Section 45X: Advanced Manufacturing Production Credit

In Tax Matters Volume 2023-5, we provided an overview of the various incentives contained within the Inflation Reduction Act (IRA). On December 14, 2023, Treasury released proposed regulations outlining further details on the advanced manufacturing production credit.

The regulations define and clarify several key terms contained within the legislation that will help determine eligibility for and monetization of the credit. We will discuss some of these items below.

General Overview

The credit is equal to the sum of the credit amounts determined with respect to each eligible component produced in the United States by the taxpayer in their trade or business and, during the taxable year, sold by such taxpayer to an unrelated person.

Definition of "Eligible Components"

Eligible components and their potential credit amounts are defined as follow:

1. Solar energy component
   a. Photovoltaic cell ($0.04 x capacity of the cell as expressed on a direct current watt basis)
   b. Photovoltaic wafer ($12 per square meter)
   c. Polymeric backsheet ($0.40 per square meter)
   d. Solar grade polysilicon ($3 per kilogram)
   e. Solar module ($0.07 x capacity of the module as expressed on a direct current watt basis)
   f. Torque tube ($0.87 per kilogram)
   g. Structural fastener ($2.28 per kilogram)
2. Wind energy component
   a. Blade ($0.02 x watt capacity of the completed turbine for which blade is designed)
   b. Fixed offshore wind foundation ($0.02 x watt capacity of the completed turbine for which foundation is designed)
   c. Floating offshore wind foundation ($0.04 x watt capacity of the completed turbine for which foundation is designed)
   d. Nacelle ($0.05 x watt capacity of the completed turbine for which foundation is designed)
   e. Related offshore wind vessel ($0.10 of sales price of vessel)
   f. Tower ($0.03 x watt capacity of the completed turbine for which tower is designed)
   
3. Inverter – product to convert electricity from solar modules or wind energy systems into alternating current electricity
   a. Central inverter ($0.25 x capacity of inverter as expressed on alternating current watt basis)
   b. Commercial inverter ($0.02 x capacity of inverter as expressed on alternating current watt basis)
   c. Distributed wind inverter ($0.11 x capacity of inverter as expressed on alternating current watt basis)
   d. Microinverter ($0.11 x capacity of inverter as expressed on alternating current watt basis)
   e. Residential inverter ($0.065 x capacity of inverter as expressed on alternating current watt basis)
   f. Utility inverter ($0.015 x capacity of inverter as expressed on alternating current watt basis)
4. Qualifying battery component
   a. Electrode active materials (10% of production costs)
   b. Battery cells ($35 x capacity of the cell as expressed on a kilowatt-hour basis)
   c. Modules using battery cells ($10 x capacity of module as expressed on a kilowatt-hour basis)
   d. Modules with no battery cells ($45 x capacity of module as expressed on a kilowatt-hour basis)
5. Applicable critical mineral (10% of production costs)
   a. Aluminum, antimony, barite, beryllium, cerium, cesium, chromium, cobalt, dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium, manganese, neodymium, nickel, niobium, tellurium, tin, tungsten (ammonium paratungstate or ferrotungsten), vanadium (ferrovanadium or vanadium pentoxide), yttrium, and various other minerals

Definition of "Production Costs"

Several of the credit amounts are based on the production costs incurred. Production costs with respect to the production of applicable critical minerals and electrode active materials include all costs as defined in §1.263A-1(e) except direct or indirect material costs or costs related to extraction of raw materials. As a refresher, some of the includible production costs under §1.263A-1(e) are:

• Direct and indirect labor costs (including benefits and payroll taxes)
• Indirect material costs (including consumables)
• Purchasing costs
• Handling costs
• Storage costs
• Depreciation or amortization on equipment or facilities
• Rent
  
• Taxes related to production activities
• Insurance related to production activities
• Utilities related to production activities
• Repairs and maintenance
• Engineering and design costs (excluding Sec. 174 research and experimental costs)
• Spoilage
• Tools and equipment
• Quality control
• Bidding costs
• Licensing and franchising costs
• Interest incurred to finance production
• Capitalizable service costs
  

Phaseout of Credit

The credit can be fully claimed for eligible components sold through December 31, 2029. Starting in calendar year 2030, the credit will phase out as follows:

• 2030: 75% for eligible components sold
  
• 2031: 50% for eligible components sold
• 2032: 25% for eligible components sold
• 2033 and later: 0% for eligible components sold
  

However, applicable critical minerals are not included in the phaseouts listed above.

Definition of "Produced by Taxpayer"

The regulations define "produced by the taxpayer" as a process conducted by the taxpayer that substantially transforms 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.

For taxpayers that are engaged in contract manufacturing arrangements, generally the party subject to such a contract that may claim the credit is the taxpayer that actually performs the production activities that bring about a substantial transformation resulting in the eligible component. However, the parties to such an agreement may determine who will claim the credit provided all parties submit signed certification statements.

Production of eligible components may begin before December 31, 2022; however, production of eligible components must be completed, and sales of such components must occur, after December 31, 2022.

Advanced manufacturing production credits may not be claimed for any components produced in a facility for which the taxpayer received an allocation of 48C credits (advanced energy project credits).

Treatment of Integrated, Incorporated, or Assembled Eligible Components

A taxpayer that integrates, incorporates, or assembles an eligible component into another eligible component which is then sold to an unrelated person will be eligible for the credit. Integrated, incorporated, or assembled refers to production activities by which a constituent element, material, or subcomponent is substantially transformed into another complete and distinct eligible component as defined under § 45X.

Definition of "Sale to Unrelated Person"

Two parties are related if such persons would be treated as a single employer under § 52(b) of the Code. The general rules of the credit require sale of eligible components only to unrelated persons.

However, if a taxpayer makes a sale of an eligible component to related person who then ultimately sells the component to an unrelated person, the eligible producer of the component would be treated as eligible for the credit if a Related Person Election is made by the producer. This allows the taxpayer to treat such sales to related persons as if they were made to an unrelated person. Similar availability applies to sales of integrated, incorporated, or assembled eligible components to an ultimate unrelated person. Note that the credit is generally only available in the year the sale to the unrelated person occurs (not in the year of transaction between related persons).

Please contact your local Rödl & Partner representative with any questions about qualifying for or claiming the advanced manufacturing production credit.

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