On Dec. 28, 2023, the U.S. Department of the Treasury and the Internal Revenue Service issued Notice 2024-9, signaling the upcoming release of proposed regulations concerning the application of domestic content requirements for certain renewable energy projects. These upcoming proposed rules will cover a critical aspect for monetization of energy credits through Direct Pay by specified non-taxable organizations. A previous alert discussed the overall Direct Pay guidance.
Beginning in 2024, the statutes for the investment tax credit (ITC) and production tax credit (PTC) require Direct Pay claimants to build projects that comply with domestic content requirements. In general, the domestic content requirements mean certain project components — such as steel, iron or manufactured products — must be U.S.-produced in sufficient quantities. A previous alert discussed the Notice 2023-38 domestic content guidance. Noncompliance would lead to a reduction in the credit amounts the Direct Pay claimants may seek. For example, a project beginning construction in 2024 but not meeting the domestic content requirements would see a credit reduction to 90% of the base amount, with reductions to 85% in 2025, and 0% for projects that begin construction after Dec. 31, 2025.
The ITC and PTC statutes mandate exceptions to these Direct Pay reductions if using U.S.-produced materials significantly elevates construction costs or if such materials are unavailable in sufficient quality or quantity. The upcoming regulations will address how these exceptions will be applied and administered. At present, Notice 2024-9 gives Direct Pay claimants a transitional safe harbor for projects that begin construction before Jan. 1, 2025. These entities will be allowed to attest, under penalty of perjury, their good faith belief in qualifying for these exceptions and Treasury and the IRS will treat an attestation that is backed by sufficient records as satisfactory to meet an exception.
Although Notice 2024-9 primarily focuses on the intersection of Direct Pay and the domestic content rules, it also highlights that proposed regulations are coming that will clarify how the domestic content requirements affect the allowable tax credits for all renewable energy projects, regardless of the use of a Direct Pay election.
Public Comments on Notice 2024-9
Taxpayers are permitted to rely on Notice 2024-9 and the existing domestic content guidance under Notice 2023-38 until proposed regulations are issued. The Treasury and IRS are actively seeking comments on various aspects of these domestic content exceptions, with a submission deadline of Feb. 26, 2024. Interested parties are invited and encouraged to submit written comments.
McGuireWoods lawyers are experienced in energy, project finance and tax equity structures, and will continue to monitor this guidance and issue updated alerts as the regulations evolve. Do not hesitate to reach out if you would like to discuss any of the above information.
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