DOMESTIC CONTENT BONUS FOR THE IRA ITC/PTC
Disclaimer
The information provided herein is for general informational purposes only and should not be construed as tax, legal, accounting or financial advice. BayWa r.e. and its employees are not qualified in these fields and do not hold any relevant certifications or licenses. Before making any decisions related to taxes and the matters herein, please seek the assistance of a qualified advisor.
- IRA = Inflation Reduction Act. Signed into law in 2022 this legislation is targeted to address various US economic and environmental issues.
- ITC = Investment Tax Credit. Reduces the federal income tax liability for a percentage of the cost of a solar system installed during the tax year.
- PTC = Production Tax Credit. A per kilowatt-hour tax credit for electricity generated by solar and other qualifying technologies for the first 10 years of a system’s operation. Adjusted annually, this credit reduces the federal income tax liability.
- Domestic Content Bonus – An additional 10% increase to either the ITC or PTC if all steel or iron used is produced in the US and a “required percentage” of the total costs of manufactured products (including components) of the facility are mined, produced, or manufactured in the US. 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 megawatt 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.
It is important to know that the Treasury Department has not issued final guidance on the domestic content bonus topic and is not expected to do so until 2025. Until the final guidance is issued the industry is working with what information has been released thus far and is subject to change.
What is the domestic content bonus?
The domestic content bonus is an additional percentage of tax credit than can be earned on top of the ITC or PTC credits by using solar products that meet minimum US production requirements in a project. To be eligible for the bonus credit, projects must have a minimum of 40% domestic content in 2025 (increasing to 50% in 2026 and then 55% in 2027).
Who can claim the tax credit?
The domestic content bonus for the IRA ITC/PTC is for commercial entities only, and the asset holder gets to claim the tax credit. This means the installation is either owned by and serves a commercial business or the system is owned by a commercial entity that sells the power to an end user. A homeowner who owns their own system is not a commercial entity and therefore cannot claim the domestic content bonus.
What does this mean for our solar installers?
They should know and communicate that this credit will only apply to commercial projects and only the owner of the system is eligible for the tax credit bonus. Since it is the asset owner and not the installer who will receive the credit, installers should ensure that the asset owner controls the bill of materials for any project, along with the documentation and chain of custody control that will be required as part of their annual tax filing to receive the credit.
Installers must work closely with the owner of the system to determine the cost and benefits to pursuing domestic content to earn the credit. Since domestic content is traditionally more expensive than imports, the additional credit may not be enough to offset the price difference of selecting product that meets domestic content requirements.
What are the requirements for a product to be considered domestic content?
Definition from the US Department of Treasury: Definition from the US Department of Treasury: A Manufactured Product is considered to be produced in the United States (U.S. Manufactured Product) if: (1) all of the manufacturing processes for the Manufactured Product take place in the United States; and (2) all of the Manufactured Product Components of the Manufactured Product are of U.S. origin. A Manufactured Product Component is considered to be of U.S. origin if it is manufactured in the United States, regardless of the origin of its subcomponents.
- In practice, this means that the Manufacturer must be able to provide documentation that the components that go into the assembly of the finished product are of US origin, and what cost percentage contribution that product will provide, according to the latest guidelines from Treasury (either the direct cost in Adjusted Percentage Rule or using the Elective Safe Harbor rate tables).
How will we know if products are considered domestic content?
Expect manufacturers to begin advertising which of their specific products meet domestic content requirements and provide documentation with those products verifying sourcing and production requirements. It will be the manufacturer’s responsibility to develop and provide documentation of a products domestic content.
What content does BayWa r.e. have that currently meets domestic content requirements for this tax credit bonus?
While we may have domestic product, we do not have any domestic content that has the required documentation that will be required to file for the tax credit bonus. We expect to begin seeing documented product hit the marketplace in fall of 2024. Selecting solar products that meet the domestic content requirements will likely be confusing during the initial roll out, but it is to be expected in the following years that all aspects of this system (identifying qualifying product, obtaining product with the required documentation, filing for the credit itself) will all become more refined.
Fast Facts:
- The Domestic Content Bonus will only apply to commercial projects or projects owned by commercial entities. Residential systems owned by homeowners do not qualify.
- It is the owner of the system (the commercial entity) who will be eligible for the tax credit bonus – not the installer.
- System owners will need to purchase product with documentation of domestic content to include in their tax filings to receive the domestic content tax credit bonus.
- As of August 1, 2024 there is currently very limited product on the market with the required documentation to obtain the domestic content tax credit, however, this is likely to change in Q3 and Q4 as manufacturers begin providing documentation.
- BayWa r.e. and its employees are not tax professionals and any information provided is for informational purposes only. Before making any decisions related to taxes a qualified tax advisor should be consulted.