IRS Release Proposed Regulations on the Advanced Manufacturing Production Credit

Signed into law in August 2022, the Inflation Reduction Act of 2022 (IRA) introduced initiatives to support clean energy advancements and an increase in domestic manufacturing jobs related to clean energy.  One program established by the legislation, the Advanced Manufacturing Production Credit (Section 45X), provides a tax credit to eligible businesses that manufacture energy components in the United States.  In January 2023, the Treasury and IRS released additional guidance regarding the credit that provides more details on how manufacturers may be able to take advantage of this program. 

Credit Overview

The Advanced Manufacturing Production Credit is available to businesses engaged in the production of “advanced energy property”, such as certain components pertaining to solar or wind energy, batteries, and inverters, as well as applicable critical minerals.  Examples of components in each category include:

• Solar energy: solar modules, photovoltaic cells, wafers, solar-grade polysilicon, torque tubes, structural fasteners, and polymeric backsheets.
• Wind energy: blades, nacelles, towers, offshore wind foundations and related offshore wind vessels.
• Batteries: electrode active materials, battery cells, and battery modules.  The proposed guidance discussed below also increases the scope to include components such as electrolytes, catholytes, anolytes, separators, and various metal salts and oxides. 
• Inverters: products that convert direct current electricity from wind or solar systems into alternating current electricity including central inverters, commercial inverters, distributed wind inverters, microinverters, and residential inverters. 

The guidance provides additional examples and criteria for the components noted. 

The credit can be claimed when the taxpayer produces the components in the United States during the tax year and sells them to an unrelated entity. To be eligible for the credit, components must have been both produced and sold after December 31, 2022.  The credit will begin to phase out by 25% per year for components sold after December 1, 2029, and is entirely phased out for components sold after December 31, 3032.  However, there is no phase-out currently planned for the production of critical minerals. 

The calculation of the credit is based on the components produced during the tax year and varies based on the nature of the components covered by the credit.  For instance, some credits are calculated based on component size while others are calculated based on wattage capacity.  Other credits can be calculated based on costs incurred to produce the product.  Therefore, it is important to ensure the right methodology is used based on the specific circumstances of your business and the specific costs or features of the component produced. 

Proposed Guidance

The proposed guidance clarifies several uncertainties in the original legislation, as follows:

• Defines “produced”.  The guidance clarifies that assembling elements or a superficial alteration does not mean the taxpayer produced the good.  Instead, the taxpayer must transform the elements, materials, or subcomponents into a distinct component that is eligible for the credit to claim it. 
• Clarifies timeline. Components in production as of December 31, 2022, but not completed and sold until after that date are eligible for the credit. 
• Defines rules for contract manufacturers. Parties in a contract manufacturing agreement may elect to agree to the party that can make the credit claim, for instance in a tolling arrangement.  Certain certified statements and forms must be submitted to the IRS. Without this, the credit will apply only to the party manufacturing (or transforming) the component. 
• Allow elections for related party sales.  Taxpayers who sell components to related parties may complete a form to elect who may claim the tax credits available. 
• Allowance of insignificant foreign-sourced components.  The guidance indicates that basic elements, materials, and subcomponents may be outsourced; however, transformation and major production must occur domestically. 

Guidance is expected to continue evolving in this program.  For questions related to the Advanced Manufacturing Production Credit or to discuss other tax credits that may be available to manufacturers, please contact a member of HBK Manufacturing Solutions at manufacturing@hbkcpa.com or call 330-758-8613.