United States: Treasury And IRS Issue Proposed Regulations On The New Section 45X Advanced Manufacturing Production Tax Credit

On December 14, 2023, Treasury and the IRS issued proposed regulations to implement the section 45X advanced manufacturing production tax credit that was enacted as part of the Inflation Reduction Act (the "Proposed Regulations").

Section 45X provides a production tax credit for the manufacturing of certain eligible solar, wind, and battery components as well as applicable critical minerals that are produced in the United States. The credit is available only if the eligible component is produced and sold in the taxpayer's trade or business. The amount of the tax credit varies based on the type of eligible component and the amount sold in a taxable year.

Last year, Treasury issued a request for comments regarding the implementation of the section 45X credit and received 320 comments.¹

There will be a 60-day public comment period, with comments due on February 13, 2024. Treasury has also scheduled a public hearing on the Proposed Regulations on February 22, 2024.

Eligible Components: The Proposed Regulations provide additional guidance to define eligible solar, wind, and battery components and for calculating the eligible amount.²

For certain solar energy components, such as structural fasteners and torque tubes, taxpayers would be required to maintain additional documentation.³

Section 45X provides a credit that is equal to 10 percent of production costs for electrode active materials within a battery.⁴ The Proposed Regulations clarify that production costs include costs incurred as defined under section 263 that are paid or incurred within the meaning of section 461.⁵The Proposed Regulations also exclude from the section 45X credit as an electrode active material: battery management systems, terminal assemblies, cell containments, gas release valves, module containments, module connectors, compression plates, straps, pack terminals, bus bars, thermal management systems, and pack jackets.⁶

Eligible Critical Minerals: The Proposed Regulations provide additional guidance regarding the definition of eligible critical minerals, including clarifications to the definitions of graphite (including synthetic graphite) and aluminum.⁷Similar to electrode active materials, critical minerals are eligible for a credit that is equal to 10 percent of production costs.⁸The production costs that are eligible for the credit also include the costs defined under section 263 and paid or incurred within the meaning of section 461.⁹

Taxpayers would be required to document that their product meets the applicable critical minerals requirements through a certificate of analysis, but Treasury is requesting additional comments on this substantiation issue.¹⁰

Produced by the Taxpayer: To qualify for the credit, the taxpayer must produce the eligible component in the United States.¹¹The Proposed Regulations state that production requires substantial transformation of constituent elements, materials, or subcomponents into a component that is functionally different; partial transformation, minor assembly or constituent inputs, or superficial modification of an eligible component is not sufficient.¹²The Proposed Regulations also provide a special rule for determining if polysilicon, electrode active materials, and applicable critical minerals are produced by the taxpayer, which require the "processing, conversion, refinement, or purification of source materials, such as brines, ores, or waste streams, to derive a distinct eligible component."¹³

Integrated, Incorporated, or Assembled: The Proposed Rule clarifies that a taxpayer may claim a section 45X credit for each eligible component the taxpayer produces and sells to an unrelated person, including eligible components that are used and incorporated into another distinct eligible component that is then sold to an unrelated person¹⁴

Domestic Production: Materials and subcomponents that are used to manufacture an eligible component do not need to be produced in the United States for the eligible component to qualify for the credit.¹⁵

Contract Manufacturing: Parties to a contract manufacturing agreement can agree as to which party to the contract will claim the credit for eligible components that are produced under the contract.¹⁶The IRS will not challenge such an agreement if the parties submit the required certification statements.¹⁷Absent such an agreement, the default rule is the contract manufacturer is entitled to the credit.¹⁸

Related Person Election: Section 45X requires the eligible component to be sold to an unrelated person to claim the credit.19 The eligible component can also be sold to a related person for sale to an unrelated person, but the date of the sale will be when the component is sold to the unrelated person.²⁰A taxpayer can make an election to treat a sale to a related person as if made to an unrelated person for the purposes of section 45X.²¹

The Proposed Regulations describe the election process, including for consolidated groups and partnerships.²²The taxpayer must affirmatively make the election annually with their originally filed tax return and the election also applies to the direct pay and transferability elections^.23

Section 48C and 45X Interaction: Section 45X prohibits a taxpayer from claiming a credit on an eligible component that was manufactured in a facility that claimed a section 48C credit after August 16, 2022.²⁴

To claim the section 45X credit, the eligible component must be produced in a "section 45X facility" and not produced in a facility by eligible property that claimed a section 48C credit (a "section 48C facility").²⁵A section 45X facility includes all tangible property that comprises an independently functioning production unit that produces one or more eligible components.²⁶A section 48C facility includes all "eligible property" for which a taxpayer received a 48C allocation after August 16, 2022.²⁷Eligible property is further defined to include property necessary for the production of qualifying property under section 48C, but not including a building or its structural components.²⁸

The Proposed Rule includes several examples to illustrate the application of the section 48C and section 45X overlap provisions.²⁹ The examples affirm that a taxpayer operating two independent production units at a manufacturing site can claim the section 48C credit on Production Unit A and the section 45X credit on eligible components produced in Production Unit B, provided the tangible property comprising Production Unit B is not eligible property that was included in the section 48C credit claimed on Production Unit A.³⁰

Anti-Abuse Rules: The Proposed Regulations include several anti-abuse rules related to both the production of eligible components and the Related Person Election to prevent fraud, as well as wasteful use of eligible components.³¹

Applicability: Eligible components for which the production is completed and sales occur after December 31, 2022, are eligible for the credit. The Proposed Regulations clarify that production of eligible components may have begun in 2022, but components that completed production in 2022 and are sold in 2023 are ineligible for the credit.³²

Footnotes

1. See IRS Notice 2022-47 (Oct. 5. 2022).

2. Prop. Reg. § 1.45X-3.

3. Prop. Reg. § 1.45X-3(b)(7)(iii), (b)(8)(iii).

4. Section 45X(b)(1)(J).

5. Prop. Reg. § 1.45X-3(e)(2)(iv).

6. Prop. Reg. § 1.45X-3(e)(2)(i)(A).

7. Prop. Reg. § 1.45X-4(b)(1), (b)(14).

8. Section 45X(b)(1)(M).

9. Prop. Reg. § 1.45X-4(c)(3).

10. Prop. Reg. § 1.45X-4(c)(4).

11. Section 45X(d)(2).

12. Prop. Reg. § 1.45X-1(c)(1)(i)-(ii).

13. Prop. Reg. § 1.45X-1(c)(2).

14. Prop. Reg. § 1.45X-1(f)(2)(i).

15. Prop. Reg. § 1.45X-1(d)(2).

16. Prop. Reg. § 1.45X-1(c)(3)(iii).

17. Prop. Reg. § 1.45X-1(c)(3)(iv).

18. Prop. Reg. § 1.45X-1(c)(3)(ii)(A).

19. Section 45X(a)(3)(A).

20. Prop. Reg. § 1.45X-2(c)(2).

21. Section 45X(a)(3)(B)(i).

22. Prop. Reg. § 1.45X-2(d)(4)(i).

23. Prop. Reg. § 1.45X-2(d)(2)(i), (d)(3).

24. Section 45X(c)(1)(B).

25. Prop. Reg. § 1.45X-1(g)(1)(i)-(ii).

26. Prop. Reg. § 1.45X-1(g)(2).

27. Prop. Reg. § 1.45X-1(g)(3).

28. Prop. Reg. § 1.45X-1(g)(3)(ii).

29. Prop. Reg. § 1.45X-1(g)(4)(i)-(v).

30. Prop. Reg. § 1.45X-1(g)(4)(i) (Example 1).

31. Prop. Reg. § 1.45X-l(i)(1).

32. Prop. Reg. § 1.45X-1(c)(4).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.