The Inflation Reduction Act of 2022 (IRA) added Internal Revenue Code (IRC) Section 45X for the Advanced Manufacturing Production Credit. The general business credit under §38 is provided for taxpayers who domestically (including U.S. possessions) produce and sell to an unrelated person (subject to exceptions discussed in the proposed regulations1), eligible components used in solar energy, wind energy, inverters, batteries, and applicable critical minerals.
Notices 2023-18 and 2023-44, respectively published in March and June 2023, established the qualifying advanced energy projections program under §48C, including rules for the interaction between §45X and §48C. In short, qualifying property for which a credit is claimed under §48C cannot also be used to claim a credit under §45X. Once the proposed regulations are finalized, Section 5.05 of Notice 2023-18 and Section 3 of Notice 2023-44 will be superseded.
The proposed regulations are organized into four sections as follows:
- 1.45X-1 General rules applicable to the Advanced Manufacturing Production Credit
- 1.45X-2 Sale to unrelated person
- 1.45X-3 Eligible components
- 1.45X-4 Applicable critical minerals
1.45X-1 General Rules Applicable to the Advanced Manufacturing Production Credit
Generally, the Advanced Manufacturing Production Credit is available for years beginning after December 31, 2022, for each eligible component produced by the taxpayer within the United States or territory and, within the taxable year, sold by the taxpayer to an unrelated person. The production and sale must be in a trade or business of the taxpayer under §162. The below discussion breaks down the commentary within the proposed regulations, covering different aspects of this general rule.
Produced
For the purpose of §1.45X-1, produced generally means “a process conducted by the taxpayer that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component that is functionally different from that which would result from mere assembly or superficial modification of the elements, materials, or subcomponents.” For example, taxpayers X, Y, and Z could not produce three sections of a wind tower, and each qualify as having produced an eligible component, but if the three taxpayers formed a partnership and together produced a wind tower, that would qualify as an eligible component (see §1.45X-1(c)(iii) Examples 1 and 2 of the regulations). In addition, simply putting a casing on a battery module, combining two halves of a wind turbine nacelle, filling the electrolyte of a battery, or applying paint and finishes to a wind turbine blade only exemplify a minor assembly or a superficial modification not qualifying as an eligible component (see §1.45X-1(c)(iii) Examples 3 through 6 of the regulations). Production of eligible components may begin before December 31, 2022, but must be completed and sold after this date to qualify for the credit.
In anticipation of these proposed regulations, many companies questioned whether the subcomponents of the eligible components were also subject to the domestic production rule. The proposed regulations definitively state that the subcomponents used in the production of eligible components are not subject to the requirement.
Contract Manufacturing Arrangements
Under a contract manufacturing arrangement, the party that may claim the credit is the party that produces the eligible component. However, the parties to the contract arrangement may agree on which party will claim the credit. The IRS will not challenge the agreement if each submits a signed certification statement. For example, company X contracts with company Y to produce a solar module and they each sign a certification statement agreeing that company X will claim the credit. Company Y produces the eligible component for company X which then sells it to unrelated company Z. Company X may claim the credit. Note that company Y could have claimed the credit if the certification statement had stated so (see §1.45X-1(c)(v) Example 1 of the regulations). Also note that if company X had not sold the eligible component to an unrelated party, neither company would have been able to claim the credit (see §1.45X-1(c)(v) Example 2 of the regulations).
Routine purchase orders for “off the shelf” components are not considered contract manufacturing arrangements if only minimal modifications to the components are required to be made by the contractor for the customer’s use.
Integrated Components
Eligible components that are integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person also qualifies for the credit. For example: a corporation that produces electrode active materials which then are incorporated into battery cells, which are then incorporated into battery modules, which are then integrated into electric vehicles, which are then sold to an unrelated person are all eligible components qualifying for the credit in the year the electric vehicle is sold.
The integration of eligible components could span several years. It is important to note that the credit cannot be claimed as the individual components are completed, but when a sale to an unrelated party occurs.
Interaction Between Sections 45X & 48C
Eligible components must be produced by a §45X facility, which is an independently functioning production unit that includes all tangible property that substantially transforms material inputs to produce an eligible component. A component is not eligible if produced at a facility where the basis of any of its tangible property is eligible property in a §48C facility and is considered for the §48C credit after August 16, 2022. For example, a taxpayer owns two production units (A and B) that each manufacture eligible components. The taxpayer claimed a §48C credit for the facility that includes property for unit A. Therefore, unit A cannot qualify as a §45X facility. However, unit B, which was not property previously included under a §48C facility, may be eligible for the §45X credit (see §1.45-1X(g)(4) Example 1 of the regulations).
1.45X-2 Sale to Unrelated Person
An unrelated person is defined as a person who is not a related person treated as a single employer under the common control rules of §52(b). If an eligible component is sold to a related person who then sells an eligible component to an unrelated person, the original sale of the eligible component is considered as sold to an unrelated person. For example, X and Y are related trades or businesses under common control under §52(b). X produces and sells solar modules to Y, who then sells the solar modules to unrelated Z. X may claim the credit in the year Y sells the eligible component to Z.
- 52(b) treats all employees of trades or businesses (whether or not incorporated) under common control as employed by a single employer. Regulations §1.52-1 further define “trades or businesses under common control” to include a “parent-subsidiary group under common control,” a “brother-sister group under common control,” or a “combined group under common control.” Further definitions are provided in the regulations, which should be consulted to make proper related party determinations for applicable sales.
Related Person Election
Taxpayers may make an election to treat the sale of an eligible component to a related person as if made to an unrelated person and claim the credit in the year the taxpayer sells the eligible component to the related person. The irrevocable election must be made annually on the taxpayer’s original tax return (including extensions) and the election is applicable to all eligible component sales by the taxpayer to a related person for each trade or business for which the taxpayer makes the election.
The election is made by providing the information required on Form 7207. Such information includes the name, EIN, and description of the taxpayer’s trade or business; the name, address, and EIN of all related persons; a list of eligible components sold; and the intended purpose of the eligible components sold by the related person. The purpose of the information is to “assist in preventing duplication, fraud, or the claiming of improper or excessive credits.”
This “anti-abuse rule” would also serve to make the election unavailable to taxpayers seeking to exploit the election by either selling a defective component to a related person or selling the component to a related person who then puts it to an improper use (discarding or destroying without putting to productive use). Such arrangements would be unlikely among unrelated persons and could take place among related persons without these provisions.
The proposed regulations specifically require a sale between related parties to occur to make the related party election and claim the credit, in contrast to a transfer of property. It is important to note the IRS’ intent to prevent “duplication” or “excessive credits” to which this situation may lend itself among related parties. It may be advisable to draft agreements among the related parties defining the amount and timing of the credits to be claimed to help prevent duplication. In addition, the Related Person Election and its effects should be contemplated when considering elections under §6417 (elective payments) and §6418 (transfer of credits).
1.45X-3 Eligible Components
Eligible components include components for solar energy, wind energy, inverters, qualifying battery components, and applicable critical mineral (detailed in the below §1.45X-4: Applicable Critical Minerals section). The following is a summary of the eligible components and amount of credit applicable to each. The proposed regulations define each component, provide details into the calculation of the credit, and provide substantiation requirements.
| Solar Energy | |
|---|---|
| Solar module | 7¢ per watt capacity |
| Photovoltaic cell | 4¢ per watt capacity |
| Photovoltaic wafer | $12 per square meter |
| Solar grade polysilicon | $3 per kilogram |
| Torque tube | 87¢ per kilogram |
| Structural fastener | $2.28 per kilogram |
| Polymeric backsheet | 40¢ per square meter |
| Wind Energy | |
|---|---|
| Blade | 2¢ per watt of turbine capacity |
| Nacelle | 5¢ per watt of turbine capacity |
| Tower | 3¢ per watt of turbine capacity |
| Offshore wind foundation – fixed | 2¢ per watt of turbine capacity |
| Offshore wind foundation – floating | 4¢ per watt of turbine capacity |
| Related offshore wind vessel | 10% of the sales price |
According to the proposed regulations, the turbine capacity must be certified by relevant national or international standards, such as the International Electrotechnical Commission (IEC) 61400, or ANSI/ACP 101-1-20021 (the Small Wind Turbine Standard). A certificate must be issued by the accredited certification body.
| Inverters | |
|---|---|
| Central | .25¢ per watt capacity |
| Commercial | 2¢ per watt capacity |
| Distributed wind | 11¢ per watt capacity |
| Micro | 11¢ per watt capacity |
| Residential | 6.5¢ per watt capacity |
| Utility | 1.5¢ per watt capacity |
| Batteries | |
|---|---|
| Electrode active materials | 10% of costs |
| Battery cells | $35 per kilowatt-hour capacity |
| Battery modules using battery cells | $10 per kilowatt-hour capacity |
| Battery modules with no battery cells | $45 per kilowatt-hour capacity |
Beginning in 2030, the credit begins to phase out. It will reduce to 75% for eligible components sold in 2030, 50% for those sold in 2031, 25% for those sold in 2032, and 0% for those sold after 2032.
It is important to consider the phase-out dates refer to when eligible components are sold, not produced. Careful production planning should be considered as to the time frame an eligible component may be completed and sold to take advantage of the credit.
1.45X-4 Applicable Critical Minerals
The proposed regulations provide definitions for each applicable critical mineral and the processes required to convert or purify the minerals to qualify for the credit. The taxpayer must provide a certificate of analysis to the purchaser documenting that an applicable critical mineral meets the requirements under §45(c)(6). In general, the credit is 10% of the costs incurred by the taxpayer to produce the mineral. The phase-out of the credit described in §1.45X-3 does not apply to applicable critical minerals.
The proposed regulations point to the fact that the §30D credit for clean vehicles is based in part on the applicable critical mineral content defined in §45X in the batteries of new clean vehicles to encourage “secure and resilient supply chains.”
Conversion & Purification
For purposes of the credit, conversion is defined as “a chemical transformation from one species to another.” Purification is defined as “increasing the mass fraction of a certain element.”
Production Costs
Production costs include all costs as defined under §1.263A-1(e) for the production of an applicable critical mineral excepting direct and indirect costs defined under §1.263A-1(e)(2)(i)(A) and (e)(3)(ii)(E) and costs to extract the raw materials. Examples of costs attributable to the production of an applicable critical mineral include but are not limited to labor, electricity used in the production of the applicable critical mineral, storage costs, depreciation and amortization, recycling, and overhead. As mentioned, the costs of acquiring raw materials used to produce the applicable critical mineral and other costs of materials used for conversion, purification, or recycling of the raw material would not be included.
| Critical Minerals | ||||
|---|---|---|---|---|
| Aluminum | Antimony | Barite | Beryllium | Cerium |
| Cesium | Chromium | Cobalt | Dysprosium | Europium |
| Fluorspar | Gadolinium | Germanium | Graphite | Indium |
| Lithium | Manganese | Neodymium | Nickel | Niobium |
| Tellurium | Tin | Tungsten | Vanadium | Yttrium |
| Arsenic | Bismuth | Erbium | Gallium | Hafnium |
| Holmium | Iridium | Lanthanum | Lutetium | Magnesium |
| Palladium | Platinum | Praseodymium | Rhodium | Rubidium |
| Ruthenium | Samarium | Scandium | Tantalum | Terbium |
| Thulium | Titanium | Ytterbium | Zinc | Zirconium |
If you have questions on Section 45X or need assistance, please reach out to a professional at FORVIS.
- 1“Section 45X Advanced Manufacturing Production Credit,” federalregister.gov, December 15, 2023.