What the Domestic Content Bonus Actually Requires

The domestic content bonus has two tests and a project has to pass both. All steel and iron structural components must be made in the United States, with no percentage and no partial credit. Separately, a share of the cost of the manufactured products in the project has to be domestic, measured against an adjusted percentage, which is 40% for a Section 48 project. The IRS released Notice 2023-38 on May 12, 2023 with the rules for both.

For a tax-exempt owner claiming direct pay, missing domestic content on a project of 1 MW or more does more than cost the bonus. It cuts the payment itself.

Why domestic content matters more for a nonprofit than for a developer

A taxable developer that misses domestic content loses 10 percentage points off a credit it still receives. An applicable entity claiming direct pay under Section 6417 faces something different. For a project of 1 MW (AC) or more that doesn’t satisfy domestic content, the elective payment itself is reduced by a phase-down, and the reduction gets steeper over time.

Projects with maximum net output under 1 MW (AC) are exempt from that phase-down entirely, regardless of where the equipment came from. That exemption covers most nonprofit rooftop systems. Check the AC rating first. Under 1 MW the phase-down disappears and domestic content is pure upside.

The steel and iron test is pass or fail

All manufacturing processes for steel and iron have to take place in the United States, with one exception for metallurgical processes involving refinement of steel additives. The rule follows the Federal Transit Administration’s Buy America regulation at 49 CFR 661.5, which the statute names directly.

It applies only to construction materials made primarily of steel or iron that are structural in function. Racking, piles, ground screws, and reinforcing steel in a foundation are in. Steel or iron used inside a manufactured product, like the frame of a module, is not tested here. Notice 2023-38 gives examples of items it treats as not structural in function: nuts, bolts, screws, washers, cabinets, covers, shelves, clamps, fittings, sleeves, adapters, tie wire, spacers, door hinges and similar items. The list is illustrative, so the function test still has to be run on anything not named.

The manufactured products test is an accounting exercise

A manufactured product counts as domestic only if all of its manufacturing processes happened in the United States and all of its components are of U.S. origin. The analysis stops one level down, so the origin of subcomponents inside a domestic component doesn’t matter.

If not every product qualifies, the project can still pass through the cost percentage: domestic manufactured products and component costs divided by total manufactured products cost, measured against the adjusted percentage.

The trap is in what counts as cost. Only direct materials and direct labor under the Section 263A rules, paid or incurred by the manufacturer, go into the calculation, which leaves out your purchase price, the EPC contract value, and the labor of installing the components on your site.

That means the numbers you need live inside your suppliers’ books, often at a foreign manufacturer, and they’re under no obligation to hand them over. An owner who waits until the return is being prepared to ask for cost data doesn’t get it.

What your EPC contract has to say

The IRS prescribes what you certify to it, but nothing about how you get there: no supplier certificate form, no prescribed attestation format, no required cost template. The burden sits with the owner under the general recordkeeping rules, and the construction contract is the only real pressure point.

Three things belong in it:

• A flow-down obligation requiring each supplier to provide origin documentation and, where needed, direct cost data in the form the IRS rules require.
• Audit access to supplier origin records that survives project completion, since the IRS can ask years later.
• Allocation of responsibility if the bonus is lost because documentation never arrived.

What gets filed with the return

The bonus is claimed with a Domestic Content Certification Statement attached to Form 3468 (or Form 8835) for the first tax year the bonus is reported. It has to state whether the project is a facility, an energy project, or energy storage; the specific project type; the geographic coordinates and address; the placed in service date; and the total bonus amount. It’s signed under penalties of perjury by someone with legal authority to bind the organization.

Which decision to make first

Decide early whether the project is under 1 MW (AC), because that answer changes which parts of this apply. If it’s 1 MW or larger, treat domestic content as a procurement decision made at contract signing, not a tax question answered at filing.

This article is general information, not tax advice, and it reflects IRS guidance as of May 18, 2023. Deadlines and eligibility depend on your organization's tax year and entity type. Please confirm your own facts with a qualified tax professional before relying on anything here.