IRS Issues Proposed Regs to Implement the Advanced Manufacturing Production Credit

(Parker Tax Publishing January 2024)

The IRS issued proposed regulations to implement the advanced manufacturing production credit established by the Inflation Reduction Act of 2022 to incentivize the production of eligible components (including certain solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals) within the United States. The guidance provides rules for the production of eligible components and sale to unrelated persons, special rules that apply to sales between related persons, and rules for a taxpayer to make an election to treat sales to related persons as made to unrelated persons (i.e., a Related Person Election). REG-107423-23.

Background

Code Sec. 45X was added to the Code on August 16, 2022, by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169). Code Sec. 45X(a)(1) provides that, for purposes of the general business credit under Code Sec. 38, the advanced manufacturing production credit (Section 45X credit) for any tax year is an amount equal to the sum of the credit amounts determined under Code Sec. 45X(b) with respect to each eligible component, as defined in Code Sec. 45X(c)(1), which is produced by the taxpayer, and during the tax year, sold by such taxpayer to an unrelated person. Code Sec. 45X(a)(2) provides that any eligible component produced and sold by the taxpayer is taken into account only if the production and sale is in a trade or business of the taxpayer.

Code Sec. 45X(a)(3) provides rules regarding the sale of components to an unrelated person, and generally provides a special rule that, for purposes of Code Sec. 45X(a), treats a taxpayer as selling a component to an unrelated person if that component is sold to the unrelated person by a person related to the taxpayer. Under Code Sec. 45X(a)(3)(B), if a taxpayer makes an election in the form and manner prescribed by the Treasury Secretary, a sale of components by the taxpayer to a related person will be treated as if made to an unrelated person for purposes of Code Sec. 45X(a) (Related Person Election). As a condition of, and prior to, a taxpayer making the Related Person Election, the Treasury Secretary may require such information or registration as the Treasury Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount.

The credit amounts for each type of eligible component are set forth in Code Sec. 45X(b)(1)(A) through (M) and Code Sec. 45X(b)(2). Except for purposes of determining the credit amount for any applicable critical mineral, the credit amounts are subject to phase out rules set forth in Code Sec. 45X(b)(3), which apply to sales of eligible components in years 2030, 2031, and 2032.

Code Sec. 45X(c)(1)(A) defines the term "eligible component" to mean any solar energy component, any wind energy component, any inverter described in Code Sec. 45X(c)(2)(B) through (G), any qualifying battery component, and any applicable critical mineral. Code Sec. 45X(c)(1)(B) clarifies that the term "eligible component" does not include any property that is produced at a facility if the basis of any property that is part of such facility is taken into account for purposes of the qualifying advanced energy project credit allowed under Code Sec. 48C after August 16, 2022 (the date of enactment of the IRA).

Code Sec. 45X(d) provides special rules that are applicable to the Section 45X credit. Code Sec. 45X(d)(1) provides that persons are treated as related to each other if they would be treated as a single employer under the regulations prescribed under Code Sec. 52(b). Code Sec. 52(b) and Reg. Sec. 1.52-1(b) generally provide that trades or businesses that are partnerships, trusts, estates, corporations, or sole proprietorships under common control are members of a controlled group and are treated as a single employer.

Code Sec. 45X(d)(2) provides that sales of eligible components are taken into account under Code Sec. 45X only for eligible components that are produced within the United States or a U.S. territory. Code Sec. 45X(d)(3) directs the Treasury Secretary to promulgate regulations adopting rules similar to the rules of Code Sec. 52(d) to apportion credit amounts between estates or trusts and their beneficiaries on the basis of the income of the estates or trusts allocable to each, and to pass-thru any apportioned credit amounts to the beneficiaries. Code Sec. 45X(d)(4) provides that for purposes of the Section 45X credit, a person is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is sold to an unrelated person.

In March 2023, the IRS issued Notice 2023-18 to establish the qualifying advanced energy projects program (Section 48C(e)). In June 2023, the IRS issued Notice 2023-44 to provide additional guidance on the Section 48C(e) program, including rules for the interaction between Code Secs. 45X and 48C.

Proposed Regulations

On December 15, the IRS published proposed regulations to implement Code Sec. 45X. The proposed regulations are organized into four sections, Prop. Reg. Sec. 1.45X-1 through Prop. Reg. Sec. 1.45X-4. Prop. Reg. Sec. 1.45X-1 provides general rules applicable to the Section 45X credit, including the definition of the term "produced by the taxpayer" for both primary and secondary production. Primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials. Prop. Reg. Sec. 1.45X-2 provides rules for sales to unrelated persons through a person related to the taxpayer, including the rules for a taxpayer to make an election to treat sales of eligible components to related persons (Related Person Election) as if made to unrelated persons. Prop. Reg. Sec. 1.45X-3 provides definitions and credit amounts for certain eligible components, including solar energy components, wind energy components, inverters, and qualifying battery components, and phase-out rules. Prop. Reg. Sec. 1.45X-4 provides definitions and credit amounts for applicable critical minerals that are eligible components.

Interaction Between Code Secs. 48C and 45X

Consistent with Code Sec. 45X(c)(1)(B), Prop. Reg. Sec. 1.45X-1(g)(1) provides that for purposes of Code Sec. 45X, an eligible component must be produced at a Section 45X facility and does not include any property (produced property) that is produced at a facility if the basis of any property that is part of the production unit that produces the produced property is eligible property that is included in a Section 48C facility and is taken into account for purposes of a credit allowed under Code Sec. 48C (Section 48C credit) after August 16, 2022. Prop. Reg. Sec. 1.45X-1(g)(2)(i) defines a Section 45X facility to include all tangible property that comprises an independently functioning production unit that produces one or more eligible components. Prop. Reg. Sec. 1.45X1(g)(2)(ii) provides that a production unit is comprised of the tangible property that substantially transforms material inputs to complete the production process of an eligible component. Prop. Reg. Sec. 1.45X-1(g)(3)(i) defines a Section 48C facility to include all eligible property included in a qualifying advanced energy project for which a taxpayer receives an allocation of Section 48C credits and claims such credits after August 16, 2022. Prop. Reg. Sec. 1.45X-1(g)(3)(ii) defines eligible property included in a Section 48C facility.

Notice 2023-18 and Notice 2023-44 have been incorporated into the proposed regulations and upon finalization, Section 5.05 of Notice 2023-18 and Section 3 of Notice 2023-44 will be superseded.

Related Person Election

The IRS clarifies in the preamble to the proposed regulations that the Related Person Election is only available if an eligible component is sold by a taxpayer to a related person. It is not available if a taxpayer does not actually sell the eligible component to another person, for example, if an eligible component is transferred between a person and an entity that is not regarded as separate from the person under Reg. Sec. 301.7701-3 or between divisions of a single corporation.

Prop. Reg. Sec. 1.45X-2(d)(2) provides the time and manner for a taxpayer to make a Related Person Election. Under Prop. Reg. Sec. 1.45X-2(d)(2)(i), a taxpayer must make an affirmative Related Person Election annually in the form and manner prescribed in guidance (currently Form 7207, Advanced Manufacturing Production Credit, and its instructions), and filed with the taxpayer's timely filed original federal income tax return, including extensions. Prop. Reg. Sec. 1.45X-2(d)(2)(i) also provides that the Related Person Election will be applicable to all sales of eligible components to related persons by the taxpayer for each trade or business that the taxpayer engages in during the tax year that resulted in a credit claim and for which the taxpayer has made the Related Person Election.

Prop. Reg. Sec. 1.45X-2(d)(2)(ii) provides the required information to make a Related Person Election. Prop. Reg. Sec. 1.45X-2(d)(3) describes the scope and effect of the Related Person Election and provides that a separate Related Person Election must be made with respect to related person sales made by a taxpayer in each eligible trade or business of the taxpayer. Prop. Reg. Sec. Sec. 1.45X-2(d)(3) also provides that a Related Person Election applies to all sales to related persons of eligible components produced by the taxpayer during the tax year for which that election is made and is irrevocable for that tax year. Additionally, Prop. Reg. Sec. 1.45X-2(d)(3) provides that a Related Person Election applies solely for purposes of the Section 45X credit, the provisions of Prop. Reg. Sec. 1.45X-1 through Prop. Reg. Sec. 1.45X-4, and so much of Code Secs. 6417 and 6418 and the regulations under Code Secs. 6417 and 6418 related to the Section 45X credit.

The proposed regulations are proposed to apply to eligible components for which production is completed and sales occur after December 31, 2022, and during tax years ending on or after the date of publication of the final regulations in the Federal Register.

For a discussion of the advanced manufacturing production credit, see Parker Tax ¶109,301.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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