How the Advanced Manufacturing Production Credit Works

The Advanced Manufacturing Production Credit is a federal tax incentive from the Inflation Reduction Act of 2022. Governed by Section 45X of the Internal Revenue Code, this credit subsidizes manufacturers for producing and selling specific clean energy components and critical minerals within the United States. The goal is to encourage investment in American manufacturing and strengthen the supply chain for renewable energy. This incentive applies to components produced and sold after December 31, 2022.

Taxpayer and Production Eligibility

To qualify, a business must be the entity that manufactures or produces an eligible component as part of its trade or business. The taxpayer must be directly involved in the production activities, as the credit is not for entities that only distribute or resell components.

Two requirements must be satisfied for the production to qualify. First, the components must be produced by the taxpayer within the United States or its territories. Second, the manufactured component must be sold to an unrelated party. An unrelated party is a buyer not connected to the seller through family or common business ownership.

An exception exists if a component is sold to a related party who then uses it to create another eligible component that is ultimately sold to an unrelated person.

Eligible Components and Credit Rates

The credit amount varies based on the type of component produced and sold. The law details specific components and their corresponding credit rates.

Solar Energy Components

For businesses producing components for solar energy systems, the credit is calculated on a per-unit basis.

• Photovoltaic wafers are eligible for a credit of $12 per square meter.
• Solar grade polysilicon receives a credit of $3 per kilogram.
• Polymeric backsheets, which are used to insulate solar panels, generate a credit of 40 cents per square meter.
• Solar modules, the complete panel assemblies, are eligible for a credit of 7 cents per direct current watt of output.

Wind Energy Components

The production of components for wind energy generation also qualifies for specific credit rates.

• Blades for wind turbines are eligible for a credit of 2 cents per watt.
• Nacelles, which house the generating components of a turbine, qualify for a credit of 5 cents per watt, based on the rated capacity of the completed turbine.
• The production of wind turbine towers generates a credit of 3 cents per watt.
• For offshore wind foundations, fixed-platform foundations are eligible for a credit of 2 cents per watt.
• Floating-platform foundations are eligible for 4 cents per watt.

Inverters

Inverters, which convert direct current (DC) electricity to alternating current (AC), are another category of eligible components.

• Central inverters, typically used in large-scale utility projects, receive a credit of 0.25 cents per watt.
• Utility inverters, with a capacity greater than 1 megawatt, qualify for a credit of 1.5 cents per watt.
• Commercial inverters are eligible for 2 cents per watt.
• Residential inverters receive 6.5 cents per watt.
• Microinverters qualify for the highest rate in this category at 11 cents per watt.

Battery Components

The credit also extends to battery components. Electrode active materials are eligible for a credit equal to 10% of the production costs. Battery cells qualify for a credit of $35 per kilowatt-hour of capacity, and battery modules receive a credit of $10 per kilowatt-hour. The module credit increases to $45 per kilowatt-hour if it does not contain any battery cells.

Applicable Critical Minerals

The credit also targets the domestic production of 50 specific critical minerals, such as lithium, cobalt, and graphite. For these minerals, the credit is 10% of the production costs. Production costs can include expenses for extraction, processing, and refining.

Calculating the Total Credit

A taxpayer’s total credit for a tax year is the sum of the credits for each eligible component produced and sold. The calculation involves applying the specific rate to the quantity or capacity of each type of component sold. A business producing both wind turbine blades and battery cells would calculate the credit for each separately and then add them together.

The credit has a scheduled phase-out for most components. For eligible components sold after December 31, 2029, the credit is reduced to 75% in 2030, 50% in 2031, and 25% in 2032. After December 31, 2032, the credit is no longer available for these components. This phase-out does not apply to the production of critical minerals.

Special Provisions and Requirements

Direct Pay

Direct pay, or elective pay, allows certain taxpayers to receive the credit’s value as a cash payment from the IRS, even without tax liability. This option is available to tax-exempt organizations, state and local governments, and other specified entities. For-profit businesses can also elect direct pay for the first five years they claim the credit, providing a direct cash infusion for new companies or those without sufficient taxable income.

Transferability

Transferability allows an eligible taxpayer to sell their tax credit to an unrelated taxpayer for cash. The manufacturer can elect to transfer all or a portion of the credit, and the buyer can use it to reduce their own federal income tax liability. This creates a market for the credits, allowing manufacturers to monetize the incentive immediately.

How to Claim the Credit

To claim the credit, taxpayers must complete and attach IRS Form 7207, Advanced Manufacturing Production Credit, to their annual federal income tax return. This form must be filed for the tax year in which the eligible components were sold.

On Form 7207, the taxpayer provides detailed information about the components, including a breakdown by type, quantities sold, applicable credit rates, and the resulting credit for each. The form guides the taxpayer in summing these amounts and applying any phase-out reductions to determine the final credit.