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What Renewable Energy Stakeholders Should Know About IRC Section 45X Advanced Manufacturing Production Tax Credit

Published by Nat Eng on Thursday, March 7, 2024

Journal Cover March 2024   Download PDF

The U.S. Treasury Department issued a notice of proposed rulemaking Dec. 14, 2023, for the Internal Revenue Code (IRC) Section 45X Advanced Manufacturing Production Tax Credit (PTC), created under the Inflation Reduction Act of 2022 to bolster domestic production of equipment, components and critical materials related to clean and renewable energy.

As Treasury and the IRS consider comments on the proposed regulations, now is a good time to review key sections of the proposed rule and their potential implications for renewable energy stakeholders.

Section 45X Advanced Manufacturing Production Tax Credit

The Section 45X Advanced Manufacturing PTC is a federal tax credit designed to incentivize production and sale of eligible components for certain renewable energy systems, including solar and wind energy components, inverters, qualifying battery components and applicable critical minerals. The Section 45X credit is based on the number of eligible components produced and sold by a taxpayer to an unrelated person as part of the taxpayer's trade or business. The credit will start phasing out 25% annually for component sold after Dec. 31, 2029.

Key Sections in the Proposed Rule

Credit Calculation

Section 45X is a PTC based on the amount of eligible components produced in a tax year. Because there is a wide range of qualifying energy components under Section 45X, the methods of calculating the amount of credit vary and can be categorized into three general methods:

  1. Dollar value multiplied by size or weight of eligible component. This method applies to five of the eligible solar subcomponents. For example, photovoltaic wafers are worth $12 per square meter, while torque tubes are worth 87 cents per kilogram.
  2. Dollar value multiplied by total capacity of eligible component in watts. This method applies to many of the eligible wind energy components, inverters and battery components. For example, a wind facility blade is worth 2 cents per watt of the total rated capacity of the completed turbine. 
  3. Value as a percentage of production cost. The credit for eligible critical minerals and other components is calculated as 10% of the costs incurred for production of the components. Further guidance is needed to clarify what costs are includible in the cost of production. 

The list of qualifying Section 45X energy components and their respective prescribed calculation methods is both extensive and detailed, so renewable energy project sponsors should consult their accountants to ensure proper calculation. 

Determining Which Taxpayer May Claim the Section 45X Credit

The Section 45X credit equals the amount of credits with respect to each eligible component that is produced by the taxpayer and sold to an unrelated taxpayer within a tax year. The proposed rulemaking provides a definition of "produced by the taxpayer" that requires the taxpayer claiming a Section 45X credit to be the person who performs the actual production activities that bring about a "substantial transformation."

The proposed rule defines the term "produced by the taxpayer" as, "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."

Under the proposed rule, "produced by the taxpayer" does not apply to partial transformation, mere assembly and superficial modification if the taxpayer does not also produce a substantial transformation. As an example, the proposed rule said that if three taxpayers each produced a section of a wind tower that together make up the wind tower, then no taxpayer has produced an eligible component within the meaning of Section 45X(a)(1)(A) because no taxpayer alone produced the entire wind tower. 

Taxpayers interested in accessing the Section 45X credit should carefully monitor the production process of their elements, materials and subcomponents to ensure they meet the Section 45X eligibility requirements. If production of an eligible component is performed as part of a manufacturing contract agreement with multiple fabricators, then the parties involved may determine in advance which taxpayer will claim the Section 45X credit. The IRS said it will not challenge the agreement of the parties, if all parties involved submit signed certification statements indicating the agreement. Proper documentation is key. 

There are also some industry stakeholders who believe that the proposed related party sales rule may be too flexible and may be amended in the final regulations. 

Timing of Production and Sale of Eligible Components

The proposed regulations state that the Section 45X credit may be claimed for production of eligible components beginning before Dec. 31, 2022. Production of the eligible components must be completed, and sales of eligible components must occur after Dec. 31, 2022.

For example, a taxpayer begins production of a related offshore wind vessel in January 2022, completing production in December 2024. The sale of the eligible component to an unrelated person occurs in 2025. Under this scenario, the taxpayer is eligible to claim the Section 45X credit in 2025, if all other requirements are met. 

Taxpayers estimating 2023 tax benefits will benefit from this clarification.

Eligible Components

The statute of Section 45X defines eligible components as any solar energy component, any wind energy component, any inverter, any qualifying battery component and any applicable critical material. The enacting legislation adopted many of the statutory definitions of these terms. However, the proposed regulations provided further direction on a few components.

  • Related offshore wind vessel. The proposed regulations state that the a related offshore wind vessel, the credit amount is 10% of the sales price of the vessel, not including the price of maintenance, services or other similar items that may be sold with the vessel. 
  • Electrode active materials. The proposed regulations state that electrode active materials are materials that are capable of being used within a battery for energy storage, but do not include battery management systems, terminal assemblies, cell containment, gas release valves, module containments, module connectors, compression plates, straps, pack terminals, bus bars, thermal management systems and pack jackets. 
  • Critical minerals. Production costs of applicable critical minerals include all costs defined in Internal Revenue Code Section 1.263A-1(e) that are paid or incurred by the taxpayer for electrode active material production only. Costs incurred after the production of the electrode active material are not includible. The definition of "production" for purposes of calculating the credit for electrode active materials and critical minerals is notable because each of these could amount to a significant portion of the goods sold, depending on the taxpayer's role in the supply chain. This would mean a less favorable tax credit amount, and thus, a diminished incentive for some taxpayers.

Further Guidance Needed

The proposed regulations provide a great deal of clarity for taxpayers interested in the Section 45X credit, but further guidance is needed on a number of topics, such as what Treasury considers as a producer of components in contract manufacturing agreements. 

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