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The section 45X tax credit

A financial catalyst for manufacturers in the advanced energy supply chain

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

What is needed to obtain the credit?

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.

Three-part process

Product eligibility

Production process evaluation

Commercial structure review

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 here.

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.

Contact our specialists today to learn more about ensuring your eligibility.

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