IRS modifies elective safe harbor

On Jan. 16, 2025, the Internal Revenue Service (IRS) issued Notice 2025-08, modifying the elective safe harbor first introduced for the domestic content bonus credit for clean energy projects in Notice 2024-41 in May 2024. The changes include revised definitions and classifications for project components, updated safe harbor tables, and new cost percentages.

Who is affected by safe harbor modifications

This change applies to all taxpayers claiming the domestic content bonus credit amount for clean energy tax credits.

Background

The domestic content bonus credit was enacted under the Inflation Reduction Act of 2022, applicable under the following Internal Revenue Code (IRC) Sections:

• IRC Section 45, Renewable Electricity Production Tax Credit
• IRC Section 45Y, Clean Energy Production Tax Credit
• IRC Section 48, Energy Investment Tax Credit
• IRC Section 48E, Clean Energy Investment Tax Credit

For projects placed in service after Dec. 31, 2024, Section 45 (PTC) and Section 48 (ITC) will be replaced by Technology-Neutral Sections 45Y and 48E, respectively.

The domestic content bonus credit amount allows taxpayers claiming clean energy tax credits to earn an additional 10% credit for qualified projects using enough U.S.-made steel, iron, and manufactured products that meet domestic content requirements as follows:

• Steel and iron must be 100% produced in the United States
• Manufactured products must meet the Adjusted Percentage Rule

The Adjusted Percentage Rule provides that the domestic cost percentage for an applicable project must equal or exceed the adjusted percentage that applies to the project. The adjusted percentage begins at 40% for applicable projects that begin construction before 2024, increasing to 55% over time, with offshore wind starting at 20%.

Under the initial guidance, taxpayers were required to collect direct cost information from manufacturers from whom they procured equipment to calculate the manufactured product’s domestic cost percentage, a requirement that was prohibitively challenging for many taxpayers.

Notice 2024-41, issued in May 2024 by the Department of the Treasury and the IRS, provided a new elective safe harbor allowing taxpayers to use an acquisition cost approach to calculate the domestic cost percentage and fulfill the Adjusted Percentage Rule rather than needing to obtain actual costs from manufacturers, at least for certain technologies. For more details on Notice 2024-41, please see our prior alert on this topic.

What changes with notice 2025-08

The First Updated Elective Safe Harbor modifies Notice 2024-41 in five key ways:

Expansion of the solar PV table

The Solar Photovoltaic (PV) Table in Table one is split into two separate tables: one for PV ground-mount (tracking and fixed) and another for PV rooftop module level power electronics (MLPE) and string projects. Additional columns further modify the tables with a second set of updated assigned cost percentages which can be used if a PV system has PV modules that incorporate crystalline silicon PV cells and wafers manufactured within the United States.

The Solar PV Table is further modified by renaming, redefining, and reclassifying several applicable project components (APCs) and manufactured product components (MPCs) for added clarity and specificity on both the structure and the function of the named components. For example, renaming “climate control” to “thermal management system” provides more specificity about the function of the component, and redefining “ground-mounted PV (fixed tilt)” to clarify that this includes canopy steel racking structures and structures floating on a body of water.

Modification of the land-based wind table

The term “steel or iron rebar in foundation” is updated to "steel or iron reinforcing products in foundation," and the term “material” for wind tower flanges is renamed “preform.” These changes were made to better reflect each component’s function, manufacturing process, and supply chain and to clarify that non-rebar steel and iron reinforcement are also covered. The associated cost percentages for land-based wind components remain unchanged, as the Department of Energy found only minor updates to the underlying cost data and, therefore, did not publish updates.

Updates for battery electric storage system (BESS)

The notice introduces updated cost percentages for Battery Electric Storage Systems (BESS), which apply to both grid-scale and distributed BESS Applicable Projects. Like the solar and land-based wind tables, the BESS table renames and recategorizes several APCs to better represent the variety of manufactured product components that are used for particular functions.

Application of the 80/20 rule

Taxpayers with qualified facilities or energy projects placed in service after Dec. 31, 2022 (for Sections 45 and 48) or Dec. 31, 2024 (for Sections 45Y and 48E) may use the classifications and cost percentages from Table one or the First Updated Elective Safe Harbor to qualify for the domestic content bonus credit, provided they meet the 80/20 Rule (which specifies certain domestic content thresholds).

Updated definitions

The First Updated Elective Safe Harbor provides revised definitions for representative types of applicable projects, as well as for APCs and MPCs, helping clarify how components should be classified and assessed under the updated rules.