should be classified as MPCs.
- No “de minimus” for components: The MPC list for PV modules includes tiny components, which raises the question: what is the smallest component that should be considered when calculating domestic content?
Even though these gray areas make it difficult to ascertain direct costs, there are still ways to take advantage of the DC bonus. One strategy shared during the webinar is to use US-manufactured PV cells—especially in residential projects. An alternative way is to consider the whole solar assembly: the project can often qualify by using domestic module materials, US solar trackers, and imported cells.
Overall, the consensus of the webinar was that the main pain point of the process was waiting for more guidance about further questions. While the complexity of the DC bonus might discourage some manufacturers at first, the IRA has a lot of potential to help build a strong US clean energy manufacturing base. I, for one, await further guidance for the DC bonus with excitement!
Glossary:
IRS, Internal Revenue Service: the body of the US government that oversees taxation, helping individuals file taxes and enforcing tax law.
IRA, Inflation Reduction Act: Passed by the Biden-Harris Administration in 2022, the IRA adjusts the tax code and creates jobs in the clean energy sector by incentivizing prevailing wages and encouraging American manufacturing for equipment for clean energy production.
PTC, Production Tax Credit: A per kilowatt-hour federal tax credit that provides a corporate tax credit for electricity produced using renewable resources.
ITC, Investment Tax Credit: A federal tax credit that can be claimed for a percentage of the cost to build a PV system.
