On October 28, 2024, the Department of the Treasury and the Internal Revenue Service (collectively "Treasury") published new final rules for one of the Inflation Reduction Act's ("IRA") key clean energy tax credits, the Advanced Manufacturing Production Credit, otherwise known by its Tax Code designation—Section 45X.
Section 45X is different from other IRA tax credits. It applies to manufacturers of specific clean energy technologies and producers of a laundry list of critical minerals for clean energy components rather than clean energy generation and storage developers.
While the new final rules are substantially similar to the rules Treasury initially proposed in December 2023, they address many issues commenters raised during the rulemaking process. We analyze the Section 45X credit and key issues below. We also address the interplay between Section 45X and Section 48C (the separate investment tax credit that similarly applies to clean energy manufacturers and critical minerals producers) and give our initial thoughts on how the incoming Trump administration might affect Section 45X and the new rules.
The Section 45X Tax Credit
Generally, Section 45X establishes fixed credits for the production and sale of eligible clean energy components. However, critical minerals and electrode active materials are eligible for credits equal to 10 percent of production costs. And, offshore wind vessels—that is, "any vessel which is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components"—can receive a credit equal to 10 percent of the vessel's sales price.
Table of Tax Credits
| Solar Components | Credit |
|---|---|
| Thin film or crystalline photovoltaic cells | 4 cents multiplied by the capacity of the cell, expressed on a per direct current watt basis |
| Photovoltaic wafer | $12 per square meter |
| Solar grade polysilicon | $3 per kilogram |
| Polymeric backsheet | 40 cents per square meter |
| Solar module | 7 cents multiplied by the capacity of the module, expressed on a per direct current watt basis |
| Torque Tube | 87 cents per kilogram |
| Structural fastener | Structural fastener |
| Wind Energy Components | Credit |
|---|---|
| Blades | 2 cents multiplied by the total rated capacity (expressed on a per watt basis) of the completed wind turbine |
| Nacelles | 2 cents multiplied by the total rated capacity (expressed on a per watt basis) of the completed wind turbine |
| Towers | 3 cents multiplied by the total rated capacity (expressed on a per watt basis) of the completed wind turbine |
| Offshore wind foundations | 2 cents for fixed platforms and 4 cents for floating platforms, multiplied by the total rated capacity (expressed on a per watt basis) of the completed wind turbine |
| Related offshore wind vessels | 10% of the vessel's sales price |
| Inverters | Credit |
|---|---|
| Central inverter | 0.25 cents multiplied by the inverter's capacity, expressed on a per alternating current watt basis |
| Utility inverter | 1.5 cents multiplied by the inverter's capacity, expressed on a per alternating current watt basis |
| Commercial inverter | 2 cents multiplied by the inverter's capacity, expressed on a per alternating current watt basis |
| Residential inverter | 6.5 cents multiplied by the inverter's capacity, expressed on a per alternating current watt basis |
| Microinverter or distributed wind inverter | 11 cents multiplied by the inverter's capacity, expressed on a per alternating current watt basis |
| Other Components | Credit |
|---|---|
| Battery cell | $35 multiplied by the capacity on a kilowatt-hour basis |
| Battery module | $10 (or $45 if the module does not use battery cells) multiplied by capacity on a kilowatt-hour basis |
| Electrode active materials | 10% of taxpayer's production costs. "Electrode active material" means cathode materials, anode materials, anode foils, and electrochemically active materials, including solvents, additives, and electrolyte salts that contribute to the electrochemical processes necessary for energy storage |
| Applied critical minerals | 10% of taxpayer's production costs. Minerals identified in Section 45X are aluminum, antimony, arsenic, barite, beryllium, bismuth, cerium, cesium, chromium, cobalt, dysprosium, erbium, europium, fluorspar, gadolinium, gallium, germanium, graphite, hafnium, holmium, indium, iridium, lanthanum, lithium, lutetium, magnesium, manganese, neodymium, nickel, niobium, palladium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, tellurium, terbium, thulium, tin, titanium, tungsten, vanadium, ytterbium, yttrium, zinc, and zirconium |
To be eligible for the 45X credits, taxpayers must produce eligible components (identified above) and sell them to an unrelated person (provided the production and sale is in a "trade or business of the taxpayer"). The rules regarding whether an eligible component is "produced by the taxpayer" are addressed in more detail below. Regarding sales to unrelated persons, the rules state that applicable "Federal income tax principles apply" when determining if a transaction is, in fact, a sale rather than "the provision of a service, or some other disposition." The rules also state that a person is "related" to another person if both persons would be treated as a single employer under the rules and Tax Code Section 52(b). Both Section 45X and the final rules, however, allow taxpayers to sell eligible components to a related person, who then sells them to an unrelated person.
The 45X credits are calculated based on the year eligible components are sold, not when they are produced.
Section 45X includes phase-out provisions for most of the credits:
| Year(s) |
Percentage of Full 45X
Credit Amount |
|---|---|
| 2023 to 2029 | 100 percent |
| 2030 | 75 percent |
| 2031 | 50 percent |
| 2032 | 25 percent |
| 2033 | Most credits expire |
Importantly, the phase-out and 2033 expiration date do not apply to the listed critical minerals.
"Produced by the Taxpayer"
Section 45X requires that creditable components be "produced by the taxpayer" in the United States (or U.S. territories). Yet Section 45X does not define "produced by the taxpayer." The new rules fill in that gap as follows:
The term produced by the taxpayer means a process conducted by the taxpayer that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component that is functionally different from that which would result from minor assembly or superficial modification of the elements, materials, or subcomponents, and includes both primary and secondary production. Primary production involves producing an eligible component using nonrecycled materials while secondary production involves producing an eligible component using recycled materials. (Emphasis added.)
The new rules finalize a slightly different definition of "produced by the taxpayer" for solar-grade polysilicon, electrode active materials, and applicable critical minerals:
[T]he term produced by the taxpayer means processing, converting, refining, or purifying source materials, such as brines, ores, or waste streams, to substantially transform the source materials to derive a distinct eligible component, and includes both primary and secondary production. (Emphasis added.)
The above definitions and Treasury's preamble to the new rules address at least two key issues.
First, as requested by commenters, the definitions clarify that "produced by the taxpayer" includes the use of recycled materials. Treasury had previously stated in the proposed rules that "secondary production" was implicitly included. In response to comments, Treasury added text to the new rules, bolded above, to make its inclusion explicit. That added text should give additional assurance to recyclers. It is also consistent with key IRA and environmental goals—namely, boosting clean energy production while minimizing its impact on the environment.
Second, the final rules address gradations of "production," distinguishing between processes that "substantially transform" (creditable) and those that consist only of "minor assembly or superficial modification" (not creditable). What does this mean in practice? The rules further define "minor assembly" and "superficial transformation" and give several examples. For instance, a taxpayer who makes three sections of a wind tower that make up the wind tower has produced a 45X "eligible component." However, a taxpayer who puts external casing on a battery module with cells, management systems, and other integrated components has engaged only in "minor assembly." Similarly, a taxpayer who buys two finished halves of a wind turbine nacelle and combines them has also engaged only in "minor assembly."
The new rules distinguish between "minor" and more complex assembly, the latter being creditable. The preamble to the rules emphasizes that this distinction applies only in "limited cases," namely, the complex assembly of components required to produce solar modules and battery modules using battery cells. The rules also specifically address "substantial transformation," particularly for certain wind turbine nacelles. Nacelles that have undergone "substantial transformation" but are not yet complete are nonetheless considered to be "produced by the taxpayer" if only "minor assembly remains left to" be completed by a third party. In that case, the taxpayer who did the substantial transformation is eligible for the 45X credit, not the third party who performs only the remaining minor assembly.
Costs Included in the 10 Percent Credit for Critical Minerals and Electrode Active Materials
The 45X credits for critical minerals and electrode active materials are equal to 10 percent of production costs, so what counts as "production costs" matters. The proposed rules previously excluded certain costs, such as extraction and direct and indirect materials costs. In response to many comments, Treasury reconsidered that position. Extraction costs and materials costs (as defined by regulations under Tax Code Section 263A), with certain limits, are now expressly included in "production costs," for which a taxpayer may claim a 10 percent 45X credit.
Regarding extraction costs, (1) the extraction must occur in the United States or a U.S. territory; and (2) the taxpayer claiming the 45X credit must pay or incur the extraction costs. If, however, a taxpayer acquires extracted raw material as a "direct (or indirect) material cost, the material costs may be included as production costs consistent with" other rules under Tax Code Section 263A, regardless of whether the extracted material comes from a domestic or foreign source. The text of the rules regarding costs that are paid and incurred is consistent with the rules for transferability. 45X credits are one of many transferrable credits under the IRA. The 45X rules are also consistent with traditional tax equity financing structures. Those features will provide qualifying producers with many of the same options for tax equity financing and tax credit monetization transactions that solar and wind power project developers have historically utilized.
To be clear, this does not mean that the 45X rules give credits for extraction operations standing alone. To the contrary, pure mining operations that do not refine critical minerals to the purity levels specified in 45X (or otherwise produce an eligible component) remain excluded from 45X.
Interaction with Section 48C
The rules clarify how Section 48C, an investment tax credit that also applies to clean energy component manufacturing operations, interacts with Section 45X. Unlike the Section 48 investment tax credit, 48C is limited to $10 billion in available credits for which taxpayers must apply. Treasury has already awarded $4 billion in 48C credits in a first-round allocation. A second round for up to the remaining $6 billion in 48C credits is now underway.
The 45X rules generally confirm that taxpayers cannot receive 45X tax credits for components made in facilities for which those same taxpayers already receive a 48C tax credit. Yet the 45X rules leave open the possibility for taxpayers who produce a "subcomponent" in a 48C facility to claim 45X tax credits for the end product that includes the 48C subcomponent. In that case, producing the subcomponent must not require the taxpayer to be considered a producer under Section 45X, such that the 48C equipment used to produce the subcomponent is not part of the Section "45X facility." The rules contain several examples to illustrate the interaction between the two credits.
Potential Impacts of the 2024 Election
It's still too soon to tell what effect the incoming Trump administration might have on the 45X rules. On the one hand, Trump campaigned on sweeping rollbacks of the Biden administration's clean energy incentives, of which 45X is one. Conversely, 45X is meant to bolster U.S. manufacturing and critical minerals production, a goal both parties have championed.
A variety of factors could be brought to bear. Even though the House will remain in Republican control, Republicans may not have the votes for wholesale repeals, as evidenced by this August 6, 2024, letter from 18 Republican representatives to Speaker Mike Johnson, urging against "[p]rematurely repealing energy tax credits, particularly those which were used to justify investments that already broke ground." Most of the signatories of that letter will return to Congress next year.
A Trump-led Treasury could try tinkering with the final rules, but that would likely require the agency to issue another set of proposed rules and engage in another notice-and-comment process. Given that Section 45X itself is highly specific regarding credits for each technology and critical minerals it incentivizes and that Treasury, in its final rules, mostly hewed closely to Section 45X's statutory text, there may not be much for a Trump administration to change through regulatory processes alone, barring the wholesale rescission of the rules themselves. That said, the National Mining Association has stated (subscription required) that it will continue to press for reforms to the 45X rules that currently exclude pure mining and extraction operations from tax credit eligibility and allow eligible taxpayers to import certain materials from outside the United States.
As with the other IRA tax credits, we will be watching this one closely as we near the change in administration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
