IRS Finalizes Clean Energy Manufacturing Credit Regulations (45X)

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

  1. 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.
  2. 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.
  3. 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.”
  4. 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.
  5. 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.
  6. 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.

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. 

Final Regulations issued for the 48D ITC

October 2024

The IRS has finalized the rules for the advanced manufacturing investment credit under Code Sec. 48D. This credit, created by the CHIPS Act of 2022, is designed to boost U.S. production of semiconductors and related equipment by offering a 25% credit for qualified investments in advanced manufacturing facilities.

To qualify, the property must be put into service after December 31, 2022, with construction happening between August 9, 2022, and December 31, 2026.

First issued on March 23, 2023, these rules lay out who’s eligible, what counts as qualified property, and the construction requirements. They also include a 10-year credit recapture rule for major foreign expansions. There was a lot of feedback from groups like the U.S. Chamber of Commerce wanting more explanation, so the final rules now have broader definitions, covering semiconductor wafer production but not precursor materials like polysilicon. These rules also clarify definitions and expand what counts as semiconductor fabrication and packaging. They refine the rules on significant foreign expansions, focusing on transaction types rather than monetary thresholds.

The final regulations take effect on December 23, 2024, providing clear guidelines and incentives for the semiconductor manufacturing industry.  The following are the areas of the regulations that were changed in the final regulations. 

Summary of Comments and Explanation of Revisions

Overview

The final regulations retain the basic approach of the proposed regulations with certain revisions based on public comments. Definitions of “semiconductor manufacturing,” “semiconductor manufacturing equipment,” and “significant transaction” have been clarified.

The examples of semiconductor manufacturing equipment were included in the final regulations. The final regulations provide a comprehensive list of specific types of equipment that qualify as semiconductor manufacturing equipment.  This broadened and clarified certain uncertainty in the proposed regulations.  Below are the equipment areas listed.

Included Examples of Semiconductor Manufacturing Equipment

  1. Deposition Equipment:
    • Chemical Vapor Deposition (CVD)
    • Physical Vapor Deposition (PVD)
    • Electrodeposition
    • Atomic Layer Deposition (ALD)
  2. Etching Equipment:
    • Wet etch
    • Dry etch
  3. Epitaxial Growth Equipment:
    • Equipment for epitaxial growth of transistor features
  4. Chemical-Mechanical Polishing Equipment:
    • Equipment to planarize layers through the semiconductor fabrication process
  5. Lithography Equipment:
    • Steppers and scanners of various light wavelengths (e.g., deep UV, extreme ultraviolet (EUV))
    • Photoresist coating and developer tracks
  6. Wafer Production Equipment:
    • Equipment for producing ingots and boules
    • Wafer growth equipment
    • Wafer slicing equipment
    • Wafer dicing equipment
    • Wire bonders
  7. Inspection and Measuring Equipment:
    • Scanning electron microscopes
    • Atomic force microscopes
    • Optical inspection systems
    • Wafer probes and optical scatterometer
    • Energy Dispersive Spectroscopy (EDS)
  8. Metrology and Inspection Systems:
    • Systems to measure critical dimensions of integrated circuit features
    • Systems for detection and measurement of defects on wafers
  9. Ion Implantation and Diffusion/Oxidation Furnaces
  10. Specialty Glass Components:
    • EUV mirrors and optical pathways
    • Lenses and mirrors used in inspection equipment and other fabrication processes
    • Lens assemblies for wafer defect inspection
  11. Electrostatic Chucks
  12. High Performance Pumps
  13. High Purity Quartz Devices
  14. Ultra-High Vacuum Chamber Components
  15. Photomasks and Light Sources:
    • Used in photolithography

Clarifications

  • Non-Exclusive List: The list provided in the final regulations is non-exclusive, meaning other types of equipment that meet the criteria can also qualify as semiconductor manufacturing equipment.
  • Subsystems: The definition includes subsystems that enable or are incorporated into the manufacturing equipment.

These examples and clarifications were added to provide more certainty and guidance to taxpayers on what constitutes semiconductor manufacturing equipment for the purposes of the advanced manufacturing investment credit.

Next are the key clarifications and changes made to the sections of the final regulations. 

Comments on and Changes to Proposed §1.48D-1

Clarifications were made regarding the exclusion of qualified rehabilitation expenditures from the qualified investment.

Comments on and Changes to Proposed §1.48D-2

Clarifications were made on the method for determining the portion of basis attributable to construction after the enactment date, and the definition of “foreign entity of concern” was updated.

Comments on and Changes to Proposed §1.48D-3

Clarifications were made on what constitutes “qualified property” and “property integral to the operation of an advanced manufacturing facility.”

Comments on and Changes to Proposed §1.48D-4

The definition of “advanced manufacturing facility” was revised to remove the term “finished” and clarify the primary purpose requirement.

Comments on and Changes to Proposed §1.48D-5

Clarifications were made on the beginning of construction rules, including the physical work test and the five percent safe harbor.

Comments on and Changes to Proposed §1.50-2 The definition of “significant transaction” was revised to align with the Commerce Final Rule, and the rules for determining “applicable taxpayer” were clarified.

If you have questions or want to discuss, please don’t hesitate to reach out to CFO Services.

IRS Circular 230 Required Notice‐‐IRS regulations require that we inform you that to the extent this communication contains any statement regarding federal taxes, that statement was not written or intended to be used, and it cannot be used, by any person (i) for the purpose of avoiding federal tax penalties that may be imposed on that person, or (ii) to promote, market or recommend to another party any transaction or matter addressed herein.