US Treasury and IRS Issue New Guidance on Domestic Content Bonus

The US Department of the Treasury and the Internal Revenue Service (IRS) have issued additional guidance on the Inflation Reduction Act’s (IRA) domestic content bonus, aimed at enhancing Clean Electricity Production and Investment Tax Credits for renewable energy projects.

As per the statement released by the US Department of the Treasury, this bonus aims to support and expand American manufacturing by incentivising the use of domestically produced iron, steel, and other manufactured components in clean energy projects such as solar farms, wind farms, and energy storage systems.

These measures are part of a broader strategy by the Biden-Harris Administration to ensure that the economic benefits of clean energy investments flow directly to American workers and businesses, creating high-quality jobs and fostering domestic production.

The statement further noted that under the Biden-Harris Administration, clean energy initiatives have seen unprecedented investment. Companies have announced more than USD 196 billion in clean power projects and USD 92 billion in clean energy manufacturing.

Highlighting the administration’s priorities, US Deputy Secretary of the Treasury Wally Adeyemo noted that these updates would further drive investments, expand manufacturing, and support job creation, emphasising the government’s commitment to building a thriving clean energy economy.

The updated guidance builds on the domestic content safe harbour provisions first introduced in May 2024. These safe harbour rules allow clean energy developers to use standardised default cost percentages provided by the Department of Energy (DOE) rather than sourcing detailed cost data directly from suppliers to determine eligibility for the domestic content bonus. The revisions now reflect improved default values, aligning more closely with the actual characteristics and costs of applicable project components and manufactured product components in today’s market, as analysed by the DOE.

According to the statement, a major update includes the introduction of optional alternative cost percentages for solar projects that utilise solar cells manufactured with domestically produced wafers. This change is designed to incentivise and support the onshoring of solar wafer manufacturing by recognising the cost differentials faced by developers who choose to source these critical components domestically.

The statement further pointed out that further updates were made to various sectors to ensure that the guidance is comprehensive and reflective of current industry standards. For solar projects, the updated safe harbour tables refine cost percentages, make adjustments to the definitions and characterisations of project components, and include the newly introduced alternative cost percentages for domestic wafers. For land-based wind projects, minor adjustments have been made to the characterisations of applicable components and their associated costs.

Battery Electric Storage Systems (BESS) also received updates, with revised cost percentages and clarifications for defining applicable project components and manufactured product components. Specific clarifications were provided for retrofits, as well as for specialised projects like floating solar installations and carports.

The updated guidance also includes provisions for projects utilising elective pay, also known as direct pay mechanisms. Taxpayers can apply the safe harbour tables for projects beginning construction within 90 days of future updates to this guidance, ensuring flexibility and continuity for clean energy developers.

It may be noted that recently, on the first day of his second term, President Donald Trump signed actions to withdraw the United States from the Paris Agreement, an international climate change treaty in which nearly 200 countries committed to limiting global warming.