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Treasury, IRS Release New Proposed Section 45X Advanced Manufacturing Production Credit Regulations on Key Domestic Critical Mineral and Manufacturing Policies and Key Components of Clean Energy Facilities

Published by Peter Lawrence on Tuesday, March 26, 2024 - 12:32PM

The Inflation Reduction Act (IRA) proposed several new tax credits and incentives to promote the production of clean energy. One of these tax credits was the Internal Revenue Code Section 45X Advanced Manufacturing Production Credit, which provides a production tax credit (PTC) for certain critical minerals and components of domestically manufactured clean energy facilities.  The components eligible for the Section 45X credit include solar and wind facility components, energy storage components and 50 different critical minerals such as arsenic, bismuth and erbium.
 
On Dec. 14, 2023, the Internal Revenue Service (IRS) released proposed Section 45X regulations, which explain how to calculate the amount of eligible credit and the rules surrounding the sale of credits between unrelated and related persons. The credit amount is equal to values specific to each type of eligible component and, for most components, multiplied by the size or capacity specific to each eligible component, as provided for in the proposed regulations and referenced further below. The IRS accepted public comments on the proposed regulations until Feb. 13 and hosted a hearing on Feb. 22 where commenters raised potential concerns and questions that they would like to see addressed before the proposed regulations are finalized. 

Blog Graphic: Eligible Components

General Rules

The terms produced by the taxpayer, related vs. unrelated person, and eligible components are all key definitions within the Section 45X proposed regulations. The term produced by the taxpayer determines what is eligible for the credit based on its production, while the definition of related vs. unrelated person details the specifics pertaining to the sale of components. The proposed regulations under Section 45X also provide new information on how to calculate the credit.

Eligible components must be produced in the United States to qualify for the Section 45X credit. However, subcomponents, elements and materials used in the production of eligible components are not subject to this rule. By only allowing credits to be provided for domestic production of eligible components, the Advanced Manufacturing Production Credit incentivizes taxpayers to grow the U.S. clean energy manufacturing capacity.

On Dec. 29, 2023, the IRS released Notice 2024-9 to establish exceptions for phaseout amounts for applicable entities if domestic content requirements are not satisfied for credits such as Section 45X. In the notice, the IRS provides rules for the entities looking to make an elective payment under Section 6417 to claim an exception to phaseouts for certain clean energy credits. The IRS invited comments on factors that would apply to projects where construction begins on or after Jan. 1, 2025. Comments for Notice 2024-9 were due Feb. 26, 2024, and the Renewable Energy Working Group (RE Working Group) will continue to monitor future proposed domestic content guidance to determine their impacts on tax credit allocations once the final guidance is released.

Implications of the Term Produced by the Taxpayer

Notably, the term produced by the taxpayer has been defined in the proposed regulations under Section 1.45X-1(c)(1) to mean 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. A component is not considered substantially transformed if it does not become functionally different from what it was before. A partial transformation that does not result in a substantial transformation of inputs into a complete and distinct eligible component is not included in the definition of produced by the taxpayer. Additionally, neither a minor assembly nor superficial modification of a final eligible component is included in this definition. There would be a special rule, however, for applying the definition of produced by the taxpayer for solar grade polysilicon, electrode active materials and applicable critical minerals. For solar-grade polysilicon, electrode active materials and applicable critical minerals, the term “=produced by the taxpayer means, "processing, conversion, refinement, or purification of source materials, such as brines, ores, or waste streams, to derive a distinct eligible component,” according to Section 45X." Integrated components may qualify for the Section 45X credit if they create a substantial transformation of the initial component into a distinct and complete eligible component that is functionally different from prior to its modification.

Related vs Unrelated Person

A taxpayer claiming the Section 45X credit must also sell the component to an unrelated person, a term that is further defined in the proposed regulations. The term related person is defined in Section 1.45X-2 of the proposed regulations as, “a person who is related to another person if such persons would be treated as a single employer under the regulations in this chapter under sect. 52(b) of the Code.” On the other hand, an unrelated person is someone who does not meet these qualifications.

An example of an exchange that qualifies for the credit is detailed in the regulations: “X and Y are members of a group of trades or businesses under common control under sect. 52(b), and thus are related persons under sect. 45X(d)(1). Each of X and Y has a calendar year taxable year. Z is an unrelated person. X is in the trade or business of producing and selling solar modules. X produces and sells solar modules to Y in 2023. Y sells the solar modules to Z in 2024. X may claim a section 45X credit for the sale of the solar modules in 2024, the taxable year of X in which Y sells the solar modules to Z.” Proposed Section 1.45X-2(d)(2) would also ensure that a taxpayer must make an affirmative related person election annually on their federal income tax return, including extensions under any other guidance. Separate related person elections must be made under the proposed regulations for each sale made by a taxpayer’s eligible trades or businesses. The proposed regulations also contain anti-abuse rules to prevent duplication, fraud, or any improper or excessive amount of the Section 45X credit.

Eligible Components for the Section 45X Credit

The proposed regulations under Section 1.45X-3 also lay out the specifications for eligibility of solar energy components, wind energy components and energy storage components. In addition to these definitions, this section also details proposed credits awarded for each item.  

The RE Working Group has been closely following the U.S. Department of the Treasury guidance on domestic content, which has far-reaching effects on other renewable and clean energy provisions of the IRA. On Nov. 13, 2023, the RE Working Group submitted a comment letter in response to Notice 2023-38. This notice provides guidance on what is considered to be a manufactured product and how to determine their adjusted percentages. It also details which components of a manufactured product are considered to be domestic, which is crucial for the determinations of tax credits such as Section 45X. Novogradac’s comment letter analyzed the proposed guidelines and detailed concerns surrounding manufactured products requirements, safe harbor classifications, and recordkeeping and certification requirements. The comment letter requested adjustments for the determinations of components costs, further granular lists of applicant components, and further guidance on certification statements.

The proposed regulations also state a taxpayer could register their eligible component as either an electrode active material or a critical mineral, but they cannot qualify as both. Battery modules must be manufactured in an end-use configuration, meaning that the product ultimately serves its intended specified end use. Eligible components except for critical minerals will follow the following phase-out rules: 

  • 75% for eligible components sold during calendar year 2030,
  • 50% for eligible components sold during calendar year 2031,
  • 25% for eligible components sold during calendar year 2032, and 
  • Zero percent for eligible components sold after calendar year 2032.

This section also notes that facilities claiming the Section 45X tax credit cannot also claim the Section 48C Qualifying Advanced Energy Project Credit. The Section 48C credit provides a 30% investment tax credit to 183 domestic clean energy manufacturing facilities, providing $10 billion in tax credits, $4 billion of which must be allocated to projects in energy communities. The Section 48C credit applies to solar, wind, or other renewable energy facilities, as well as electric grids and storage for renewables, fuel cells and energy storage systems for electric or hybrid vehicles, among others.

Lastly, proposed regulations under Section 1.45X-4 define and provide the credit amounts that apply to critical minerals which are used in the eligible components. The credit amount depends on the production process for applicable critical materials, the production costs incurred and the substantiation of the claim. The credit amounts to 10% of the costs incurred by the taxpayer with respect to production of such mineral. The cost of extracting and acquiring the raw minerals as well as the cost of production of a mineral will be taken into account when determining the eligibility of this tax credit. Costs relating to incorporation of the eligible critical mineral into another product will not be considered. For electrode active materials, or qualified battery components, the costs of acquiring raw materials, conversion, purification, recycling of raw materials and other material costs related to production will not be considered for the Section 45X credit. A certificate must be provided proving that all requirements for critical minerals have been followed. The phase-out rules listed above do not apply to critical minerals.

Transferability has Caused a Boom in Section 45X and Other Clean Energy Tax Credits

Renewable energy tax credits have unique transferability delivery mechanisms which were established in the IRA. The IRS released proposed regulations June 21, 2023, on Section 6418 - Transfer of certain credits, which allows taxpayers to transfer all or a portion of an eligible credit. Some of the industry’s initial concerns surrounding uncertainty in transferability and elective pay were outlined in an Aug. 29, 2023, Tax Credit Tuesday Podcast. Sellers of credits pre-register with the IRS and receive an identification number assigned to their eligible property. After this, transactions between sellers and buyers of tax credits can be claimed on both of their tax returns. As of Mar. 8, 2024, more than 45,500 projects have requested registration numbers through the IRS Energy Credits portal for elective pay or transferability.

The transferability of these tax credits has allowed a higher availability of tax credit equity, which has generated an explosion of growth in IRA renewable energy tax credits. In an interview, Crux Climate CEO Alfred Johnson estimated that the transferable tax credit market shattered expectations and was worth between $7 billion and $9 billion in just the second half of 2023. He predicts an $80 billion to $100 billion market by the second half of the 2020s, citing a surprising number of new technologies, intermediaries and competition. Johnson said that the high end of the market for transferable tax credits in the second half of 2023 were $0.94 to $0.96 per credit, while the average was $0.92 to $0.94. Larger deals for tax credit purchases are typically priced better than smaller deals, and new technologies tend to be priced lower than more established technologies. He said that transferability is leveling the playing field for smaller deals that are $50 million and below. Traditional deals in tax credits are usually $50 million to $100 million or above, but smaller deals consist of 80% of transactions for transferable tax credits since they don’t need to go through tax equity structures. Significantly, Section 45X credits were the second most broadly considered transaction. Johnson said that companies have been planning their expansions in the United States because of their ability to sell Section 45X credits.

Future Section 45X Guidance

The RE Working Group will continue to monitor any changes made to the proposed regulations and provide analysis on how those changes will affect energy stakeholders’ use of the credit. To join the RE Working Group and stay updated on the impacts of future proposed tax regulations, click here.

Recently released guidance and other renewable and clean energy issues will be discussed at the Novogradac 2024 Spring Renewable Energy Tax Credits Conference from May 16-17 in San Diego. 

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