The Inflation Reduction Act (IRA) includes several provisions related to tax incentives that encourage investment in clean energy production and energy-efficient property. One of these incentives is the advanced manufacturing production credit under Internal Revenue Code (IRC) Section 45X. The IRA extends and expands the Sec. 45X credit, which encourages domestic production of eligible clean energy components. Here are answers to questions you might have about this credit.

Which products qualify?

The following five types of components are eligible for the Sec. 45X credit:

• Solar energy components, including solar modules, photovoltaic cells, photovoltaic wafers, solar grade polysilicon, torque tubes, structural fasteners and polymeric backsheets;
• Wind energy components, including blades, nacelles, towers, offshore wind foundations and related offshore wind vessels;
• Qualifying battery components, including electrode active materials, battery cells and battery modules;
• Fifty applicable critical minerals; and
• Inverters, including central, commercial, distributed wind, micro-, residential and utility inverters.

The term “inverters” refers to end products suitable for converting direct current (DC) electricity from one or more solar modules or certified distributed wind energy systems into alternating current electricity.

Who is eligible?

To qualify for the credit, manufacturers must meet several requirements. First, eligible components, including applicable critical minerals, must be “produced by the taxpayer.” Under proposed regulations, the taxpayer must substantially transform elements, materials or subcomponents into a complete and distinct eligible component. Eligible components must be functionally different from what would result from assembly or superficial modification of the elements, materials or subcomponents. Minerals meet this requirement if the taxpayer processes, converts, refines or purifies source materials to derive a distinct eligible component.

In addition, taxpayers must produce the eligible components, including applicable critical minerals, in the United States or its territories. However, under the proposed regulations, that does not mean that a component’s elements, materials and subcomponents must be produced domestically. The critical factor is that the substantial transformation of those elements, materials or subcomponents takes place in the United States or its territories.

Finally, to claim the Sec. 45X credit, the taxpayer must sell the eligible components to unrelated persons. However, under limited circumstances, a taxpayer may make an election to treat a related person as an unrelated person for purposes of the credit.

How is the credit calculated?

Calculation of the credit varies depending on the type of eligible component. For certain components, the credit is equal to a dollar amount multiplied by the component’s weight, size or capacity. For example, the credit for solar grade polysilicon is $3 per kilogram, the credit for a photovoltaic wafer is $12 per square meter and the credit for a photovoltaic cell is four cents times the cell’s capacity expressed on a per-DC-watt basis.

For some components, the credit is a percentage of the sales price. For example, the credit for a related offshore wind vessel is 10% of its sales price.

In the case of electrode active materials and applicable critical minerals, the credit amount equals 10% of the taxpayer’s production costs for such materials or minerals. According to the proposed regulations, production costs don’t include direct or indirect materials costs or costs related to the extraction of raw materials.

Are there other rules or restrictions?

Manufacturers are not required to comply with the prevailing wage and apprenticeship (PWA) rules to claim the Sec. 45X credit. Although some incentives created or expanded by the IRA require compliance with the PWA rules, those rules do not apply to the Sec. 45X credit.

The credit is not available for components produced at a facility that claims the qualifying advanced energy project credit under IRC Sec. 48C. In addition, if eligible components are produced under a contract manufacturing arrangement, the party that performs the actual production activities is entitled to claim the credit. However, the parties may agree to assign the credit to the other party.

If you are eligible for the Sec. 45X credit, you will need to provide documentation that confirms the components or minerals qualify for the credit and supports your credit calculation. You may need to furnish purchasers of applicable critical minerals with a certificate of analysis.

Getting help

The Sec. 45X credit is complex. Additional requirements may apply. Consult your tax advisors with questions about your eligibility for the credit, as well as how to calculate it and comply with the substantiation requirements.

Sidebar: 2 options to monetize the Sec. 45X credit

Manufacturers can claim the Section 45X credit as part of their general business credits. If your business does not have enough taxable income to take immediate advantage of the credit (and you do not want to carry unused credits forward to future years), the Inflation Reduction Act (IRA) provides two ways to monetize the credit:

1. Direct Pay
   Taxpayers that elect this option are treated as if they made a payment of tax equal to the amount of their eligible Sec. 45X credits. They can then claim a refund for the deemed payment of tax. Ordinarily, direct pay is limited to certain tax-exempt entities, but the IRA expanded it to for-profit businesses for some tax incentives, including the Sec. 45X credit. This option is available for the first five credit years.
2. Credit Transfers
   Eligible taxpayers can elect to sell some or all of their credits to unrelated parties for cash. These payments are tax-free to the transferor and nondeductible by the transferee.

For more information, contact Seamus Donoghue at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group. Sign up here to receive our blogs, newsletters and Client Alerts.