The section 45X tax credit

What is the 45X tax credit?

The Inflation Reduction Act of 2022 established the section 45X Manufacturing Production Tax Credit (PTC) to expand the domestic supply chain of critical components used in advanced energy production. A wide range of components qualify for the tax credit. Companies with vertical integration can be eligible to claim credits for multiple products within the operating footprint.

There is no application process to claim the credits. Manufacturers who produce and sell the qualifying product while meeting the requirements of the program can claim the credits on their tax return. The program provides for full benefits through tax year 2029 and partial benefits through tax year 2032.

Manufacturers often have significant depreciation that reduces taxable income, which can reduce the attractiveness of tax credits when they cannot be utilized quickly. In order to assist with this industry challenge, the program offers two alternative monetization options:

1. Direct pay – a manufacturer may request direct payment of the credit beginning in a specific tax year and the subsequent four tax years during the credit period
2. Transferability of the credits, partial or full, to unrelated taxpayers to facilitate liquidity for the manufacturer

Investing in facilities and technologies eligible for the section 45X credit significantly enhances a company's return on investment (ROI) by reducing tax liability, improving cash flow and allowing for reinvestment into innovation or business development. The transferability of the 45X credit is a strategic advantage that offers companies the flexibility to monetize credits that cannot immediately be utilized. Transferability can directly impact financial performance and ROI.

What is needed to obtain the credit?

Qualifying energy components under section 45X cover a broad range of equipment aimed at promoting solar and wind energy production, alongside battery technology and critical minerals. For solar energy, eligible components include solar panels (photovoltaic cells), solar modules, photovoltaic cells and wafers, solar grade polysilicon, torque tubes, structural fasteners and polymeric backsheets. Wind energy components extend to blades, nacelles, towers and both fixed and floating platforms for offshore wind foundations, as well as vessels related to offshore wind. Inverters, crucial for converting direct current to alternating current electricity, are also covered, with eligibility spanning central, commercial, distributed wind, microinverters, residential inverters and utility inverters. Battery technology components recognized include electrode active materials, battery cells and battery modules, focusing on the production of operational components rather than supporting hardware. Additionally, the production of 50 critical minerals, essential for modern technology and clean energy solutions, qualifies for the tax credit, underscoring the importance of these materials in advancing clean energy technologies.

The tax credit may be claimed by any taxpayer who produces and sells the qualifying products. While this sounds relatively straightforward, there are several requirements that should be evaluated to ensure full eligibility. The IRS has stepped up enforcement of lucrative tax credits such as the Employee Retention Credit (ERC) in recent years to prevent fraudulent claims, so caution and due diligence must be taken prior to claiming the credits.

Baker Tilly has established a program to review key attributes of each manufacturer’s unique situation and provide an independent validation of eligibility for the tax credit.

This three-part process will address the requirements of the program to establish structure and planning for documentation to maintain when claiming the credit. This assessment can be used to assist in the event of an audit of the credit.

If a manufacturer is claiming an allocation of the 48C tax credit for assets used in the manufacture of the qualifying products, the 45X tax credit cannot be claimed. It is possible for separate sections of a facility to be able to claim each credit for separate processes if managed carefully. Learn more about the 48C program.

Credit calculation

The section 45X tax credit calculation is based on the production volume of eligible components within a tax year, employing three primary methods: value per component size or weight, value per electric capacity, and a percentage of production costs. For solar subcomponents, the credit is determined by a dollar value multiplied by the component's size in square meters or weight in kilograms, necessitating detailed production and testing records. Other components' credits are calculated based on their total electric capacity in watts. Particularly for critical minerals and some other components, the credit amounts to 10% of production costs. Further clarification on cost inclusion is anticipated.

Risks associated with the credit

The primary risks of navigating section 45X include compliance challenges, where inaccuracies in eligibility interpretation or documentation can lead to IRS disputes, penalties or loss of credits. The market for transferring credits, while beneficial, demands careful legal and financial scrutiny to mitigate risks. Additionally, there is a risk of recapture, requiring companies to repay credits if they fail to meet certain post-qualification requirements, further emphasizing the need for diligent compliance and accurate claim substantiation.

What happens after claiming the credit?

The 45X PTC can be claimed through tax year 2032. While learning more about initial eligibility is an important start, an ongoing monitoring and management process should be established to evaluate changes to products and processes over the entire lifespan of the credit period.

A monitoring program should include data validation processes to ensure proper production reporting quantities, evaluations of new products and production activities, and customer relationship tracking as businesses are acquired and sold.

Ever changing business conditions mean this is not a “one and done” exercise – proper controls should be in place to protect from any risk of recapture.