IRA Section 45X: The Advanced Manufacturing Credit

The Section 45X Advanced Manufacturing Production Credit, established by the Inflation Reduction Act of 2022, provides a financial incentive for the domestic production of specific clean energy components and critical minerals. This tax credit aims to bolster the United States’ role in the clean energy supply chain by encouraging the onshoring of manufacturing. The credit is available to businesses that produce and then sell qualifying components. This creates a direct link between domestic manufacturing output and tax benefits.

Eligible Taxpayers and Components

An eligible taxpayer for the Section 45X credit is an entity that produces a qualifying component within the United States or its territories and sells it to an unrelated party as part of its trade or business. The production process must involve the “substantial transformation” of inputs into a distinct component, not minor assembly or superficial modifications. A facility that has already claimed the Section 48C Advanced Energy Project credit is not eligible for the Section 45X credit.

The sale must generally be to an “unrelated person,” which the IRS defines as individuals or organizations not under common control. An exception exists for sales to a related party if that party then incorporates the component into another eligible product that is ultimately sold to an unrelated third party. The credit is generated in the year the component is sold, not the year it was produced.

Solar Energy

For solar energy, a range of components qualifies for the credit:

• Solar-grade polysilicon
• Photovoltaic wafers
• Photovoltaic cells and modules
• Torque tubes and structural fasteners
• Polymeric backsheets

Wind Energy

Eligible wind energy components include:

• Blades, nacelles, and towers
• Offshore wind foundations, including fixed and floating platform types
• Vessels built for the service and maintenance of offshore wind farms

Inverters

Inverters convert direct current (DC) electricity into alternating current (AC) for use on the power grid. The credit applies to several types:

• Central inverters
• Commercial inverters
• Distributed wind inverters
• Microinverters
• Multi-mode inverters

Batteries

For energy storage, the Section 45X credit targets both the building blocks of batteries and the finished products. Electrode active materials, the substances within a battery that store energy, are eligible. The credit also applies to the production of battery cells and battery modules. The credit does not extend to items like battery casings or connecting equipment.

Critical Minerals

A distinct category within the Section 45X credit is for the production of “applicable critical minerals.” The legislation identifies specific minerals vital for renewable energy and battery manufacturing. This inclusion aims to reduce reliance on foreign sources and strengthen the domestic supply chain.

Calculating the Credit Amount

The calculation of the Section 45X credit varies depending on the specific component. For most solar, wind, and battery components, the credit is a fixed amount per unit of capacity, size, or weight. For instance, solar modules receive a credit of 7 cents multiplied by the module’s capacity in direct-current watts, while battery cells are eligible for a credit of $35 multiplied by the cell’s maximum kilowatt-hour capacity.

Other components have different calculation bases. For example, the credit for polymeric backsheets used in solar panels is 40 cents per square meter, and for torque tubes, it is 87 cents per kilogram. Wind turbine blades are eligible for a credit of 2 cents per watt of the blade’s rated capacity.

A different methodology applies to applicable critical minerals and electrode active materials. For these items, the credit is calculated as 10% of the costs incurred by the taxpayer to produce them. Production costs can include expenses related to extraction, processing, and refining.

The Section 45X credit has a built-in phase-out schedule for most eligible components. For components sold through 2029, the credit is available at its full value. The credit amount then decreases to 75% of the original value in 2030, 50% in 2031, and 25% in 2032. After 2032, the credit is no longer available for these components, but this phase-out does not apply to the production of critical minerals.

Claiming the Credit Monetization Options

Manufacturers have several options to monetize the Section 45X credit. The traditional method is to use the credit to offset their own federal income tax liability. As a general business credit, it can reduce the amount of tax a company owes, which is a straightforward option for profitable companies.

A second option, “elective pay” or “direct pay,” allows certain entities to receive the credit amount as a direct cash refund from the IRS, even if they do not have any tax liability. This option is primarily available to tax-exempt organizations, state and local governments, the Tennessee Valley Authority, Indian tribal governments, and rural electric cooperatives.

The third monetization strategy is “transferability,” which allows eligible taxpayers to sell their earned credits to an unrelated third party for cash. This is useful for manufacturers who may not have enough tax liability to use the credits themselves. The buyer can then use the purchased credits to offset their own tax liability. A taxpayer cannot both transfer a credit and receive a direct payment for that same credit.

The transferability mechanism creates a market for these tax credits. The price of a transferred credit is negotiated between the buyer and seller but is typically less than the face value of the credit. This allows the buyer to achieve a positive return on their purchase.

Procedural Steps for Claiming the Credit

To claim the Section 45X credit, a manufacturer must first calculate the credit amount using Form 7207, Advanced Manufacturing Production Credit. This form reports the production and sale of qualified components. The total credit amount is then reported on Form 3800, General Business Credit, which is filed as part of the taxpayer’s annual income tax return.

For taxpayers choosing to monetize the credit through either elective pay or transferability, there is a mandatory pre-filing registration step. This process must be completed through a dedicated IRS online portal before the tax return is filed. This registration provides the IRS with information about the intended claim and provides a unique registration number for each facility.

This registration number must be included on the taxpayer’s tax return when they file. Failure to complete the pre-filing registration and obtain a valid registration number will prevent the taxpayer from claiming the credit via elective pay or transferability. The registration process is an annual requirement for each facility.

Taxpayers must maintain thorough records to substantiate their credit claims. This documentation should support the eligibility of the components, the production volumes, the costs of production for critical minerals, and the details of the sales to unrelated parties. These records are necessary to demonstrate compliance in the event of an IRS examination.