The IRS and the Department of Treasury recently unveiled proposed regulations detailing the implementation of the Section 45X Advanced Manufacturing Production Credit, a pivotal incentive established under the Inflation Reduction Act. This credit aims to stimulate domestic production and sales of specific eligible components within the U.S. Manufacturers hoping to leverage this credit should become familiar with qualifying components, calculation methodologies and other critical considerations.
To qualify, taxpayers must substantially transform elements, materials and subcomponents into distinct eligible components. It does not include minor assembly or partial transformation. Eligible components encompass a range of items, including:
Additionally, solar energy components, wind energy components, inverters and qualified battery components each have specific criteria defining their eligibility. For instance:
Eligible components must ultimately be sold to unrelated parties. Production of eligible components can begin before December 31, 2022, but must be completed and sold after December 31, 2022.
Section 45X credit rates vary, based on the specific eligible component being produced, and are calculated on a per unit basis. Notably, the credit does not cover property produced in facilities considered for the qualifying advanced energy project credit under 48C.
The Section 45X credit begins to phase out in calendar year 2030 and is entirely phased out for eligible components, excluding production of critical materials, sold after December 31, 2032.
Eligible components must be produced at a 45X facility, defined as “tangible property comprising an independently functioning production unit generating one or more eligible components.” A production unit is the tangible property that substantially transforms the material inputs to complete the production process of an eligible component.
In cases where production occurs under a contract manufacturing arrangement, parties may agree on who will claim the credit. The IRS accepts this agreement, provided all parties submit signed certification statements. Without mutual agreement, the credit applies only to the party performing the production resulting in the substantial transformation.
An innovative aspect of the Section 45X credit is that it allows for the use of recycled elements, materials and subcomponents in the production of eligible components.
The proposed regulations confirm that only eligible components produced within the U.S. qualify for the credits; however, basic elements, materials and subcomponents used to produce eligible components are not subject to domestic production rule requirements.
You must calculate the credit on Form 7207, with a separate Form 7207 required for each facility engaged in the production and sale of eligible components.
The proposed regulations for the Section 45X Advanced Manufacturing Production Credit offer a comprehensive framework for businesses seeking to capitalize on this incentive, encouraging domestic production and technological innovation within the U.S.
Contact Justin Gartner or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.