Opportunities with the New Advanced Manufacturing Production Tax Credit

The Inflation Reduction Act of 2022 (IRA) introduced energy incentives and credits for businesses of all sizes in nearly every industry. A key feature of the IRA was a new credit designed to support manufacturers and distributors. The Advanced Manufacturing Production Tax Credit (Section 45X) intends to provide manufacturers with a tax credit based on the production of qualifying components. The IRS released proposed regulations late in 2023 to assist businesses hoping to take advantage of the new credit.

How can a business determine if it qualifies for this new credit?

Section 45X describes the following components that qualify for the credit:

• Solar Energy Components
• Wind Energy Components
• Inverters
• Qualifying Battery Components
• Applicable Critical Minerals

Manufacturers must produce components within the United States or a specified possession of the U.S. (as defined). However, the IRS notes in its proposed regulations that certain elements, materials and sub-components used in the production of eligible components do not need to be from the U.S.

Further, to qualify for the Section 45X credit, manufactured property must be sold to an unrelated person and be produced and sold after December 31, 2022. Components are eligible only if they are part of your trade or business – unlike other credits enacted under the IRA. The credit is reduced to 75% of the components sold in 2030; then to 50% in 2031; and finally drops to 25% in 2032 (excluding critical mineral production, which never phases out).

Please note: if the manufacturing facility was constructed using the 45C Advanced Energy Investment Tax Credit, manufacturers and producers of critical minerals will not qualify for the 45X credit.

Claiming the Credit

For critical minerals, the credit is based on 10% of costs spent to produce qualifying components. It is important for manufacturers to identify which costs are eligible for the Section 45X credit. Final regulations may provide more guidance on these costs but have yet to be released.  

For inverters and components of wind and solar, as well as qualifying components of batteries, the credit is based on a value per unit produced. Manufacturers, in these instances, should reference the 45X regulations.

Realizing the Cash Benefit

Businesses have three options for monetizing the Advanced Manufacturing Production Credit and realizing the cash benefit in a manufacturers’ operations.  

1. The first option (and the default rule) allows recipients to use the tax credit as a “general business credit,” whether the business is a C Corporation or pass-through entity (a Partnership/LLC or S Corporation).
2. Another option includes a direct “sale” of this Section 45X credit. The manufacturer, under this approach, sells the credit directly for cash to another party. It may make economic sense for businesses to choose this sale option when the Section 45X credits exceed its tax liability.
3. The final option is to claim the tax refund over a five-year period. Businesses that follow this route will receive tax refunds equal to the amount of the credit.

Main Takeaways

Manufacturers are presented with a significant opportunity through the Section 45X credit. And, it can be enhanced for critical components – especially critical minerals. Businesses interested in pursuing this tax benefit should note the importance of documenting which production costs are eligible for the credit.  

To learn more about this credit, please contact a Sikich tax advisor. Our professionals can skillfully support your business in implementing complicated tax saving strategies.

About our Authors

Tom Bayer, CPA, CExP, has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He has deep experience providing a range of accounting, tax, and business advisory services to commercial clients across industries.

Larry Johnson, CPA, MST, is a senior tax manager with nearly 40 years of experience closely serving clients with their tax preparation and planning needs. Working with both businesses and tax-exempt organizations, Larry has deep expertise in tax reorganization, consulting and charitable giving/planning.

Jim Brandenburg, CPA, MST, possesses extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.