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Final regulations released for the IRA section 45X tax credit

Final regulations revise previous guidance and provide clarity on 45X credit compliance

Nov 07, 2024·Authored by Jiyoon Choi, Selene Cullen

On Oct. 24, 2024, the Treasury released final regulations, subsequently published on Oct. 28, 2024, regarding the IRA section 45X advanced manufacturing tax credit established through the Inflation Reduction Act (IRA). The section 45X production tax credit provides an incentive for manufacturers to produce certain qualifying energy production components in the US. These final regulations will affect taxpayers intending to claim a section 45X tax credit on any eligible component they produce. The rules will become effective on Dec. 27, 2024 (60 days after publication in the Federal Register).

The Treasury and IRS officially finalized the proposed regulations published on Dec. 15, 2023, except for the regulations on section 1.45X-4(b)(1), which provides the requirements for aluminum to be considered an applicable critical mineral for the purposes of section 45X. The final regulations for section 1.45X-4(b)(1) will be released at a later date.

ira 45x graphic

Updates and reiterations addressed in the final rule

The final regulations are generally consistent with the proposed regulations proposed on Dec. 15, 2023. Some updates or reiterations are addressed in the final regulations, such as:

Clarifications to the definition of “produced by the taxpayer,” including confirmation that taxpayers may produce eligible components using recycled materials, and that eligible components produced by assembling other eligible components are still eligible for the 45X tax credit.
Reiteration of the special rule for the production of certain eligible components, stating that the act of extraction alone does not produce an eligible component.
Confirmation that subcomponents, constituent elements and materials used to make an eligible component are not subject to domestic content requirements.
Confirmation that the 45X credit does not require domestic sale of the eligible components.
Clarification on the sale of integrated components. A taxpayer will be deemed to have sold an eligible component if the taxpayer produced such a component and subsequently integrated, incorporated, or assembled it into another eligible component that is then sold to an unrelated person.
Clarifications on the interactions between 45X and 48C, including confirmation that the physical proximity of facilities does not matter as long as each facility operates independently, and a revision to the regulations to remove the term “production unit” to avoid unnecessary complexity. The final regulations also clarify that eligible components can include subcomponents, constituent elements, or materials that were produced at a 48C facility.
Revisions to the acceptable methods taxpayers can use to determine the specifications of eligible components (e.g., measuring the capacity of a solar module).
Clarification that repowering equipment can be considered a form of on-site manufacturing and, in certain cases, can qualify for a 45X tax credit.
Clarification on the credit’s anti-abuse rule. The 45X credit will not be available to a taxpayer if the primary purpose of the production and sale of an eligible component is to claim the 45X tax credit in a manner that is wasteful, such as discarding, disposing of, or destroying such a component without putting it to productive use.
Revisions to allow taxpayers to include the cost of extraction and direct and indirect materials costs when determining the 45X credit amount for applicable critical minerals and electrode active materials. The extraction of materials must have taken place in the U.S. or a U.S. territory, and extraction costs can only be included if such costs were incurred by the taxpayer claiming the 45X credit. Direct and indirect materials costs can only be included if the acquired material is not an eligible component at the time of acquisition, to avoid crediting the same components twice.

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Comparison chart of the proposed and final rule

Proposed rule	Final rule
Produced by the taxpayer
“Produced by the taxpayer” means a process conducted by the taxpayer that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component. Does not include partial transformation that does not result in substantial transformation. Does not include “mere assembly” of two or more constituent elements, materials, or subcomponents, or superficial modification of the final eligible component.	Clarifies that primary and secondary production are included in the definition of “produced by the taxpayer,” and explicitly adds secondary production to the definition of “produced by the taxpayer.” Clarifies that in the case of certain eligible components, such as solar modules, that are produced primarily by assembling other components, that the substantial transformation requirement is met by the taxpayer that assembles the constituent components to produce the eligible component. Because assembly is the primary activity that produces the component, such assembly should not be viewed as “minor assembly.” “Mere assembly” was replaced with “minor assembly” to clarify the above point.
Special rule for production of clean eligible components
“Produced by the taxpayer” means processing, conversion, refinement or purification of source materials, such as brines, ores, or waste streams, to derive a distinct eligible component.	The Treasury clarifies that this definition does not include extraction.
Contract manufacturing arrangements
If an eligible component is produced either in whole or in part subject to a contract manufacturing agreement, then the party that performs the actual production activities that bring about the eligible component can claim the 45X credit. However, any entity that is party to the contract can claim the credit so long as all parties agree. Contract manufacturing agreement is defined as any agreement providing for the production of an eligible component if the agreement is entered into before the production of such component is completed. A routine purchase order for ‘off-the-shelf' property shall not be treated as a contract manufacturing agreement.	No substantial changes were made, but the Treasury includes additional examples of how these rules may be applied in the final regulations.
Timing of production and sale
To claim a 45X tax credit, eligible components must be sold after Dec. 31, 2022. Production activities may begin before Dec. 31, 2022.	The Treasury clarifies that production of eligible components may begin before Dec. 31, 2022, as long as production is completed, and the components are sold after Dec. 31, 2022. There is no maximum percentage of production that may occur before Dec. 31, 2022.
Produced in the U.S.
To qualify for a 45X credit, an eligible component must be produced within the U.S.	Clarifies that constituent elements of an eligible component need not be produced in the U.S. Further, the eligible component does not need to be sold in the U.S. to qualify for the credit.
Production and sale in a trade or business
The eligible component must be produced and sold in a trade or business of the taxpayer, as defined within the meaning of section 162 of the Code.	No changes were made.
Sale of integrated components
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 which is sold to an unrelated person.	The Treasury clarifies that this general rule applies only to deemed sale treatment and not deemed production. The taxpayer must produce the component that is then integrated into another component for the deemed sale rule to apply.
Interactions between section 45X and 48C
An eligible component must be manufactured at a 45X facility and cannot include any property that was produced at a 48C facility and is considered for purposes of a credit allowed under section 48C. A 45X facility includes all tangible property that comprises an independently functioning production unit that produces one or more eligible components. A production unit is defined as the tangible property that substantially transforms material inputs to complete the production process of an eligible component. A 48C facility includes 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 Aug. 16, 2022.	The final rules clarify that the general rule is that property that would otherwise qualify as an eligible component under 45X is only an eligible component if the property is produced at a 45X facility, and no part of that facility is a 48C facility. The definition of a 45X facility was revised to clarify that the 45X facility is the independently functioning tangible property used by the taxpayer to produce the eligible component. The term ‘production unit’ was removed from the regulations to avoid confusion. Property used to produce a subcomponent or other property that is later integrated into the eligible component is not part of the 45X facility. In other words, a subcomponent can be made at a 48C facility unless the production of such subcomponent is required for the taxpayer to be considered the producer of the eligible component. Final regulations add a rule for contract manufacturing arrangements to clarify that the 45X facility would include the tangible property used to produce otherwise qualified eligible components.
Anti-abuse rule
The section 45X credit is unavailable when the eligible component is produced for the primary purpose of claiming the credit, and is disposed of, discarded, or destroyed without being put to productive use.	No meaningful changes were made.
Sale to an unrelated person
To claim the 45X credit, an eligible component must be sold to an unrelated person. Persons are treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). If a taxpayer sells an eligible component to a related person, who then sells such component to an unrelated person, that taxpayer will be treated as if it sold the component to an unrelated person.	No meaningful changes were made.
Related person election
A taxpayer can elect to have a sale to a related person be treated as a sale to an unrelated person for the purposes of claiming the 45X tax credit.	No meaningful changes were made.
Sales of integrated components to a related person
A taxpayer that produces an eligible component to a related person, who then integrates such component into another complete and distinct eligible component that is sold to an unrelated person, may claim a 45X credit upon the sale to the unrelated person.	No meaningful changes were made.
Eligible components
Please reference the graphic above for a list of eligible components and their credit amounts.	Several clarifications are made regarding the acceptable methods to use to measure equipment specifications, such as nameplate capacity, etc. The Treasury clarifies that in certain situations, repowering of equipment may count as on-site manufacturing and be eligible for the 45X credit. The Treasury clarified the rules regarding DC optimizer inverter systems. They reiterated that for a DC optimizer inverter system to qualify as a microinverter, the inverter and DC optimizers must be produced and sold together as one combined end-product. However, the IRS clarifies that the DC optimizer and inverter need not be physically packaged together or interconnected at the time of sale. The same rule was adopted for multi-module inverters.
Calculation of the credit amount for electrode active materials and applicable critical minerals
The amount of the 45X credit shall be 10% of the total costs to produce the eligible component, excluding materials costs, including the cost of extraction and direct and indirect materials costs.	The Treasury revised regulations to allow taxpayers to include materials costs in the calculation of the 45X credit amount for electrode active materials and applicable critical minerals. For extraction costs, the extraction activities must have taken place in the U.S., and the taxpayer can only claim such costs if they were the entity that incurred or paid them. If a taxpayer acquires extracted raw material, the costs of such materials may be included as production costs if the costs do not relate to the purchase of materials that are an eligible component at the time of acquisition. Substantiation will require certifications from the taxpayer’s suppliers for each element, material, or subcomponent purchased, stating that the supplier is not claiming the 45X on such material and is not aware of any prior supplier in the chain of production of that material having claimed a 45X credit with respect to that material. Taxpayers must also provide an analysis of any elements, materials, or subcomponents acquired that certifies that the materials did not meet the definition of an eligible component at the time of acquisition. A list of all direct and indirect material costs and the amount of such costs included in production costs must also be provided, as well as a document related to the taxpayer’s production activities with respect to the direct and indirect materials costs that establishes the acquired materials were used in the production of the eligible component.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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