Passage of the Inflation Reduction Act of 2022 established Internal Revenue Code (IRC) Section 45X, the advanced manufacturing production credit, and also further funded IRC Section 48C, which is the qualifying advanced energy project credit.
Below is an exploration of the two credits and some frequently asked questions.
IRC Section 45X
IRC Section 45X provides an income tax credit for domestic manufacturing of certain components for solar and wind energy, inverters, batteries, and critical minerals produced and sold starting January 1, 2023.
What Is the IRC Section 45X Advanced Manufacturing Production Credit?
IRC Section 45X provides a general business credit based on the type of eligible components produced by a taxpayer within the United States or possession thereof and sold to an unrelated person during such taxable year.
An election, the form and manner of which has yet to be determined by the secretary of the treasury, will allow taxpayers to elect to sell to related persons where the sales are deemed as having been made to unrelated persons. Additionally, the eligible components produced and sold will need to be within the taxpayer’s trade or business to be eligible for the credit.
How Can the IRC Section 45X Credit Be Used?
As a general business credit, the IRC Section 45X credit may be used against a taxpayer’s regular income tax. For corporate taxpayers, the credit is limited to 75% of the tax liability.
The Inflation Reduction Act provides direct pay and transferability opportunities to monetize the IRC Section 45X credit.
The direct pay option is allowed for tax-exempt entities for the duration of the program, and to tax paying entities within five years of the credit. Once elected for a given tax year, direct pay will be treated as having been made for each of the four succeeding taxable years ending before January 1, 2033, unless otherwise revoked.
Tax Credit Transfer
Eligible taxpayers, generally taxable entities, may elect to transfer some or all of the credit to an unrelated third party, which must be by the return’s due date in the applicable tax year, including extensions. For federal income tax purposes, the consideration received isn’t subject to tax. It isn’t clear how states will treat such payments.
What Is an Eligible IRC Section 45X Component?
For the advanced manufacturing production credit, eligible components include:
- Solar energy components
- Wind energy components
- Battery components
- Critical minerals
Importantly, eligible components don’t include any components produced at a facility for which the IRC Section 48C advanced energy project tax credit was claimed, as further discussed below.
What If Multiple Components Are Combined?
For purposes of this credit, a taxpayer is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component sold to an unrelated person.
Does the Credit Have a Phaseout?
Except for critical minerals, the IRC Section 45X credit begins to phase out by 25% for eligible components sold beginning in 2030 with zero credit after December 31, 2032. The amount of the credit will equal the regularly computed credit, without regard to the phaseout, multiplied by a phaseout percentage. There’s no phaseout for critical minerals.
IRC Section 48C
Below are FAQ regarding the qualifying advanced energy project credit.
What Is the IRC Section 48C Qualifying Advanced Energy Project Credit?
The qualifying advanced energy project credit under IRC Section 48C is an investment tax credit treated as a general business credit equal to 6% or 30% of a qualified investment for a taxable year applicable to any qualifying advanced energy project placed in service by a taxpayer.
The base credit is 6% but may be increased up to 30% if the taxpayer meets certain prevailing wage and apprenticeship requirements.
Please note that there may be other applicable enhancements to the credit as well, including energy communities and low income communities.
What Is a Qualifying Advanced Energy Project under IRC Section 48C?
IRC Section 48C includes projects that reequip, expand, or establish an industrial or manufacturing facility for producing or recycling renewable energy resources, components thereof, property designed to sequester carbon, reduce greenhouse emissions, or pertaining to electric vehicles.
How Do You Qualify for IRC Section 48C Tax Credits?
The secretary had 180 days since Inflation Reduction Act’s enactment on August 16, 2022, to establish a program to competitively award certification to eligible applicants. Guidance has been released and the application window for the submission of concept papers starts June 1, 2023, and ends July 31, 2023. Additional guidance will be issued prior to May 31, 2023, for the concept papers.
What Are the Selection Criteria for IRC Section 48C Tax Credits Awards?
The secretary must consider the following when looking at granting awards:
- Reasonable expectation of commercial viability that will provide the greatest domestic job creation
- The greatest net impact in avoiding or reducing emissions
- The greatest potential for technological innovation and commercial deployment
- The shortest project time from certification to completion.
Upon receipt of a certification, an applicant has two years to complete the project.
How Do the IRC Sections 45X and 48C Tax Credits Affect Each Other?
IRC Section 48C is an investment tax credit that’s claimed once in the year the eligible property is placed in service. IRC Section 45X is a production tax credit based on eligible components produced and sold to an unrelated party yearly until the program sunsets on December 31, 2032, except for critical minerals, which don’t have a sunset date.
IRC Section 48C doesn’t specify that the IRC Section 45X credit can’t be claimed alongside the IRC Section 48C credit. However, IRC Section 45X does specifically state that a taxpayer claiming investment tax credits under IRC Section 48C can’t later claim production tax credits for components produced and sold at that same facility.
Taxpayers should choose the ideal credit program for their circumstances and project they’re undertaking. For example, a taxpayer may be producing eligible components under IRC Section 45X but using them in their business and not selling them. In that case, IRC Section 48C may be a better choice.
IRC Section 45X also allows for a direct pay option, which allows qualifying taxpayers to claim up to 100% refund if they don’t have tax liability, as opposed to transferring the credit to a third party—presumably for an amount less than one dollar of credit.
We’re Here to Help
For guidance in finding tax credit opportunities with either IRC Section 45X or Section 48C, contact your Moss Adams professional.
You can also find additional resources on our Tax Credit & Incentive Services page.