Background

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”). Two of the key objectives of the IRA are to incentivize the industry to produce certain types of renewable energy facilities and projects (“Qualified Projects”) and to promote employment within the United States in manufacturing industries. To accomplish these objectives, the IRA amended Sections 45 and 48 of the Internal Revenue Code to allow companies to receive additional bonus tax credits of up to 10 percent for Qualified Projects that satisfy certain domestic content requirements for iron, steel, and manufactured products.

The U.S. Department of Treasury (“DOT”) and the Internal Revenue Service (“IRS”) recently released guidance (the “Guidance”) on the domestic content tax credit requirements for Qualified Projects. The Guidance is not a proposed regulation but rather a statement of how the DOT and IRS intend to implement the domestic preference requirements of the IRA in future proposed regulations. The Guidance offers key insights into the future IRA regulations and provides a framework for companies to prepare their supply chains to take advantage of the IRA’s domestic content tax credits.

Domestic Content Standards

The IRA’s domestic content standards are based on the domestic preference requirements that appear in the Federal Transit Administration (“FTA”) Buy America regulations for iron, steel, and manufactured products found at 49 CFR § 661. Pursuant to the IRA, all manufacturing processes for iron and steel products that are structural in nature must take place in the United States, except metallurgical processes involving the refinement of steel additives.  The iron and steel requirements do not apply to steel or iron used in manufactured products and their components. The Guidance also makes clear that certain predominantly iron and steel items are not subject to the IRA’s iron and steel requirements such as nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, and door hinges.

Manufactured products are considered to be produced in the United States if at least 40 percent (20 percent for qualified offshore wind facilities) of the total costs for all manufactured products used for the Qualified Facility are mined, produced, or manufactured in the United States. These domestic content percentages will incrementally increase from 40 percent if construction begins before 2025 to 55 percent in 2027, and from 20 percent for an offshore wind Qualified Facility if construction begins before 2025 to 55 percent in 2027.

A Manufactured Product is considered to be a 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. See 49 CFR § 661.5(d). 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. Id. The Guidance defines manufacturing process as “the application of processes to alter the form or function of materials or elements of a product in a manner adding value and transforming those materials or elements so that they represent a new item functionally different from that which would result from mere assembly of the elements or materials.”

The Guidance also provides safe harbor classifications to help companies differentiate certain products that are commonly used in utility-scale photovoltaic systems, land-based wind facilities, offshore wind facilities, and battery energy storage technologies and could be classified as either an iron/steel product or a manufactured product.

Impact on Companies

The IRA domestic content tax credits could present unique opportunities for companies that are already complying with the myriad of Buy America requirements on other construction projects. Buy America requirements imposed by various U.S. government agencies typically require strict compliance with domestic preferences in order to bid on and perform covered construction projects. The new IRA domestic content requirements take a markedly different approach and provide companies a benefit for compliance with domestic preferences.

The Guidance gives companies that produce Qualified Projects an opportunity to work with existing and prospective vendors in their supply chain to produce new products or modify existing products to take advantage of both Buy America requirements and the new domestic content tax credits. Companies that produce components that meet the IRA’s domestic preference requirements will likely be at an advantage in the future as more prime contractors seek to access the domestic content tax credits.

We will continue to provide updates as more information on the proposed regulations becomes available.