On May 12, 2023, the IRS issued Notice 23-38 to outline the guidelines for projects that qualify for the Domestic Content Bonus Credit under Section 48 Investment Tax Credit or Section 45 Production Tax Credit in the Inflation Reduction Act. Below are key takeaways as you plan projects for your business.
This article will speak mostly about Commercial Solar projects under the Section 48 Investment Tax Credit.
What projects does this apply to?
This applies to the commercial renewable energy projects covered under Section 48 and Section 45 of the Inflation Reduction Act of 2022. Most notably because of their widespread adoption, this includes commercial solar projects. It also includes wind, geothermal, battery storage, combined heating and power and other less-adopted technologies. It applies to commercial installations, including businesses, nonprofits, state and local governments, churches, colleges and universities, real estate investment trusts (REITs), and tribal governments. It doesn’t apply to residential projects, which are credited elsewhere in the Inflation Reduction Act.
How much credit can my project qualify for?
Generally, the Inflation Reduction Act provides a 30% tax credit for qualifying projects under Section 48 of the Investment Tax Credit. Each type of project has its own guidelines, so as you consider different renewable energy projects, it will be important to dive into the specifics of your project. For solar projects, projects over 1 megawatt (MW) have additional requirements. However, for projects under 1 MW (most projects currently), the credit is 30%, plus any applicable bonus credits.
The Domestic Content Bonus Credit (DCBC) provides an additional 10%, so that projects would qualify for a 40% total credit (plus accelerated depreciation – for more details on depreciation, see this article).
What are the Domestic Content requirements?
Tied to the “Buy America Requirements”, the bonus credit requires the products and components being manufactured in the United States.
Steel and Iron:
100% of all structural steel and iron is required to be manufactured in the United States**. For solar projects, this would include any tracks / framing that support the panels. The notice specifically indicates that this requirement does not apply to steel or used in components and subcomponents, such as nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, door hinges and similar items that are made primarily of steel or iron but are not structural in function.
The notice provides definitions, details, and examples that I encourage you to read or consult with a specialist about. In short, in 2023, for commercial solar projects, at least 40% of the manufactured products and components (as determined by the cost of the products) must be manufactured in the United States to qualify. This percentage will increase to 55% beginning in 2026.
How do I know if my system qualifies for the Domestic Content Bonus Credit?
As you’re selecting solar contractors and/or manufacturers for panels, inverters, and framing, it is critical that you ask for documentation of the Domestic Content to ensure that you meet these criteria and get the bonus. Because the guidance was just issued today (as of the date of this article), even domestic solar manufacturers such as First Solar, QCells, SILFAB, and Mission Solar will need to document that their components meet the requirements of the IRS notice. Additionally, the United States currently has limited manufacturing of solar inverters, which are also critical components of a solar system.
In the coming months, it is likely that the Department of Energy will publish a list of qualifying manufacturers. More manufacturers will also have ready-made information marketing their compliance. Until then, if you are doing a solar project, there is no substitute for asking the questions, documenting the responses in writing, and/or working with someone who can help you navigate this process.
What else should I know about the Inflation Reduction Act?
Tax incentives for Commercial Solar have been increased greatly under the Inflation Reduction Act, as have incentives for energy efficiency projects (LED lighting, HVAC upgrades, insulation). There are over 100 different programs in the act, and almost every business, community, non-profit, and homeowner can benefit! Now is the time to incorporate these high-ROI projects into your planning for 2023 and beyond!
About the Author
Caleb Quaid is the founder of Regenerative Shift, a Tampa-based environmental consulting firm, working with businesses and communities on regenerative environmental initiatives and sustainability programs. Regenerative Shift focuses on life-creating and cost-saving holistic programs, including regenerative land and water projects and Inflation Reduction Act (IRA) consulting. As a public speaker, Caleb provides motivating insight into practical life-creating environmental practices and shows the business case for going green with tax incentives under the IRA.
The IRA can be a lot to navigate, and new guidance is issued every week. If you’d like to discuss how your business can benefit, Regenerative Shift is here to help! Contact us today to set up a free consultation!