Understanding the Section 45X Advanced Manufacturing Production Credit

The Inflation Reduction Act (IRA) of 2022 expanded energy incentives to encourage investment in qualified clean energy and energy-efficient property. This expansion includes the Section 45X advanced manufacturing production credit.

What is the Section 45X Credit?

Enacted by the IRA, Section 45X allows for an advanced manufacturing production credit for domestic manufacturing of eligible components, including solar energy, wind energy, inverters, battery components, and applicable critical minerals.

Section 45X seeks to boost the production of domestic clean energy property by rewarding the production of eligible components and critical minerals within the U.S. and U.S. territories.

What qualifies for Section 45X?

There are five types of eligible components within 45X:

1. Solar energy components: includes solar modules, photovoltaic cells (thin film and crystalline), photovoltaic wafers, solar grade polysilicon, torque tubes (for solar tracking devices), structural fasteners (for solar tracking devices), and polymeric backsheets.
2. Wind energy components: includes blades, nacelles, towers, offshore wind foundations (fixed and floating platforms), and offshore wind vessels.
3. Inverters: includes central inverters, commercial inverters, distributed wind inverters, microinverters, residential inverters, and utility inverters.
4. Qualifying battery components: includes electrode active materials, battery cells, and battery modules.
5. Applicable critical minerals: includes 50 critical minerals.

There are additional considerations regarding the eligible components of Section 45X.

Eligible Components Must Be Produced by the Taxpayer

While the listed eligible components and applicable critical minerals may qualify under Section 45X, taxpayers must still meet additional criteria to fully claim the credit. Eligible components must be “produced by the taxpayer,” which means the taxpayer must substantially transform constituent elements, materials, or subcomponents into eligible components. Minerals have their own definition of “produced by the taxpayer,” which equates to processing, conversion, refinement, or purification of the source materials to create a distinct eligible component.

Contract Manufacturing Agreement

In instances where eligible components are produced through a contract manufacturing arrangement, recent proposed regulations clarify the ability to assign the credits. Parties involved, including the taxpayer and related entities, should define the roles and responsibilities, including who will claim the Section 45X credit in the arrangement.

Domestic Production Guidelines

While eligible components are required to be produced in the U.S. and U.S. territories, constituent elements, minerals, and subcomponents used in eligible component production need not be domestically sourced. This eases the need for the taxpayer to substantiate the production of constituent elements, minerals, and subcomponents used in producing their eligible components and allows them to focus on the location of substantial transformation.

Prevailing Wage & Apprenticeship

Taxpayers looking to utilize the Section 45X credit are not required to follow Prevailing Wage & Apprenticeship rules, unlike many other sections of the IRA.

Determining the Section 45X Credit

The Section 45X credit can be claimed when a taxpayer produces eligible components and sells the components to unrelated persons or related persons (upon election).

Eligible Component Credit

The credit is equal to the sum of the credit amounts determined for the unique eligible component.

For solar energy components, the credit is calculated by multiplying a dollar value by the size or weight of the component as outlined. Other components are calculated by multiplying a dollar value by the total capacity of the property (watts) for which the component was designed.

Applicable Critical Mineral Credit

The proposed regulations outline the credit determination for applicable critical minerals, specifying that the credit amount is 10% of the taxpayer's production costs. Production costs include costs paid or incurred by the taxpayer in producing applicable critical materials, excluding direct or indirect costs related to raw material extraction.

Monetizing the Credit

The Section 45X credit is reported with the taxpayer’s federal income tax return through Form 7207, Advanced Manufacturing Production Credit, and claimed through Form 3800, General Business Credit. A separate Form 7207 should be completed and filed for each facility operated to produce and sell eligible components.

The credit can be realized in the following ways:

• Direct Pay (Elective Payment): Both tax-exempt and for-profit entities can elect to treat the Section 45X credit as a payment of tax. Section 6417 allows an eligible entity to receive direct pay, treating the credit amount as an overpayment of tax available to be refunded. For-profit entities are entitled to make a direct pay election for the first five years ending before January 1, 2033. Tax-exempt organizations making the direct pay election also need to file Form 990T, Exempt Organization Business Tax Return.
• Transfer of Credit: Eligible taxpayers, partnerships, and S corporations under Section 6418 can elect to sell all or part of their credit for cash payments. Eligible taxpayers do not include applicable entities (tax-exempt and government entities).
• General Business Credit: C corporations can utilize the credit directly under the General Business Credit, while partnerships or S corporation owners can utilize the credit amounts allocated from the entity. Credits carry forward for 20 years, if unused in a given tax year.

Pre-filing registration must be completed with the IRS prior to electing direct pay or transfer via the IRA/CHIPS Pre-Filing Registration Tool at least 120 days prior to the return’s due date.

Section 45X Important Dates and Phase Out

Production of eligible components may have begun prior to December 31, 2022, although completion and sale must occur after that date to remain eligible for the credit.

The phasing out of credits begins in 2030 for eligible components sold after December 31, 2029.

The credit amount is then determined by multiplying the original credit amount by the specified phase-out percentages: 75% in 2030, 50% in 2031, 25% in 2032, and zero percent for components sold after 2032. The phase-out rules do not apply to applicable critical minerals, which continues in perpetuity.

The Intersection of Sections 45X & 48C

The Section 45X credit is not applicable if the eligible property is produced at a facility that claims Section 48C, Qualifying Advanced Energy Project Credit. Section 48C, an investment credit, can be claimed by taxpayers who place new equipment into service as part of a qualifying facility.

Eligible Section 45X components must be produced by a Section 45X facility and must not include any property that was produced in a Section 48C facility. This provision streamlines eligibility and seeks to avoid double benefits when circumstances overlap. Businesses will need to choose which credit to pursue based on the installation of equipment or production of components at a facility.

Navigating Section 45X

The energy efficiency tax credits under the Inflation Reduction Act offer both tax and environmental benefits. Understanding which credits you potentially qualify for can be complex. Our energy efficiency tax professionals can help.