Treasury Department Releases Proposed Guidance Related to the 45X Tax Credit for Clean Energy Manufacturing Facilities
- Confirms that eligible components must be produced within the United States or territories. Also affirms that components must be sold in order to be valid claim.
- IRS has decided to allow flow batteries and thermal batteries to qualify.
- The release of guidance opens a 60-day comment period (deadline February 13, 2024). While the Administration is unlikely to make significant changes to the proposal before finalizing, there is an opportunity to work with the Administration to seek clarifications if your technology’s applicability remains uncertain.
When Congress passed the Inflation Reduction Act of 2022 (IRA), a primary goal of the Biden Administration and Democrats in Congress was to create incentives that would onshore manufacturing of key industries related to the clean energy transition. The primary manifestation of this objective was the creation of the Advanced Manufacturing Production Tax Credit (Section 45X in the Internal Revenue Code). Section 45X provides a tax credit for the manufacturing of components related to the battery, solar, and wind industries.
Additionally, recognizing that most of the innovation in these sectors comes from emerging companies without a significant, or any, tax base upon which to monetize credits, the credit provides the taxpayer with the option of utilizing something called “Direct Pay.” Direct Pay allows eligible companies to opt to receive this tax credit as a direct cash payment rather than needing to apply the credit against their income tax owed. As a result, instead of needing tax liability to utilize the credit, taxpayers can choose to directly receive a payment from the Treasury in amount equal to the credit value.
On December 14, the Treasury Department released initial guidance for the implementation of Section 45X. Interested stakeholders have until mid-February to provide feedback to the Administration, with the aim to have the proposal finalized by mid-to-late 2024.
Section 45X Summary
The Section 45X tax credit subsidizes the manufacturing of a range of key components for the battery, solar and wind industries. The full list is here with a breakdown below of manufacturing incentives:
|Electrode Active Materials
|10% of the cost of production
|$10 kWh/$45 kWh if no cell
|Applicable Critical Mineral
|10% of the cost of production
|$3 per kilogram (kg)
|$12 per square meter (m2)
|11¢ per Wac
|6.5¢ per Wac
|$2.28 per kg
Summary of Key Sections
Section 45X-1(c) Definition of Produced by Taxpayer: The term “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 that is functionally different from that which would result from mere assembly or superficial modifications.
Contract Manufacturing and Eligibility: The taxpayer claiming the credit must be the entity performing the actual production. If a contract manufacturer is used for production, that entity is eligible.
Section 45X-3(a) Eligible Components – Perhaps the most anticipated section of the guidance was determining which technologies the IRS would deem eligible for the credit, as the Inflation Reduction Act deferred these definitions. Again, you can refer to the full guidance for a comprehensive list, but we found the following interest and of critical importance to our clients:
(d) Inverters – an end product that is suitable to convert DC electricity from one or more solar modules or certified distributed wind energy systems into AC electricity. IRS adds that an inverter includes a central inverter, commercial inverter, distributed wind inverter, microinverter, or residential inverter.
Guidance also “clarifies” that direct current optimized inverter system (DC optimizers) may qualify as a microinverter. However, to qualify, the DC optimizer must be sold with the inverter as “a single end product.”
(e) Qualifying Battery Components – electrode active materials, battery cells, or battery modules. Further, it defines each as following:
- Electrode Active Materials: cathode electrode materials, anode electrode materials, and electrochemically active materials that contribute to the electrochemical processes necessary for energy storage.
- Cathode electrode materials: the cathode of a commercial battery technology, such as binders, and current collectors (such as cathode foils).
- Anode electrode materials: anode of commercial battery technology, including anode foils.
- Electrochemically active material: active materials that contribute to the electrochemical processes necessary for energy storage means battery-grade materials that enable the electrochemical storage within a battery technology.
- Battery grade materials: processed materials found in a final battery cell or an analogous unit, or the direct battery-grade precursors to those processed materials.
Note: For the above, eligible taxpayers are entitled to a tax credit in the amount of 10 percent of the production costs.
- An electrochemical cell comprised of one or more positive electrodes and one or more negative electrodes;
- An energy density of at least 100-watt hours per liter, and;
- Is capable of storing at least 12-hours of energy.
Note: For the above, eligible taxpayers are entitled to a tax credit in the amount of $35 multiplied by the capacity of the cell.
Section 45X-3(e)(4)(i)(B) Definition of modules with no battery cells. Defined as a product with a standardized manufacturing process and form that can store and dispatching useful energy, that contains an energy storage medium that remains in module and that is not a custom-built electricity generation or storage facility. Guidance notes that flow batteries and thermal batteries are eligible.
Areas where Treasury is Seeking Comment
While we do expect that proposed guidance to remain largely intact, there are areas where the Administration seeks feedback from the public. For these questions, we can reasonably expect the guidance to be altered in its final form.
Specific End Use: For modules, guidance does not permit credit for modules not designed for a specific end use. Treasury seeks feedback on this restriction.
Extraction: Under the proposal, costs related to the extraction of raw materials is not an eligible cost to produce electrode active materials. The Administration is seeking feedback from the public whether these costs should be considered and how extraction should be defined.
Comments can be submitted electronically using the rulemaking portal.
 Guidance adds electrolytes, catholytes, anolytes and separators as eligible.
38 North Insight
Submitting a comment in response to the Administration’s proposed guidance for Section 45X is an integral part of the process. Even if your technology is comfortably within the boundaries established in this proposal, we advise that you submit a comment letter to the Treasury Department supporting the way in which the policy was developed.
The Administrative Procedures Act requires federal agencies to consider input from the public before finalizing the rules. Therefore, should the government receive strong feedback opposing a key phrase, or definition, and no documented support, it might feel compelled to make a substantive change that could negatively impact your business. As a result, it is just as important that they have comments on the record noting areas of agreement as it is to submit when your company opposes the proposal or is seeking clarification.