The IRS has issued the final regulations for Code Section 45X under the Inflation Reduction Act, aimed at enhancing domestic clean energy manufacturing. The Advanced Manufacturing Production Credit incentivizes the production and sale of clean energy components such as solar panels, wind parts, inverters, battery components, and critical minerals, provided they are manufactured in the U.S. or its territories.
Key Updates:
- The credit is based on the eligible components produced and sold within the tax year and works in conjunction with the Section 48C credit for advanced energy projects.
- Earlier this year, the IRS released initial guidance and proposed regulations. Following extensive feedback and a public hearing, the final rules have been refined.
- Material costs for critical minerals and electrode active materials are now included in the credit calculation, and the use of recycled materials is permitted.
To qualify, the property must be produced at a Section 45X facility, which cannot also be a Section 48C facility. A Section 45X facility is defined as independently functioning tangible property necessary for the taxpayer to be considered the producer of the qualified components.
To prevent duplication, fraud, or improper credit amounts, the anti-abuse rule disallows the Related Person Election if the required information is not provided or if the components are improperly used or defective. However, defects arising after the sale are usually acceptable.
Since the start of the Biden-Harris administration, $450 billion in new clean energy investments have been announced, with $275 billion occurring post-Inflation Reduction Act. This includes significant investments in batteries, critical minerals, solar, and wind. The regulations aim to level the playing field for U.S. companies and boost domestic production of clean energy technologies.
Key Changes to Section 45X
- Inclusion of Material Costs:
- Material costs for critical minerals and electrode active materials are now included in the credit calculation.
- Mining and extraction costs are also considered in the credit calculation.
- Use of Recycled Materials:
- The final regulations clarify that eligible components can be produced using recycled materials. This was not explicitly stated in the proposed regulations but was included in the final regulations based on stakeholder feedback.
- Definitions and Clarifications:
- The definition of “produced by the taxpayer” was refined to mean a process that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component.
- The final regulations specify that both primary and secondary production (including using recycled materials) are included in the definition of “produced by the taxpayer.”
- Facility Requirements
- Property must be produced at a Section 45X facility, which cannot also be a Section 48C facility. A Section 45X facility is defined as independently functioning tangible property necessary for the taxpayer to be considered the producer of the qualified components.
- Anti-Abuse Rule:
- The anti-abuse rule disallows the Related Person Election if the required information is not provided or if the components are improperly used or defective. However, defects arising after the sale are generally acceptable.
- Interaction with Section 48C:
- The final regulations further clarify the interaction between Sections 45X and 48C, ensuring that property qualifying for the Section 45X credit must be produced at a Section 45X facility and not at a Section 48C facility.
If you have questions or want to discuss, please don’t hesitate to reach out to CFO Services.
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