Advanced Manufacturing Production Credit Regs Finalized

The IRS issued final regs implementing Code Sec. 45X under the Inflation Reduction Act (P.L. 117-169) to further the Treasury Department’s goal of boosting domestic clean energy manufacturing through increased activity across critical mineral supply chains. (TD 10010, 10/24/2024; IR 2024-281).

Section 45X.

Generally, the Advanced Manufacturing Production Credit incentivizes the production and sale of certain clean energy components, such as solar and wind components, inverters, battery components, and 50 critical minerals. To qualify, the components are required to be produced within the U.S. or a U.S. territory.

The credit is equal to the sum of eligible credit amounts detailed in Code Sec. 45X(b) for each component produced by the taxpayer and sold to an unrelated person within the tax year. It is designed to interact with the Code Sec. 48C credit for qualifying advanced energy projects equal to 30% of qualifying investments.

Previous guidance.

The IRS released two initial notices in March (Notice 2023-18) and June (Notice 2023-44) of 2023 that established the Section 48C(e) qualifying advanced energy projects program and expanded on the interplay between Section 45X and Section 48C, respectively.

Proposed regs issued in December 2023 on the Advanced Manufacturing Production Credit offered definitions, rules on how to calculate the credit, and recordkeeping and reporting requirements.

A public rulemaking hearing was held in February and the IRS received nearly 200 submissions during the comment period.

Final regs.

The proposed rules were mostly retained in the final version issued Thursday, with some revisions incorporating stakeholder feedback. Deputy Treasury Secretary Wally Adeyemo explained that the final regs “will allow material costs to be included in calculating the Section 45X credit for critical minerals and electrode active materials, as well as mining and extraction costs.”

The final regs also clarify various definitions. For example, the proposed regs defined “produced by the taxpayer” as “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 mere assembly or superficial modification of the elements, materials, or subcomponents.”

But as several commenters told the IRS, the text of the proposed regs did not specifically clarify that eligible components can be produced using recycled materials, even though the preamble states that both primary and secondary production are included in the definition of “produced by the taxpayer.” The final regs were revised accordingly.

To further nail down the interaction between Sections 45X and 48C, the IRS stated: “property that would otherwise qualify as an eligible component (otherwise qualified property) is only an eligible component if the property is produced at a section 45X facility and no part of that section 45X facility is also a section 48C facility,” which the final regs reflect.

Also, the definition of a Section 45X facility is the “independently functioning tangible property used by the taxpayer that is necessary to be considered the producer of the otherwise qualified property.”

A so-called anti-abuse rule was included in the proposed regs on the Related Person Election to prevent duplication, fraud, or improper or excessive credit amounts. Such an election may not be made, the proposed regs said, if:

• the taxpayer fails to provide the information required with respect to the relevant eligible components; or
• the taxpayer provides information that shows such components were put to an improper use or were defective.

The IRS agreed with a commenter’s suggestion that final regs specify that “if an eligible component is not defective at the time of sale, defects arising after the point of sale may occur in the ordinary course of a business and do not generally raise the improper claim concerns” for purposes of the anti-abuse rule.

Credit usage.

Speaking with reporters on a press call October 23, Senior Advisor to the President for International Climate Policy John Podesta said since the beginning of the Biden-Harris administration, the private sector announced $450 billion in new clean energy investments. Of that amount, $275 billion occurred after the enactment of the Inflation Reduction Act in August 2022, $126 billion of which was invested in clean energy manufacturing “in nearly every state” nationwide.

According to a Treasury press release citing data from the Rhodium Group/MIT’s Clean Investment Monitor, that $126 billion is comprised of $77 billion for batteries, $6 billion for critical minerals, $19 billion for solar, and $8 billion for wind.

“The law is government-enabled,” said Podesta. “But make no mistake about it, the real power of the Inflation Reduction Act is that it’s private sector led. We need literally trillions of dollars of investment if we’re to stave off the worst effects of the climate crisis.”

The regs were crafted with the help of the Department of Energy to “level the playing field for U.S. companies, allowing us to onshore production of technologies currently dominated by China,” according to Deputy Secretary of Energy Dave Turk.

“[I]f you just look at the supply chain that feeds batteries here in the United States, companies have announced more than 300 new or expanded minerals, materials, processing, and manufacturing facilities,” said National Climate Coordinator Ali Zaidi. “The final rule … is absolutely a game changer for our ability to lean into mineral security sourced, processed, and manufactured” stateside.

For more on the Advanced Manufacturing Production Credit, see Checkpoint’s Federal Tax Coordinator ¶ L-17520.