US Treasury Announces Guidance on 45X Advanced Solar Manufacturing Tax Credit

Stakeholders can submit their comments by February 13, 2024

December 20, 2023


The U.S. Department of Treasury and the Internal Revenue Service (IRS) have proposed regulations and provided guidance to the advanced manufacturing production credit established by the Inflation Reduction Act (IRA).

The new Section 45X provides a credit for the production (within the U.S.) and sale of certain eligible components, including solar and wind energy components, inverters, qualifying battery components, and applicable critical minerals.

Eligible solar components include solar modules, photovoltaic cells and wafers, solar-grade polysilicon, torque tube, structural fastener, or polymeric backsheet. Wind components include blade, nacelle, tower, offshore wind foundation, or related offshore wind vessel.

Battery components include electrode active materials, battery cells, or battery modules. Inverters include central inverters, commercial inverters, distributed wind inverters, microinverters, and residential inverters.

The proposed regulations would affect taxpayers who produce and sell eligible components and intend to claim the benefit of an advanced manufacturing production credit by making elective payments or credit transfer elections.

Stakeholders can submit their comments by February 13, 2024.

Tax credits can also be claimed for 10% of the cost of processing 50 critical minerals.

Eligible Components for Advanced Manufacturing Production Tax Credit

To qualify for section 45X tax credits, a company must manufacture and sell eligible components domestically. The IRS emphasizes that merely assembling, making superficial changes, or partially transforming materials into products is insufficient. There must be a significant transformation of raw materials into a distinct product. Alternatively, the manufacturer can use components made by others to create a different product, such as using solar cells to produce solar modules.

However, a special rule applies to solar-grade polysilicon, electrode active materials, and applicable critical minerals. For these components, the term refers to activities like processing, converting, refining, or purifying source materials, such as brines, ores, or waste streams, to create a unique eligible component.

The IRS said two types of arrangements are not contract manufacturing. One is a routine purchase order for off-the-shelf components that require no more than minimal tailoring. The other is where the factory knows when the contract is signed that it can satisfy the order out of existing stocks or normal production of finished goods.

Components must be manufactured in 2023 or later. Production may have commenced before 2023, like the construction of a wind tower, as long as it is finished in 2023. If an item is produced in one year and sold in the following year, the tax credit is applied in the year of sale.

Global law firm, Norton Rose Fulbright explains that for instance, if company X produces photovoltaic wafers and sells them to affiliate Y in 2023, and Y sells the cells to a third party Z in 2024, both X and Y can claim tax credits for the components they produced, but not until 2024. However, if a related person election is made where wafers are integrated into cells in 2023, and the cells are sold in 2024, X can claim its tax credit in 2023. Integration, where the component disappears in another, larger eligible component, triggers the tax credit when combined with a related person election.

The eligible components must be produced in the U.S., Puerto Rico, the U.S. Virgin Islands, Guam, or the Northern Mariana Islands.

The origin of the inputs used to make them does not matter.

The eligible components must be sold or incorporated by the manufacturer into other eligible components to trigger tax credits. The IRS said to use general tax principles to determine when a sale occurs.

For eligible components sold in 2030, 2031, and 2032, the reduction in credit percentages is 75%, 50%, and 25%, respectively. The phase-out percentage is zero percent for an eligible component sold after December 31, 2032. Thus, current law provides no section 45X credit after 2032 for eligible components other than for applicable critical minerals.

The proposed regulations have reservations about the potential manipulation of Section 45X tax benefits. In extreme cases where the primary reason for producing and selling eligible components is solely to obtain tax benefits, the rules aim to prevent such misuse. Specifically, if the tax benefits gained from selling an eligible component exceed the production cost of that component, the credit will not be available.

In August, the Treasury Department and IRS proposed rules and guidelines under the Inflation Reduction Act to harmonize sustainable energy and employment opportunities and solidify commitment to the “Investing in America” agenda.

In August last year, President Joe Biden signed the ‘Inflation Reduction Act,’ which the U.S. House of Representatives and the Senate had passed. The Act addresses issues of climate change, taxes, healthcare, and inflation. The Act proposes $369.75 billion in energy security and climate change programs over the next ten years.