What manufacturers should know about the new Section 45X tax credit
Section 45X was added to the tax code by the Inflation Reduction Act of 2022 (IRA) as an incentive for U.S. manufacturers producing various components for clean energy technologies. Titled the “advanced manufacturing production credit,” it can be claimed as a dollar-for-dollar reduction of federal income tax liability or as a direct payment from the IRS.
How it works
The credit is available for eligible components manufactured in the U.S. and sold to an unrelated party beginning January 1, 2023. Eligible components consist of:
- Solar energy components
- Wind energy components
- Inverters
- Battery components
- Critical minerals
Each component type has its own technical requirements and definitions. For example, solar energy components include modules, photovoltaic cells and wafers, and structural fasteners, to name a few – and each of these in turn has its own sub-definitions.
The requirements under inverters and battery components are fairly involved and impose limitations based on the component’s capacity or rated output.
The credit rate to be applied varies extensively depending upon the specific component at issue but is generally determined by reference to the item’s weight or power output. Therefore, it’s important to review each component type to understand the nuances of what qualifies and the credit rate to be applied.
How it’s claimed
Taxpaying entities can claim the credit as a direct offset to their federal income tax liabilities. The IRA also expands the carryback period for the Section 45X credit from one year to three years.
The IRA further allows monetization of the credit through cash refunds under Section 6417 (also referred to as elective or direct payments), making it a great cash flow tool for businesses not able to use the credit against income tax due to net operating losses or other credits being applied.
Section 6418 also permits the credit to be transferred to unrelated taxpayers for cash; however, taxpayers not able to use the credit against income tax will likely prefer to receive a refund of the full credit amount under Section 6417 rather than sell their credits to a third party at a discount.
Recent guidance
Treasury and the IRS issued proposed regulations under Section 45X on December 14, 2023 covering a range of items, including more detailed definitions in connection with eligible components and critical minerals, what “produced by the taxpayer” means for eligibility purposes, and how sales to unrelated and related persons are treated.
The proposed regulations also cover rules for determining which taxpayer in a contract manufacturing arrangement is entitled to the credit. Generally, the party to a contract that may claim the credit is the party that performs the actual production activities that bring about a substantial transformation resulting in the eligible component. However, the proposed regulations also allow the parties to agree who will be entitled to claim the credit, which the IRS will not challenge provided the parties submit signed certification statements indicating such agreement. Thus, manufacturers of eligible components should be prepared for contractual terms and negotiations with their customers and subcontractors.
How we can help
CLA’s federal tax strategies team can help your manufacturing organization evaluate and claim the new Section 45X tax credit while also analyzing other credits that may be available for your design and manufacturing activities, such as the research tax credit.
Check out this recent case study highlighting how the Section 45X credit can help your organization.
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