The IRS has published final regulations for the Section 45X advanced manufacturing production credit. The final regs update several significant areas from the proposed regs released in late 2023.

The credit in a nutshell

The Sec. 45X credit was created by the Inflation Reduction Act (IRA). It is available to manufacturers that domestically produce and sell certain clean energy equipment in the United States between December 31, 2022, and December 31, 2032.

The total credit amount for a tax year equals the sum of the credit amounts for each eligible component, assuming the component's production and sale is part of a manufacturer's business. The IRA defines "eligible component" as any solar or wind energy component, eligible inverter, qualifying battery component (electrode active materials [EAMs]), battery cells and battery modules, or applicable critical minerals (ACMs).

What's new?

At nearly 50 pages, the final regs are extensive. Here are some of the most notable issues manufacturers should be aware of:

"Produced by the taxpayer." The final regs basically adopt the proposed regs' definition of "produced by the taxpayer." The final regs define it as "substantial transformation" of constituent elements, materials or subcomponents into a complete and distinct eligible component that's functionally different from what would result from "minor assembly or superficial modification."

But the final regs expand the definition to recognize two types of production: primary (using non-recycled materials) and secondary (using recycled materials). Both production types can qualify for the credit. The final regs also confirm that a manufacturer that assembles constituent components to produce solar modules or battery modules using battery cells can claim the credit.

Eligible costs of production. The final regs reverse the proposed rules by allowing producers of EAMs and ACMs to include direct and indirect material costs in their production costs if certain conditions are met. This is the case as long as the acquired material isn't an eligible component when the manufacturer acquires it.

The final regs also permit the inclusion of extraction costs for raw materials in the United States or a U.S. territory for EAMs and ACMs. The costs must be paid or incurred by the credit claimant.

Contract manufacturers. What if you hire a contract manufacturer to produce eligible components? According to the final regs, you can specify in your manufacturing agreement which party — you or the contractor — can claim the credit. The IRS won't challenge the contract as long as the parties submit signed certification statements.

Interplay with the Sec. 48C credit. Some costs might qualify for both Sec. 45X and the Sec. 48C qualifying advanced energy project credit. The final regs explain that property that otherwise qualifies as an eligible component under Sec. 45X is eligible only if no part of its Sec. 45X facility is included in the qualified investment of a Sec. 48C facility.

This means you can have multiple independent manufacturing facilities where some components from facilities will qualify for the credit and other components from facilities won't because the latter facilities fall within a qualified investment of a Sec. 48C facility. The regs make clear that the physical proximity of facilities is irrelevant if they're independent.

Substantiation of materials costs. The final regs introduce substantiation requirements for direct or indirect materials included as production costs for EAMs and ACMs. You must, among other things, provide with your tax return certifications from suppliers from which you purchased constituent elements, materials or subcomponents, attesting that the supplier isn't claiming the credit or aware of any earlier supplier claiming it.

Plan ahead

The Sec. 45X final regs provide clarity on these and numerous other issues, but compliance remains complex. For example, you'll need to ensure that your sales and vendor agreements include the necessary language to qualify for the credit and that you collect the requisite documentation.

With the upcoming new administration, Sec. 45X credit's future is uncertain due to potential regulation and tax law changes. HLB Gross Collins, P.C. can assist clients in making the most of the credit now.