Understanding New IRS Guidance on the 45X Credit

On December 15, the IRS released proposed regulations relating to the 45X Advanced Manufacturing Production Credit. The 45X Credit is a production credit established under the Inflation Reduction Act of 2022 to support the domestic manufacturing of wind, solar, and battery system components as well as critical materials needed for these systems. This lucrative credit has generated significant interest as businesses look to move manufacturing operations to the United States to take advantage of these incentives.

Eligible parts under the law include solar energy components, wind energy components, inverters, qualifying battery components, and critical materials. Depending on the component, the value of the credit is calculated in different ways. For some components, the size or weight determines the value of the credit; for example, photovoltaic wafers have a credit of $12 per square meter, and torque tubes have a credit of $0.87 per kilogram. Other components have a credit based on generating capacity, such as wind turbine blades at $0.02 per watt of the rated capacity. Others have credit based on the cost of production, such as lithium at 10% of the cost of production.

The calculation of the credit amount is not the only confusing aspect of the credit that requires regulations. Taxpayers also need to understand questions around the definitions of eligible components to determine what is qualified. Additionally, many manufacturing agreements include contract manufacturing or co-manufacturing agreements. These can be confusing and require additional guidance.

The new guidance answers these as well as many other questions regarding when the tax credit can be taken, what constitutes manufacturing, and others. It’s important to note that this is only a proposed regulation, and the IRS will accept comments until February 13, 2024. With the size and lucrative nature of these credits, it’s critical that stakeholders understand the intricacies of these regulations.

McGuire Sponsel is well-versed in 45X calculations; if you have any questions about implementing the new 45X rules, please reach out to your McGuire Sponsel representative.