The Inflation Reduction Act (IRA) of 2022 is designed with multiple objectives, including the fight against climate change and the initiative to promote clean energy. Among the IRA’s core themes is its emphasis on domestic content requirements, aimed at stimulating American manufacturing and reducing reliance on foreign supply chains.
Those working towards renewable energy goals must understand the IRA domestic content requirements to reap maximum benefits and remain compliant.
Understanding IRA Domestic Content Requirements
As per the guidelines mandated by the IRA, projects must include a certain percentage of domestically manufactured content to qualify for selective tax credits.
General Requirement
A major part of the overall cost of manufactured goods and components must be produced domestically to be eligible for the domestic content bonus credit.
Steel and Iron Requirements
The IRA requires that all steel and iron employed in renewable energy projects be 100% made in the United States.
Thresholds for Manufactured Products
For project-based manufactured products, the IRA requires that some portion of the total cost be attributable to components made in the U.S. This portion grows over time; for instance:
| For Projects Starting Construction | Percentage |
| Before 2025 | 40% |
| In 2025 | 45% |
| In 2026 | 50% |
| In and after 2027 | 55% |
Notices Regarding IRA Domestic Content Requirements: Determining Eligibility
Here are details about the applicability and calculation methods of the IRS notices on IRA domestic content requirements.
| Notice 2023-38 | Notice 2024-41 | Notice 2025-8 | |
| Calculation Method | Must use the actual costs, which include the direct material and direct labor costs | Elective Safe Harbor | First Updated Elective Safe Harbor |
| Beginning of Construction (BOC) Date | Does not interfere with the application of Notice 2023-28; can be for any Applicable Project, provided the taxpayer does not go with the Elective or the First Updated Elective Safe Harbor | Can be used in case the Applicable Project’s construction begins prior to April 16, 2025 | Can be used irrespective of the Applicable Project’s BOC Date of |
Exploring the Significance of IRA Domestic Content Requirements
Here’s why the IRA domestic content requirements are crucial:
Improving the U.S. Manufacturing Industry
By mandating the use of domestically manufactured steel, iron, and goods, the IRA domestic content requirements are boosting the U.S. manufacturing industry. This push can lead to increased employment opportunities, enhanced local economies, and reduced reliance on foreign supply chains.
Improving Energy Security and Supply Chain Resilience
The IRA can contribute to creating a robust supply chain by encouraging domestic manufacturing of renewable energy inputs and allowing the country to meet all energy requirements without relying on imports.
Aligning Economic and Environmental Objectives
The IRA domestic content requirements balance economic incentives with environmental objectives. By providing more tax credits for the use of American-made equipment and materials in projects, the IRA makes it more profitable to invest in domestic production. This balance promotes infrastructure and economic development, while also helping job creation and industrial expansion.
Ensuring Compliance and Optimising Benefits
Meeting the domestic content requirement involves fulfilling specific requirements regarding the use of U.S.-made materials. Projects qualifying on these grounds are eligible for additional tax credits, making them more financially feasible.
Confronting Challenges and Grabbing Opportunities
There remains a lack of adequate manufacturing capability for certain components of renewable energy. This weakness can complicate developers’ ability to domestically source the requisite materials, effectively driving up project costs. To meet this goal, the IRA provides exceptions in cases where construction costs increase by over 25% due to domestic sourcing or in the event of a lack of available products in timely and adequate quantities and quality.
Summing Up!
A significantly greater outcome can be obtained when the renewable energy sector’s sustainability goals are merged with the objectives of boosting domestic manufacturing and reducing reliance on imports. In this regard, the IRA domestic content requirements provide guidelines and create space for a more systematic approach.
