On May 16, 2024, the government announced new guidance regarding the domestic content bonus credit that will make it easier to take advantage of the 10% domestic content bonus tax credit. The guidance can be found in Notice 2024-41. It modified Notice 2023-38.
What does the new guidance provide?
- Before this guidance, the domestic content bonus credit had rules that required taxpayers to use the manufacturer’s direct costs of producing manufactured products and their components.
- The new rules provide a safe harbor that provides a certain percentage for various components and allows a taxpayer to use those percentages, instead of direct costs, to determine if the domestic content threshold is met.
Why is the new guidance important?
- Before this guidance, the domestic content bonus credit had rules that were very difficult to satisfy. Many developers placing projects in service felt that they should qualify for the domestic content bonus, but weren’t in a position to satisfy the prior domestic content guidance. As the IRS noted in explaining the new rules, “The Treasury Department and the IRS are aware that obtaining a manufacturer’s direct costs of manufacturing may require the taxpayer to gather cost data from multiple suppliers and manufacturers, including foreign manufacturers, and may present challenges for substantiation and verification.“
- The new rules are much simpler to apply and do not require a taxpayer to collect cost information from manufacturers. As a result, domestic content is expected to be more prevalent in tax credit transactions going forward.
What should developers do?
- Developers should consider whether they can satisfy the NEW domestic content rules and take advantage of the 10% domestic content bonus credit.
- For tax credits that have already been sold, but for which domestic content was not included because the seller wasn’t able to obtain cost information from manufacturers, it may be worth considering whether to sell the increased credit that may now be able to be sold.
- While the domestic content bonus credit cannot be sold separately, there may be an increase in the total credit amount that can be sold.
