IRS Finalizes Regs on Advanced Manufacturing Production Credit

(Parker Tax Publishing November 2024)

The IRS issued final regulations regarding the advanced manufacturing production credit established by the Inflation Reduction Act of 2022 (Pub. L. 117-169) under Code Sec. 45X to incentivize the production of eligible components, including solar and wind energy components, inverters, qualifying battery components and certain critical minerals, within the United States. The final regulations define qualifying production activities, provide rules for the sale of eligible components to unrelated persons as well as special rules that apply to sales between related persons, and provide recordkeeping and reporting requirements. T.D. 10010.

Background

Code Sec. 45X was added by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169). In general, for purposes of the general business credit under Code Sec. 38, Code Sec. 45X provides for the advanced manufacturing production credit (Section 45X credit) with respect to eligible components produced by the taxpayer and sold during the tax year to an unrelated person. Code Sec. 45X applies to eligible components produced and sold after December 31, 2022.

Under Code Sec. 45X(a)(1), the total Section 45X credit amount for the tax year equals 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)). Under Code Sec. 45X(a)(2), 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) generally provides rules regarding the sale of eligible components to an unrelated person. However, Code Sec. 45X(a)(3)(B) provides a special rule whereby if a taxpayer makes an election in the form and manner prescribed by the IRS, a sale of eligible components by the taxpayer to a related person will be treated as if made to an unrelated person (Related Person Election). As a condition of, and prior to, a taxpayer making the Related Person Election, the IRS may require such information or registration as it deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount.

Code Sec. 45X(b)(1) generally provides the credit amount determined with respect to any eligible component, including any other eligible component it incorporates, subject to the credit phase out rules provided in Code Sec. 45X(b)(3). Code Sec. 45X(b)(1)(A) through (M) and Code Sec. 45X(b)(2) set forth the credit amounts for each type of eligible component. The credit amounts are generally subject to phase out rules under Code Sec. 45X(b)(3), but the phase out rules do not apply to any applicable critical mineral. For any eligible component (except applicable critical minerals) sold after December 31, 2029, the credit amount for such component equals the product of the amount determined under Code Sec. 45X(b)(1) for such component multiplied by the applicable phase out percentage under Code Sec. 45X(b)(3)(B)(i) through (iv). In the case of an eligible component sold during calendar year 2030, 2031, and 2032, the phase out percentages are 75 percent, 50 percent, and 25 percent, respectively. For any eligible component sold after December 31, 2032, the phase out percentage is zero percent, and no Section 45X credit is allowed other than for applicable critical minerals. Code Sec. 45X(b)(4) provides capacity limitations used to compute the credit amount for battery cells and battery modules. Code Sec. 45X(b)(4)(A) provides that the capacity determined with respect to a battery cell or battery module must not exceed a capacity-to-power-ratio of 100:1. Code Sec. 45X(b)(4)(B) defines "capacity-to-power-ratio" as the ratio of the capacity of a battery cell or battery module to the maximum discharge amount of such cell or module.

Code Sec. 45X(c)(1)(A) defines an 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 eligible components do 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)(1) provides that persons are related to each other for purposes of the Section 45X credit if they would be treated as a single employer under controlled group rules in Code Sec. 52(b) and Reg. Sec. 1.52-1(b). 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 IRS 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 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.

Prior Guidance

In Notice 2022-47, the IRS requested comments on issues arising under Code Sec. 45X that may require guidance. In December 2023, the IRS issued proposed regulations (REG-107423-23) on the Section 45X credit.

In Notice 2023-18, the IRS established the qualifying advanced energy project allocation program (Section 48C(e) program). In Notice 2023-44, the IRS provided additional guidance on the Section 48C(e) program, including rules for the interaction between Code Secs. 45X and 48C.

T.D. 10010

On October 28, the IRS published final regulations under Code Sec. 45X (T.D. 10010). The final regulations retain the same basic structure as the proposed regulations with certain revisions.

One change in the final regulations is a clarification of the definition of "produced by the taxpayer" in Prop. Reg. Sec. 1.45X-1(c). Practitioners requested that the final regulations specifically state that taxpayers may produce eligible components using recycled materials. While the preamble to the proposed regulations stated that primary and secondary production are included in the definition of "produced by the taxpayer," that issue was not addressed in the text of the proposed regulations. The preamble further stated that primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials. The IRS agreed with the request for clarification on the general rule that production includes primary and secondary production, and the final regulations revise Prop. Reg. Sec. 1.45X-1(c)(1) and (2) to add secondary production to the definition of produced by the taxpayer.

In Prop. Reg. Sec. 1.45X-2(d)(4), the proposed regulations provided an anti-abuse rule for the Related Person Election consistent with Code Sec. 45X(a)(3)(B)(ii) for preventing duplication, fraud, or any improper or excessive amount of the Section 45X credit. Under the proposed regulations, a Related Person Election may not be made if (1) the taxpayer fails to provide the information required by Prop. Reg. Sec. 1.45X-2(d)(2) with respect to the relevant eligible components; (2) the taxpayer provides information that shows such components were put to an improper use as defined in proposed Pro. Reg. Sec. 1.45X-2(d)(4)(ii) or were defective as defined in Prop. Reg. Sec. 1.45X-2(d)(4)(iii); or (3) such components were actually put to an improper use or were defective. The final regulations clarify that components with respect to which defects arise after the deemed sale to a related person pursuant to a valid Related Person Election are not considered defective components for purposes of the anti-abuse rule. The IRS agreed with practitioners' comments 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 regarding defective components.

The final regulations apply to eligible components for which production is completed and sales occur after December 31, 2022, and during tax years ending on or after October 28, 2024. Taxpayers may choose to apply the final regulations to eligible components for which production is completed and sales occur after December 31, 2022, and during tax years ending before October 28, 2024, provided that taxpayers follow the final regulations in their entirety and in a consistent manner.

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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