LegiStorm

Summary:

P.L. 117-169, commonly known as the Inflation Reduction Act of 2022 (IRA), enacted a new tax credit for the production of component parts and critical minerals used in clean energy equipment. The credit is referred to as either the Advanced Manufacturing Production Credit or the 45X credit based on the credit’s Internal Revenue Code section (26 U.S.C. §45X). This In Focus summarizes the 45X credit and policy issues that have arisen following its creation. The 45X credit subsidizes the production of five types of goods: solar energy components, wind energy components, battery components, inverters, and critical minerals. Businesses may only claim the credit for goods produced in the United States or its territories. Goods produced from recycled materials qualify for the credit. While Section 45X provides credits for many different clean energy goods, there are three general methods that are used to calculate the credit values for different goods: • Goods used to produce, transmit, or store energy receive credits proportional to their output, transmission, or energy storage capacities. For example, solar modules are eligible for a credit equal to 7 cents multiplied by the module’s capacity per direct-current watt; commercial inverters are eligible for a credit equal to $2 multiplied by the inverter’s alternating-current-watt capacity; and battery cells are eligible for a credit of $35 multiplied by the maximum kilowatt-hour capacity of the cell. • Subcomponent goods are eligible for either flat credits or credits proportional to the subcomponents’ size or weight. Blades used in wind turbines, for example, are eligible for a flat credit of 2 cents per blade. Polymeric backsheets (which insulate the backs of solar panels) are eligible for a credit of 40 cents per square meter, and torque tubes (which are used to cojoin and support solar panels) are eligible for a credit of 87 cents per kilogram. • Critical minerals and electrode active materials are eligible for credits equal to 10% of the production costs of the given mineral or material. According to a final rule released by the IRS in October 2024, the costs of extracting, acquiring, processing, purifying, refining, and converting critical minerals and electrode active materials are considered qualifying production costs. One exception to these general rules is that offshore wind vessels—vessels used to transport and install turbines at offshore wind farms—are eligible for a credit equal to 10% of the vessel’s sales price. Sales prices are not used to calculate credit amounts for any other good. A second exception is that solar-grade polysilicon, which is arguably more similar to a critical mineral than a subcomponent part, is eligible for a credit of $3 per kilogram. To qualify for the credit, goods generally must be sold by producers to “unrelated persons,” a term interpreted by the IRS to mean individuals and organizations not under common control. However, 26 U.S.C. §45X(a)(3)(B)(i) states that “[a]t the election of the taxpayer ... a sale of components by such taxpayer to a related person shall be deemed to have been made to an unrelated person.” Based on its interpretation of this language, the IRS created a Related Persons Election (RPE) in its final rule. Under the RPE, a taxpayer may receive the 45X credit if “the taxpayer produces and then sells an eligible component to a related person, who then integrates, incorporates, or assembles the taxpayer’s eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person.” This allows certain intercompany sales to qualify for the credit, which is consistent with the IRS’s interpretation of Section 45X as “contribut[ing] to the development of secure and resilient supply chains.” Section 45X credits are calculated based on the year a product is sold, which may differ from the year it is produced. Businesses may receive full credits for goods sold from 2023 through 2029, then may receive 75% of normal credit amounts for goods sold in 2030, 50% for goods sold in 2031, and 25% for goods sold in 2032. The credit expires for most 45X credit-eligible products in 2033. Neither the phaseout nor the expiration apply to the credits for critical minerals. Production facilities that have previously been awarded a qualifying advanced energy project tax credit (26 U.S.C. §48C) are not eligible for the 45X credit. A facility that has been awarded a Section 48C credit for some but not all of its production units may claim the 45X credit for production units not used to claim the 48C credit.