Domestic Content Bonus Credit Is a Promising Push for Solar

September 6, 2024

Clean energy is critical for combating climate change, but the initial monetary investment can be restrictive to commercial and private entities seeking to implement renewable energy solutions. To make clean energy infrastructure a reality, individuals and companies need effective financing options for costly projects like solar facilities or wind farms. The clean energy revolution, though no longer an unattainable objective, often relies on third-party investment and incentives. Recognizing this, the federal government introduced the Inflation Reduction Act (IRA) and the Domestic Content Bonus Credit (DCBC) to help proportionately close the funding gaps that building owners face when installing clean energy solutions.

The IRA currently provides a 30 percent tax credit for residential and commercial renewable energy projects, making it broadly applicable to most installations. Additionally, embedded in the IRA, the domestic content bonus credit offers for businesses an extra 10 percent tax rebate for projects that primarily use components manufactured in the United States. Combined, the IRA and DCBC can reduce the cost of a clean energy project by 40 percent. This tax incentive significantly lowers the financial barriers to adopting solar energy and can be a decisive factor in a building owner’s decision to invest in America’s clean energy future.

Although the Department of the Treasury has issued initial guidance for the domestic content bonus credit, it has yet to be finalized, making it a tricky path to navigate. To meet these requirements, the taxable entities involved in solar energy projects must partner with reputable manufacturers who have a proven track record of supplying domestically produced components. Additionally, with the availability of the IRA and other federal and state tax credits, there is a need for clarity regarding how solar investments can provide maximum returns, offset unnecessary financial burdens, and enable a swift and sustained transition to clean energy.

There has been a notable surge in companies registering to benefit from clean energy tax credits under the IRA, reflecting the policy’s effectiveness and growing interest. The legislation supports the expansion of commercial installations and ensures that customers incorporating large and small solar systems benefit equally. The benefits are further amplified when taking into account solar TPOs (Third Party Ownership) and the increasing market share of solar among low- and middle-income households. Solar financiers who access these tax credits indirectly benefit homeowners by lowering the overall cost of solar adoption. As the median income of solar adopters trends down and becomes more proportionate to the general population, coupled with rising electricity prices, solar is becoming more accessible to a broader demographic.

Historically, accessing tax incentives for financing solar projects has been challenging for companies, making it more difficult to deploy clean energy solutions. Even though the situation has improved, solar investments still require careful planning to ensure sustainability and profitability. Incorporating the DCBC and other incentives into financial models and understanding how to access them can help investors realize the aggregate benefits that reduce financial liabilities, allowing them to consider solar as a viable option that aligns with their long-term goals and contributes to the larger clean energy transition.

Solar Tax Incentives and Why They Matters for the Solar Industry Today

Tax incentives are foundational to the growth of the U.S. solar industry, playing a crucial role in enhancing the accessibility and financial viability of solar energy for individuals, businesses, and utilities.

Overcoming the challenge of substantial upfront costs remains one of the most significant hurdles for solar adoption, and despite the arguments in favor of the long-term financial benefits of solar, the initial expense remains a barrier to entry. Although necessary infrastructure like solar mounting and racking systems represent a fraction of the total system cost, deploying a well-designed, engineered, and tested mounting system at scale can still be costly from an objective point of view.

The cost of solar installation in the United States generally ranges between $2.50 and $3.50 per watt, with larger and more straightforward commercial solar projects often falling closer to $3–$4 per watt. According to EnergySage, the national average cost to install a typical 6-kilowatt residential rooftop solar system in 2024 is approximately $20,650 before any federal tax credits or local incentives. Overall, a residential customer can expect to pay between $17,430 and $23,870, depending on system size and location. However, scaling the system size for commercial purposes magnifies the cost, making the financial burden even more apparent. Consider that the average monthly energy consumption for commercial properties in the United States was 6,066 kWh in 2019.

In such cases, solar tax incentives become even more critical in offsetting the substantial capital expenditures associated with solar energy adoption, for example:

Small Businesses: Solar incentives empower small businesses to explore tailored solar solutions, offering the flexibility to choose combinations that reduce energy costs, improve the bottom line, and elevate their sustainability profile.

Commercial and Industrial Businesses: Larger businesses can take advantage of substantial tax savings and energy cost reductions. Incentives such as the Federal Investment Tax Credit (ITC) and various state-level programs enable businesses to offset a sizable portion of their installation costs, making solar a more appealing option. This approach also addresses environmental concerns, as larger enterprises are the biggest consumers of traditional retail energy.

Increasing Accessibility for Diverse Communities: The domestic content bonus, along with other provisions in the IRA, helps increase the accessibility of solar energy for diverse communities, including low- and middle-income households. While TPOs and financiers are the primary beneficiaries of the DCBC, they pass on the savings through reduced installation costs, making solar energy more affordable for homeowners. Lowering the initial cost of solar projects ensures that the benefits of clean energy are distributed more equitably across different socioeconomic groups.

The ITC and The IRA Incentivizing America’s Renewable Future

The Inflation Reduction Act (IRA), signed into law on August 16, 2022, marks a pivotal investment in clean energy and climate change mitigation. This landmark legislation addresses the climate crisis while creating economic opportunities within the emerging clean energy economy. By reducing the cost of renewable energy for businesses, nonprofits, and educational institutions, the IRA fosters both economic growth and sustainability. Notably, the ‘direct pay’ option has revolutionized access to clean energy benefits for tax-exempt entities like schools and government agencies, enabling communities nationwide to more readily adopt renewable energy sources like solar.

The IRA also modifies and extends the clean energy investment tax credit (ITC) to provide a technology-neutral tax credit of 30% for clean electricity projects that meet prevailing wage and apprenticeship requirements or for those under 1 MW installed between 2022 and 2032. Projects can also receive a bonus credit of up to 10 percentage points for meeting domestic content requirements.

The ITC has been a cornerstone in the growth of solar energy in the United States. The Solar Energy Industries Association’s (SEIA) data testifies that, since its inception in 2006, the residential and commercial solar ITC has helped the U.S. solar industry grow by more than 200 times, with an average annual growth rate of 33% over the past decade. This statistic alone underscores the ITC’s critical role in incentivizing clean energy in the United States.

The increase of the ITC to 30% in 2022 (compared to the 26% tax credit for solar PV systems installed in 2020 and 2021) has provided market certainty, thus enabling companies to develop long-term investments that drive competition and technological innovation. This, in turn, will help lower energy costs for consumers. The tax credit is set to decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit will expire starting in 2035.

Thanks to policies like the IRA and ITC, solar deployment has rapidly expanded across the country at both distributed and utility-scale levels. The long-term stability of these federal policies will allow businesses to keep driving down costs.

Domestic Content Bonus Credit: What You Need to Know

The DCBC improves the already favorable solar tax incentives, even if it requires some effort to qualify. The principle is straightforward: lower costs lead to wider solar adoption. In essence, the lower the cost of solar adoption, the higher its penetration, whether it’s direct commercial investment or for residential households through TPOs or financing options.

The domestic content bonus increases the available ITC by 10 percentage points, allowing businesses to boost their total tax credit from 30% to 40%. This bonus is available to all business entities who certify that their solar qualified facility was constructed using specific percentages of steel, iron, or manufactured products that were mined, produced, or manufactured in the United States. Additionally, a ‘required percentage’ of the total costs of manufactured products (including components) must be mined, produced, or manufactured domestically. Eligibility for the domestic content bonus credit is determined by calculating the ‘domestic cost percentage,’ which is acquired by dividing the cost of domestically manufactured products and components by the total cost of the project’s manufactured products. This percentage must meet the IRS’s threshold of 40% for projects beginning construction before 2025. The requirement jumps to 45% for projects beginning construction in 2025, 50% for projects beginning construction in 2026, and up to 55% for projects beginning construction after 2026.

There are some key considerations for solar investors contemplating DCBC. The latest IRS notice provided a new elective safe harbor for calculating the domestic cost percentage of an applicable project. This guidance explicitly clarifies that when calculating the required percentage of domestic content of an installation, investors must consider all including components of the manufactured product, not just a single major element. This means that focusing solely on one component, such as ensuring that only the rails of a racking system are domestically manufactured, will not help satisfy the requirements. The entire racking system, including standard attachments, the rail splice, and other additional components, should be evaluated collectively for domestic content to ensure compliance.

Meeting the domestic content requirements further requires careful strategic planning and thoughtful supplier selection. Investors and key stakeholders also need to ensure that a combination of products with domestic content is used throughout the project. For example, a project might include a domestically manufactured racking system and a MLPE with components that contain at least some domestically sourced materials. This approach will help meet and exceed the DCBC requirements and maximize the potential tax credits.

Equipment that Qualifies: Elevate Projects with Unirac’s Domestic Mounting Solutions

Navigating the complexities of solar tax credits demands more than a superficial understanding; it requires a comprehensive strategy that capitalizes on available incentives while ensuring long-term project viability. This pursuit is not a solitary endeavor but one that necessitates collaboration with trusted partners who can provide compliant and reliable solutions, thereby minimizing risks and maximizing returns. Selecting a well-researched, IRS-compliant supply partner is crucial to securing not only the financial advantages of solar tax credits but also the enduring benefits of a robust, well-engineered racking system.

Unirac recognizes this as a great market opportunity to supply customers with quality American-made products for solar projects. As a leading manufacturer of solar racking and mounting systems, we have made it our mission to ensure that our customers receive the best products and are excited to assist you in creating your optimal, viable solar project.

Our domestic Solarmount system is a professionally designed, comprehensive solution that includes domestically manufactured rail, rail splices, Solarmount standard clamps, and Solarmount butyl attachments, each of which qualifies as U.S. components under IRS guidelines. This fully domestic racking system is available today and will be instrumental in achieving a 40% tax credit.

Choosing Unirac’s solutions provides clear, substantial advantages. These U.S.-manufactured components enable you to capture up to 25.8% for MLPE systems or 37% for string systems of the 40% IRS threshold required to claim the DCBC. Additionally, Unirac offers a comprehensive range of other U.S.-made products, including adjustable tilt legs and various accessories. By pairing Unirac’s domestic Solarmount system with a semi-domestically sourced micro-inverter or optimizer, customers can have a clear path to exceed the 40% threshold necessary to qualify for the additional 10% DCBC embedded tax credit in 2024, even without domestic modules.

Collaborating with a solar racking partner that leads the industry with the largest domestic content portfolio—and is poised to increase this presence—ensures a high level of confidence in product quality and performance. Choosing Unirac translates into leveraging cutting-edge technology while supporting the advancement of American manufacturing capabilities and innovation.

Domestic Content is Your Competitive Edge for Solar Investment Opportunities

This pivotal moment in the solar industry represents a significant opportunity, with a confluence of supportive policies and initiatives creating an optimal environment for solar investment. Unirac believes in the power of American innovation and craftsmanship, and we stand firm in our commitment to delivering quality American-made products that allow you to seize this moment and invest in a brighter future.

As a leading manufacturer of solar racking and mounting systems, Unirac has spent decades refining our products, channeling our dedication and extensive resources into ensuring excellence. We believe that the decreasing tax credit percentages and increasing thresholds over time reflect the maturity and growing viability of the industry. With over 45,000 projects already benefiting from clean energy tax credits, this is the ideal time to minimize financial burdens while contributing to a better tomorrow. However, we also recognize the complexities involved. It is critical to conduct thorough due diligence and seek multiple sources of information before making purchasing, investment, or tax decisions, especially when navigating tax credits like the Domestic Content Bonus Credit (DCBC), which is complex and still being revised in real time.

Transparency is a powerful asset in the renewable energy sector. By relying on Unirac’s expertise, you benefit from our extensive industry knowledge and commitment to best practices. This collaboration not only strengthens your investment but also supports American jobs, communities, and the future of clean energy. Together, we can harness the strength of American ingenuity to power your optimal solar project and contribute to a more sustainable tomorrow.

*Unirac cannot provide, and is not providing, tax advice regarding DCBC eligibility, which depends on several factors. Customers must consult their own tax advisors to determine eligibility. Unirac makes no representation or warranty that any customer or taxpayer will be able to claim the DCBC if they purchase Unirac domestic components.

** This article only offers an overview of clean energy tax credits and the Domestic Content Bonus Credit (DCBC) for solar. It is not intended to offer professional tax advice or make any financial claims. As such, it should not be used as the sole basis for making tax-related decisions or entering into binding agreements.