What Is the Advanced Manufacturing Production Credit (45X)?

The Advanced Manufacturing Production Credit, Section 45X of the Internal Revenue Code, is a tax incentive created by the Inflation Reduction Act of 2022. It provides a tax credit to businesses that manufacture specific clean energy components and critical minerals within the United States and its territories. The goal is to strengthen U.S. supply chains for renewable energy. The credit applies to components produced and sold to an unrelated party after December 31, 2022.

Eligible Components and Taxpayers

An eligible taxpayer is the entity that manufactures a component within the United States or its possessions as part of its trade or business and sells it to an unrelated person. A taxpayer cannot claim the 45X credit for production at a facility if a credit was claimed under Section 48C for an investment in that same facility.

The definition of “unrelated person” is based on standard IRS rules for controlling ownership. A special election allows a manufacturer to treat a sale to a related party as if it were made to an unrelated one, which is useful in vertically integrated business structures.

Solar Energy Components

The 45X credit applies to solar industry components like solar-grade polysilicon, a highly purified form of silicon. Also included are photovoltaic wafers, the thin slices of silicon processed into solar cells. The credit also applies to the photovoltaic cells themselves and the fully assembled photovoltaic modules, known as solar panels. Other qualifying components include polymeric backsheets and torque tubes used in solar tracking systems.

Wind Energy Components

For the wind energy sector, the credit covers large-scale components. This includes blades, nacelles that house power generation equipment, and the structural towers. The credit extends to offshore wind development by including offshore wind foundations, which anchor turbines to the seabed. A provision also makes offshore wind vessels, used for installation and servicing, eligible.

Energy Storage Components

The 45X credit provides incentives for battery manufacturing, applying to both battery cells and battery modules. A battery cell is a fundamental electrochemical unit, while a battery module is a collection of cells connected together in a protective structure. The credit also extends to electrode active materials, which are the raw materials used to create the cathodes and anodes within the battery cells.

Critical Minerals

The credit also applies to the domestic production of specific raw materials. The credit for these minerals is calculated as 10% of the costs of production. The list of applicable critical minerals includes:

• Aluminum
• Antimony
• Barite
• Beryllium
• Cerium
• Cesium
• Chromium
• Cobalt
• Dysprosium
• Erbium
• Europium
• Fluorspar
• Gadolinium
• Gallium
• Germanium
• Graphite
• Holmium
• Indium
• Iridium
• Lanthanum
• Lithium
• Lutetium
• Manganese
• Neodymium
• Nickel
• Niobium
• Osmium
• Palladium
• Platinum
• Praseodymium
• Rhodium
• Rubidium
• Ruthenium
• Samarium
• Scandium
• Tantalum
• Tellurium
• Terbium
• Thulium
• Tin
• Titanium
• Tungsten
• Vanadium
• Ytterbium
• Yttrium
• Zinc

Inverters and Other Equipment

Inverters, which convert direct current (DC) electricity into alternating current (AC), are also covered. The credit distinguishes between different types of inverters based on their capacity and use. Eligible inverters include central inverters for utility-scale projects and smaller microinverters and string inverters for residential and commercial systems. The credit also applies to other equipment like DC-optimized inverters and utility-scale battery inverters.

Calculating the Credit Amount

The credit’s value is determined by applying a specific rate to each eligible component produced and sold. For most components, the credit is a fixed dollar amount tied to a unit of production, such as watts of capacity or kilograms. For applicable critical minerals, the credit is 10% of the costs incurred by the taxpayer to produce those minerals.

Credit Rates per Component

The credit amounts are highly specific. For solar components, photovoltaic cells receive a credit of 4 cents per watt of direct current (DC) capacity, while photovoltaic modules get 7 cents per watt (DC). Wind energy components are credited based on the capacity of the completed turbine they are designed for, with blades eligible for 2 cents per watt and towers receiving 3 cents per watt. Offshore wind foundations are credited at 2 cents per watt for fixed foundations and 4 cents per watt for floating foundations.

Battery components also have detailed rates. Battery cells are eligible for a credit of $35 per kilowatt-hour (kWh) of capacity, and battery modules receive $45 per kWh. For electrode active materials, the credit is 10% of the production costs. Inverters are credited based on their alternating current (AC) capacity, with rates of 11 cents per watt for microinverters, 6 cents per watt for residential inverters, 2 cents for commercial, and 0.25 cents for central inverters.

Phase-Out Schedule

The 45X credit includes a phase-out schedule for all eligible components except critical minerals. For components sold before the end of 2029, manufacturers can claim 100% of the credit. The credit amount drops to 75% for components sold in 2030.

For components sold in 2031, the credit is reduced to 50%, and in 2032, it falls to 25%. The credit is phased out completely for components sold after December 31, 2032.

Monetizing the Credit

Manufacturers can use the credit to offset their federal income tax liability. The Inflation Reduction Act also introduced two mechanisms for monetizing these credits: direct pay and transferability. Both options require a pre-filing registration process with the IRS to be valid.

Direct Pay

Direct pay, or elective pay, allows certain taxpayers to treat the credit as a tax payment, resulting in a direct cash refund if the credit exceeds tax liability. This option is available to tax-exempt organizations, governments, the Tennessee Valley Authority, Indian tribal governments, and Alaska Native Corporations. For-profit businesses can also elect direct pay for the 45X credit for the first five years of production.

Transferability

Transferability allows an eligible taxpayer to sell their 45X credit to an unrelated third party for cash. This lets the manufacturer receive an immediate cash benefit, while the buyer uses the credit to reduce their own federal tax liability. The sale must be for cash, the credit can only be sold once, and the buyer must attach a transfer election statement to their tax return to claim it.

Claiming the Credit

Required IRS Forms

To claim the 45X credit, taxpayers must file Form 7207, Advanced Manufacturing Production Credit. The total from Form 7207 is then carried to Form 3800, General Business Credit. These forms must be attached to the taxpayer’s annual income tax return.

Pre-Filing Registration

Manufacturers choosing direct pay or transferability must complete a mandatory pre-filing registration through the IRS’s online energy credit portal. The taxpayer must provide details about their facilities and the types of credits they intend to generate. The IRS then issues a unique registration number for each facility, which must be included on the tax return. Failure to obtain this registration number before filing will invalidate a direct pay or transfer election.