IRS Issues Guidelines for U.S.-Based Manufacturing Domestic Content Bonus

The U.S. Department of the Treasury and Internal Revenue Service (IRS) have released guidance that provides detailed information about the domestic content bonus under the Inflation Reduction Act for clean energy projects and facilities that meet American manufacturing and sourcing requirements.

“The domestic content bonus under the Inflation Reduction Act will boost American manufacturing, including in iron and steel,” says Secretary of the Treasury Janet L. Yellen. “These tax credits are key to driving investment and ensuring all Americans share in the growth of the clean energy economy.”

Under the Production Tax Credit (PTC), facilities that meet domestic content requirements receive a 10 percent bonus. Under the Investment Tax Credit (ITC), projects that meet the domestic content requirement receive up to a 10-percentage-point bonus.

Projects are eligible for the full value of the bonus only if they meet the domestic content requirement and one of the following requirements: 1) the project has a maximum net output of less than 1 MW of energy; 2) construction of the project began before January 29, 2023; or 3) the project satisfies the Inflation Reduction Act’s prevailing wage and apprenticeship requirements. 

The domestic content bonus applies to facilities built using the required amounts of domestically produced steel, iron and manufactured products. To receive the bonus, all steel and iron manufacturing processes must take place in the United States. A statutorily required minimum percentage of the costs of the manufactured products and components of manufactured products that comprise a facility must come from products and components that were mined, produced, or manufactured in the United States.

“The IRA’s domestic content incentive represents a monumental opportunity to continue growing our domestic clean energy supply chain,” comments the American Clean Power Association’s JC Sandberg. “This guidance will help provide clarity around its eligibility requirements, unlocking billions of dollars of investment in American clean energy manufacturing and its workforce.”

Consistent with the Buy America rules administered by the Federal Transit Administration, a manufactured product is produced in the United States if the manufacturing processes for the product take place in the United States and all the components of the product are manufactured in the United States. Components include any articles, materials, or supplies that are incorporated into the manufactured product. The guidance also includes key clarifications around the treatment of labor costs, to ensure the focus of the incentive remains on domestic manufacturing.

To assist taxpayers in determining the applicable steel, iron, or manufactured product standards, the Treasury Department and the IRS are providing a safe harbor for certain types of clean energy projects, which was recommended by the Federal Transit Administration and the Department of Energy.

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