Inflation Reduction Act: The 45X Production Credit

The Inflation Reduction Act of 2022 established the Advanced Manufacturing Production Credit, or 45X credit, to foster the domestic production of clean energy technologies. This provision rewards companies for producing specific clean energy components and critical minerals within the United States, aiming to strengthen domestic supply chains.

The 45X credit is a production-based incentive, with its value tied to the volume of qualifying items a company produces and sells. It covers a wide array of components across the solar, wind, and energy storage sectors.

Qualified Components and Credit Amounts

The 45X credit provides specific monetary values for components produced and sold after December 31, 2022. For most components, the full credit amount is available for products sold through 2029. The credit then phases down to 75% in 2030, 50% in 2031, and 25% in 2032 before expiring.

Solar Energy Components

Solar modules are eligible for a credit of 7 cents per direct-current watt of capacity. Key subcomponents also qualify, including:

• Photovoltaic cells at 4 cents per direct-current watt
• Photovoltaic wafers at $12 per square meter
• Torque tubes at 87 cents per kilogram
• Structural fasteners at $2.25 per kilogram
• Polymeric backsheets at 40 cents per square meter

Wind Energy Components

Credit amounts for wind energy components include:

• Blades at 2 cents per watt of the wind turbine’s capacity
• Nacelles at 3 cents per watt
• Towers at 3 cents per watt
• Fixed offshore wind platforms at 2 cents per watt
• Floating offshore wind platforms at 4 cents per watt

Additionally, vessels used for offshore wind purposes are eligible for a credit equal to 10% of the sales price.

Inverters

Inverters, which convert direct current (DC) electricity to alternating current (AC), are eligible for the following credits:

• Utility-scale inverters at 0.25 cents per AC watt
• Central inverters at 0.5 cents per AC watt
• Residential inverters at 2 cents per AC watt
• Microinverters at 11 cents per AC watt

Battery Components

Battery cells are eligible for a credit of $35 per kilowatt-hour (kWh) of capacity. Battery modules, which consist of multiple cells, receive a credit of $10 per kWh. This amount increases to $45 per kWh for modules that do not contain cells produced by the taxpayer. Electrode active material is also included, with a credit calculated as 10% of the costs incurred in its production.

Applicable Critical Minerals

The 45X credit also supports the domestic production of 50 specified critical minerals with a credit calculated as 10% of the production costs. Unlike other components, the credit for critical minerals does not phase out over time. Qualifying production costs include expenses related to processing, refining, and recycling.

Taxpayer Eligibility and Production Requirements

To qualify for the 45X credit, a business must be an “eligible taxpayer,” which is the entity that produces a qualifying component within its trade or business. Two requirements must be met for the credit to apply. The first is that the production of the eligible component must take place within the United States or one of its territories. The source of the raw materials or subcomponents does not affect eligibility.

The second requirement is that the component must be sold to an “unrelated person.” A “related person election” allows a manufacturer to treat a sale to a related entity as a sale to an unrelated one. This is permitted if the related entity then sells the component, or a product containing it, to an outside party, which accommodates vertically integrated companies.

A taxpayer cannot claim the 45X credit for components produced at a facility that has already received the Section 48C Advanced Energy Project Credit. If a facility has received a 48C credit for only some of its production lines, it may still claim the 45X credit for components produced on the other lines.

Utilizing the Credit: Direct Pay and Transferability

The Inflation Reduction Act introduced two mechanisms for monetizing tax credits: transferability and direct pay. These options give manufacturers flexibility, particularly those without enough tax liability to use the credits themselves.

Transferability allows an eligible taxpayer to sell all or a portion of their earned 45X credits to an unrelated taxpayer in exchange for cash. The buyer of the credits can then use them to offset their own federal tax liability. This option is available to most for-profit businesses.

Direct pay, also known as elective pay, allows certain entities to receive the credit’s value as a direct cash refund from the IRS, even if they have no tax liability. This option is primarily available to tax-exempt organizations, state and local governments, rural electric cooperatives, and the Tennessee Valley Authority.

The 45X credit is one of three exceptions where for-profit taxpayers can choose direct pay. An electing taxpayer can make a direct pay election for the 45X credit for a period of five consecutive years. This allows manufacturers, including partnerships and S corporations, to receive a direct refund from the IRS for the value of the credits generated.

How to Claim the Production Credit

To use either direct pay or transferability, a taxpayer must first complete a pre-filing registration through the IRS’s online portal for each manufacturing facility. Upon successful registration, the IRS issues a unique registration number. This number must be included on the taxpayer’s annual tax return to validate the claim.

The IRS suggests that taxpayers should allow ample time for the registration process, as it can take several months to receive the number. The credit is formally claimed on the taxpayer’s annual tax return. The primary form used to calculate the credit is Form 7207, Advanced Manufacturing Production Credit, and a separate form must be filed for each facility.

The total credit amount from all facilities is then reported on Form 3800, General Business Credit, which is filed with the main income tax return.