Advanced Manufacturing Production Credit

Advanced Manufacturing Production Credit

Published on November 5, 2024 – On October 24, 2024 the U.S. Treasury Department and Internal Revenue Service released final regulations (T.D. 10010) regarding the advanced manufacturing production credit under section 45X established by Pub. L. No. 117-169 (commonly called the “Inflation Reduction Act of 2022” (IRA)) to incentivize the production of eligible components within the United States.

As explained in the related IRS release—IR-2024-281 (October 24, 2024)—section 45X provides a tax credit for the production and sale to unrelated persons after December 31, 2022, of “eligible components,” which include solar and wind energy components, inverters, qualifying battery components, and 50 applicable critical minerals.  Only eligible components that are produced and sold in a trade or business of the taxpayer are taken into account for purposes of the section 45X credit.

The final regulations define qualifying production activities, provide rules for the sale of eligible components to unrelated persons as well as special rules that apply to sales between related persons, and provide rules to address contract manufacturing scenarios. The final regulations also provide definitions of eligible components, rules related to calculating the credit, including eligible production costs and specific recordkeeping and reporting requirements.

What is the new 45X tax credit program and when was it introduced?  

The Inflation Reduction Act of 2022 introduced the Section 45X Manufacturing Production Tax Credit (PTC) to strengthen the domestic supply chain for critical components in advanced energy production. This program allows manufacturers to claim tax credits for a variety of qualifying products, and those with vertical integration can potentially claim credits for multiple products within their operations.

What are some of the implications of the 45X tax credit program?

  1. Economic Growth: The credit is expected to stimulate growth in the renewable energy manufacturing sector, leading to job creation and increased investment in U.S.-based production facilities.
  1. Supply Chain Resilience: By incentivizing local production, the credit aims to strengthen supply chains for critical components needed in renewable energy technologies.
  1. Market Dynamics: As manufacturers seek to qualify for the credit, competition may increase, potentially driving down costs for consumers while enhancing innovation in renewable technologies.
  1. Long-term Planning: The phase-out timeline encourages manufacturers to invest and scale production rapidly to maximize their benefits before the credits diminish.

This tax credit represents a significant step toward achieving a sustainable energy future while promoting economic development within the U.S. manufacturing sector.

What are some of the key features of the 45X tax credit program? 

  1. Eligibility: There’s no formal application process. Manufacturers can claim credits on their tax returns if they produce and sell qualifying products while meeting program requirements.
  2. Credit Amounts: The credit varies by component:
    • Thin Film Photovoltaic Cells: $0.04 per unit multiplied by capacity.
    • Photovoltaic Wafers: $12 per square meter.
    • Critical Minerals: 10% of production costs.
  1. Credit Duration:
    • The credit is effective from January 1, 2023.
    • The phase-out period begins for components sold after December 31, 2029.
  1. Related Party Restrictions:
    • Sales must be made to unrelated persons, meaning partnerships where a partner has more than a 50% interest are considered related.
  1. Monetization Options: Given the significant depreciation often experienced by manufacturers, which can limit the immediate usability of tax credits, the program offers two monetization pathways:
    • Direct Pay: Manufacturers can opt for direct payments of the credits for a specific tax year and the following four years.
    • Transferability: Manufacturers can transfer some or all credits to unrelated taxpayers, enhancing liquidity and financial flexibility.

What is the newly proposed guidance, and what does this mean for the Advanced Manufacturing Production credits?

The final regulations regarding the advanced manufacturing production credit from the Inflation Reduction Act of 2022 aim to incentivize the domestic production of various eligible components, including:

  • Solar energy components
  • Wind energy components
  • Inverters
  • Qualifying battery components
  • Critical minerals

These regulations outline essential recordkeeping and reporting requirements for taxpayers who produce and sell these eligible components and intend to claim the advanced manufacturing production credit.

Key aspects include:

  • Eligibility: Taxpayers producing qualifying components are eligible to claim the credit.
  • Incentives: The regulations promote domestic manufacturing by providing financial benefits for producing eligible components in the U.S.
  • Elective Options: Taxpayers can choose to make elective payments or transfer credits to maximize their financial flexibility.

What does this mean for the renewable energy sector?

By attracting capital to renewable energy projects, you not only stimulate job creation but also foster a more stable and innovative environment. Increased investment can lead to advancements in technology and infrastructure, making renewable energy more efficient and accessible. Additionally, a strong focus on sustainability can enhance investor confidence, encouraging long-term planning and growth in the sector. This creates a positive feedback loop that benefits the economy, the environment and society as a whole.

By adhering to these regulations, manufacturers can effectively navigate the claiming process for the advanced manufacturing production credit, enhancing their operational and financial strategies.

What are the pathways available to manufacturers to monetize 45X tax credits?

The 45X tax credit can be monetized by direct pay or transferability.  The flexibility of 45X credits, allowing for direct pay and transferability, provides manufacturers with strategic options to optimize their financial benefits. With direct pay, manufacturers can opt for direct payments of the credits for a specific tax year and the following four years.

With transferability, manufacturers can transfer some or all credits to unrelated taxpayers, enhancing liquidity and financial flexibility.

The transferability of the 45X credit is a strategic advantage that offers companies the flexibility to monetize credits that cannot immediately be utilized.

What are some of the pricing factors for Transferability, or Transfer Credits?

The tax credit industry, particularly for 45X tax credits, risk-based pricing is influenced by several key factors:

  • Size of transaction
  • Timing of purchase
  • Creditworthiness of guarantor
  • Tax insurance policy size and coverage
  • Recapture risk
  • Prevailing wage and apprenticeship exemption
  • Seasonality (tax credits tend to be more expensive at year end)
  • Tax opinion availability
  • Legal cost coverage

By analyzing these factors, stakeholders can better understand and navigate the pricing landscape for 45X tax credits.

Conclusion

This tax credit represents a significant step toward achieving a sustainable energy future while promoting economic development within the U.S. manufacturing sector.

Washington, D.C. – Following the release of guidance by the U.S. Department of the Treasury and the IRS for the Advanced Manufacturing Production Credit (Section 45X of the Internal Revenue Code), National Association of Manufacturers Managing Vice President of Policy Chris Netram released the following statement:

“Manufacturers welcome today’s announcement of final guidance on the 45X Advanced Manufacturing Production Credit and appreciate the administration’s willingness to make improvements that support manufacturing in the U.S. In particular, including critical mineral extraction and materials costs in the credit calculation will help bolster supply chain resiliency throughout the manufacturing sector. This tax credit will help manufacturers build a strong and sustainable domestic advanced manufacturing supply chain—from mining to processing to final product assembly.”

To learn more about the 45X tax credit and what it means for you, contact our team today: https://bit.ly/3cOAM6G