U.S. Department of Treasury issues final 45X advanced manufacturing production credit rules

On October 25, 2024 the Department of the Treasury and its bureau, the Internal Revenue Service, issued final regulations under the section 45X advanced manufacturing production tax credit. The following provides highlights of key updates in the final regulations as compared to the proposed regulations issued December 20, 2023.

Effective Date: These regulations are generally effective for taxable years ending after October 28, 2024.

Produced by the Taxpayer

The final regulation largely left in place the substantial transformation requirement set forth in the proposed regulations.  The final regulations note that ‘minor assembly,’ however -- replacing the term ‘mere assembly’ that was used in the proposed regulations -- does not satisfy the substantial transformation requirement. Using the new term ‘minor assembly’ to denote activities that do not satisfy the substantial transformation requirement allows Treasury in the final rule to clarify that in limited circumstances, including with solar modules and battery modules using battery cells, the assembly is the activity that primarily produces the components, and thus the substantial transformation requirement is met by the taxpayer that assembles the constituent components to produce the solar module or battery module using battery cells.

In addition, the final regulations clarify that in circumstances where certain eligible components (such as nacelles) have undergone substantial transformation by the taxpayer but require minor assembly by another party to complete (to qualify as eligible components), the taxpayer is still eligible to claim the 45X credit for such components, while the third party that conducted the minor assembly to complete the component is not.

Produced in the United States

The preamble to the final regulation notes that, while section 45X specifically requires domestic production of an eligible component for credit eligibility, it is silent regarding the location of production or sourcing of constituent elements, materials, and subcomponents, and therefore the final rule does not impose a domestic production requirement for constituent elements, materials, and subcomponents.

Sold to an Unrelated Party

The final regulations confirm that there is no requirement under 45X that the component be sold in the U.S. or used in the U.S.; i.e. the credit still applies regardless of the location of the buyer.  The final regulations also clarify the procedural rules for the related person election, where the component is sold to a related entity.

Minerals/Electrode Active Materials Cost of Production

The final regulations adopt a rule allowing taxpayers that produce applicable critical minerals and electrode active materials as specified in the statute to generally include direct and indirect materials costs (as described in Internal Revenue Code section 263A regulations) in production costs, but only if those direct or indirect material costs do not relate to the purchase of materials that are an eligible component at the time of acquisition (such as an electrode active material or applicable critical mineral).

The final regulations also make clear that the cost of such materials (including raw ore) need not be sourced in the U.S. as long as the taxpayer engages in substantial transformation of such materials in the U.S. to produce the applicable critical mineral or electrode active material. If the taxpayer producing the applicable critical mineral or electrode active material also itself extracts/mines the raw ore used in this process, however, it can also include its own costs associated with such extraction, but only to the extent the extraction occurs in the U.S.

In addition, the final regulations clarify that costs of production attributable to an applicable critical mineral or electrode active material may only be counted once with respect to any 45X credit claimed by the taxpayer or any other taxpayer.

Solar Energy Components—in General

The final regulations make several important clarifications with regard to solar components.

To provide parity in the treatment of two-terminal and four-terminal tandem technologies, the final regulations revise proposed § 1.45X–3(b)(1)(ii) to clarify that ‘‘[w]here that cell is sold to a customer who will use it as the bottom cell in a tandem module, its capacity should be measured with the customer’s intended top cell placed between the bottom cell and the one-sun light source.’’

The preamble clarifies that wafers produced by ‘kerfless’ or ‘direct’ wafer technologies fall within the statutory definition of photovoltaic wafers as long as they are produced directly from evaporated solar grade polysilicon.

The final regulations clarify that the term ‘‘polymeric backsheet’’ is limited to backsheets made of polymeric materials that also meet the functional definition provided in section 45X(c)(3)(B)(iii). This excludes most glass backsheets because they are typically not composed of a polymer, but of soda-lime glass.

The final regulations add to the definition of solar grade polysilicon to denote that the required purity standard can be demonstrated by meeting the purity standard in SEMI Specification PV17–1012 Category 1.  The Preamble also notes that Categories 2 through 5 of this Specification do not meet the standard.

For solar cells and modules, the final regulations confirm that ‘capacity,’ for purposes of determining the credit amount, is the nameplate capacity, in direct current watts using Standard Test Conditions (STC), as defined by the International Electrotechnical Commission (IEC), and that flash value capacity cannot be used.

Wind Turbine Components

The final regulations under § 1.45X–3(c) provide that the total rated capacity of a completed wind turbine means, for the completed wind turbine for which a blade, nacelle, offshore wind foundation, or tower was manufactured and sold, the nameplate capacity at the time of sale as certified to the relevant national or international standards, including IEC 61400, American National Standards Institute (ANSI)/American Clean Power Association (ACP) 101–1– 2021, or the Small Wind Turbine Standard (Standard). The final regulations also allow AWEA 9.1–2009 as acceptable wind turbine certification standards.

Inverters

The preamble to the final regulation highlights that inverters such as bidirectional electric vehicle inverters or utility and commercial inverters that are in practice used with battery modules can meet the suitability standard and need not be actually connected to solar modules or certified distributed wind energy systems to qualify for the 45X(c)(2) credit as long as the inverters meet the technical requirements of this section.

We are happy to discuss further the details and implications of these final regulations.

Authored by James M. Wicket and Scott Friedman.