January 2024
The IRS and Treasury on December 27 released Notice 2024-9, addressing the phaseout relating to direct payments and the domestic content credit bonus for certain clean energy credits.
The domestic content credit bonus increases the base credit for qualified facilities under Section 45 or Section 45Y, energy projects under Section 48, and qualified facilities and energy storage technologies under Section 48E (collectively, applicable properties). Applicable entities may elect to receive the benefit of these credits as direct payments. Direct payments may be phased out if a project does not comply with domestic content requirements, with certain exceptions. Notice 2024-9 provides transitional procedures for exceptions to the phaseout that apply to properties beginning construction in 2024.
Notice 2024-9 requests comments on specific issues to be addressed in anticipated proposed regulations. Taxpayers must provide comments by the due date of February 26, 2024.
The domestic content credit bonus is an additional 10% of the base credit (2% under Section 48 or 48E if the taxpayer does not satisfy wage and apprenticeship requirements). To qualify for the domestic content bonus, a taxpayer must certify that any steel, iron, or manufactured product that is a component of an applicable property was produced in the United States.
Steel or iron is produced in the United States only if generally all steel and iron manufacturing processes take place in the United States. An adjusted percentage of the total costs of all manufactured products (generally, 40%) must be mined, produced, or manufactured in the United States.
An applicable entity may elect to treat the Section 45, 45Y, 48, or 48E credit as a direct payment against tax equal to the amount of the credit. An “applicable entity” is a tax-exempt organization, state or political subdivision, the Tennessee Valley Authority, an Indian tribal government, an Alaska native corporation, or a rural electric cooperative.
The amount of a direct payment may be phased out for applicable properties that do not satisfy domestic content requirements and have a maximum net output of one megawatt or more. The phaseout is a percentage of the otherwise allowable amount. The phaseout percentage is 90% for properties that begin construction in 2024. Under Sections 45Y and 48E, the phaseout percentage is 85% if construction begins in 2025 and zero if construction begins after 2025.
Observation: Sections 45Y and 48E generally supersede Sections 45 and 48, respectively, for properties placed in service after 2024.
Treasury is required to provide exceptions to the direct payment phaseout if either (1) the inclusion of domestically produced steel, iron, or manufactured products increases the overall costs of construction of applicable properties by more than 25% (increased cost exception) or (2) relevant steel, iron, or manufactured products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality (nonavailability exception).
For additional information, see the following PwC insights:
Notice 2024-9 advises that, for an applicable property that begins construction before 2025, an applicable entity may attach an attestation to the appropriate form filed with its federal income tax return providing that it is familiar with the phaseout exceptions and has made a good faith determination that the property meets the requirements for an exception. The IRS and Treasury will treat the attestation as establishing a phaseout exception for that property.
Notice 2024-9 requests comments on the following general issues:
(1) What factors are relevant for defining “overall costs of construction” for purposes of the increased cost exception and for defining “relevant steel, iron, or manufactured products” for purposes of the nonavailability exception?
(2) What substantiation/documentation should be required to support the exceptions?
(3) How should the exceptions take into account that not all manufactured products are required to be mined,
produced, or manufactured in the United States to meet the domestic content requirements? What process and criteria could be used to identify steel, iron, or manufactured products within the nonavailability exception?
(4) How many applicable properties are expected to be affected by the phaseout each year absent an exception? What characteristics of facilities, projects, or technologies (for example, size) are relevant in developing an exceptions process?
(5) What solicitation processes do applicable entities use regarding qualified facilities or energy projects with a maximum net output of one megawatt or more? Do these processes provide cost, product origin, or product availability information? How might these processes affect the ability to source domestic products or determine if products would qualify for an exception?
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