Proposed regulations released for Section 45X Advanced Manufacturing Production Tax Credit

On Dec. 14, 2023, the Treasury and IRS released proposed regulations for implementing the Section 45X Advanced Manufacturing Production Tax Credit.

The Inflation Reduction Act of 2022 established the credit to incentivize domestic production of eligible components within the US.

The tax credit would apply to businesses with domestic production in the US and that sell certain eligible components, including solar and wind energy components, inverters, qualifying battery components and applicable critical minerals.

As proposed, the regulations would apply to eligible components for which production is completed and sales occur after Dec. 31, 2022, and during taxable years ending on or after the date of publication of the final regulations in the Federal Register.

The proposed regulations provide much needed clarification of definitions and confirmed credit amounts for eligible energy components. The updated rules can serve as guidance for taxpayers that produce and sell eligible components and intend to claim the credit, including by making elective payment or credit transfer elections.

Items of note within the proposed regulations include but are not limited to the following:

  • Definitions and credit amounts of eligible components and applicable critical minerals
  • Definition of "produced by the taxpayer" for solar-grade polysilicon, electrode active materials and applicable critical minerals
  • Definition of production costs incurred to calculate the credit for certain components
  • Interactions between Sections 45X and 48C of the Code
  • Production of eligible components subject to a contract manufacturing arrangement
  • Rules for a taxpayer to make an election to treat sales to related persons as made to unrelated persons, known as the “related person election”
  • Specific recordkeeping and reporting requirements related to documentation and substantiation of the credit
  • Various examples with illustrative fact patterns for practical application of the proposed rules

Some of the proposed regulations released for Section 45X are in response to feedback received from previously released IRB 2022-47, where the Treasury and IRS requested general comments from industry participants and other stakeholders related to the credit and specific issues surrounding:

  • Definitions (including definitions of eligible components)
  • Related person election
  • Capacity-to-power ratios for battery cells or battery modules
  • Credit amount for components used in systems of varying capacity
  • Offshore wind vessels
  • Applicable critical minerals
  • Apportionment and pass-through of credit amounts to beneficiaries of estates or trusts

Written or electronic comments related to the proposed regulations, requests to speak and outlines of the topic are requested to be sent by Feb. 13, 2024. Public comments received by the deadline will be taken into careful consideration before issuance of final rules. Additionally, a public hearing on the proposed regulations is scheduled for Feb. 22, 2024, at 10 a.m. ET.

IRS and Treasury releases related to the proposed regulations published Dec. 14, 2023, can be referenced here:

IRS release:  IR-2023-238
Treasury release: Treasury release

Mazars’ insight

The Inflation Reduction Act of 2022 established a suite of interrelated tax credits designed to support the transition to clean and renewable energy in the US. Billions of dollars have been invested in support of the domestic manufacture of eligible energy components, increased innovation and development efforts in the energy sector. The investments have created thousands of jobs in the clean energy industry.

Additionally, the act created two new credit delivery mechanisms: “elective pay” (also referred to as direct pay) and “transferability” that enable state, local and tribal governments; non-profit organizations; US territories; and other entities to take advantage of clean energy tax credits.

The IRS and Treasury expect that proposed regulations for Section 45X will provide much-needed guidance and clarity surrounding previously held questions related to the credit. The issuance of proposed regulations provides assurance of effective tax administration for this area and ensures taxpayers are versed about what’s required for the credit.

While there had previously been uncertainty about the interpretation of areas within Section 45X — such as definition of eligible components, definition of “producer” in a contract manufacturing arrangement context and practical application of definitions — the new proposed regulations provide much-needed clarity and context about the areas that were broadly defined in the statutory text of Section 45X.

As the Act includes many attractive tax advantages for businesses, there’s also increased scrutiny from the IRS to document and substantiate all claims and corresponding information to avoid the potential of a future audit. The proposed regulations detail accurate recordkeeping requirements further emphasizes the necessity for taxpayers to maintain detailed documentation and ensure all required qualitative information is maintained for the credit. Businesses should carefully examine their Section 45X tax positions, maintain applicable records, and document production when proactively thinking of claims.

The Section 45X credit is set to phase down by 25% for each subsequent year beginning in 2030 for eligible components other than applicable critical minerals; it is planned to fully phase out by 2033. As the current law provides no credit after 2032 for eligible components other than 

Please contact your Mazars professional for additional information.

Authors 

Ryan Vaughan, Partner 
Andrew Kosoy, Senior Manager 
Kayla Cancel, Senior 

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.