TAKEAWAYS

• The proposed regulations provide important clarity on the distinction between substantial and superficial modification for purposes of determining eligible components produced by the taxpayer, along with guidance as to “production costs incurred” for those instances where the credit is based on a percentage of such costs.
• The proposed regulations include a related person election, which allows a taxpayer to treat sales to a related person as being sales to an unrelated person for purposes of the IRC 45X credit.
• The proposed regulations address the scheduled phaseout beginning after December 31, 2029, for all components that are not applicable critical materials, at which point the credits decrease 25% per year until their expiration in 2033.

As amended by the Inflation Reduction Act of 2022, section 45X of the Internal Revenue Code (IRC) grants an advanced manufacturing production credit (AMPC) to manufacturers who produce certain clean energy components in the United States. On December 14, 2023, the Internal Revenue Service (IRS) published proposed regulations [REG-107423-23] in the Federal Register providing further guidance on the AMPC. The proposed regulations supplement Notices 2022-27, 2023-18 and 2023-44 that were published on October 14, 2023, March 6, 2023, and June 20, 2023, respectively.

The APMC is available for eligible components produced and sold after December 31, 2022. Eligible components include solar and wind components, inverters, some battery components and applicable critical minerals. In addition to being produced in the United States, the components must be sold to an unrelated party in the course of the taxpayer’s trade or business. The credit amounts available under IRC section 45X vary based on the type of eligible component that is produced and sold by the taxpayer.

High-Level Overview of the Proposed Regulations

The proposed regulations address several open issues relating to the AMPC, notably including the difference between substantial and superficial transformation. The proposed regulations are organized into four sections, and the points below contain a high-level overview of each section:

§1.45X-1: General Rules

• The proposed regulations define the term “produced by the taxpayer” to mean “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 modification of the elements, materials, or subcomponents.” Certain technical engineering and physical requirements or specifications must be met. The proposed regulations contain examples illustrating the definition, although the examples tend to focus more on what is not substantial transformation.
• The proposed regulations clarify that manufacturers may claim the AMPC for all the eligible components it incorporates into the finished product.
• The proposed regulations apply the “produced by the taxpayer” definition differently for solar grade polysilicon, electrode active minerals and applicable critical minerals. Specifically, in those cases, the definition refers to processing, converting, refining or purifying.
• The proposed regulations provide guidance as to which taxpayer is eligible to claim the AMPC in a contract manufacturing arrangement, including a special rule which allows taxpayers to agree which party will claim the AMPC for eligible components produced under such contract. Absent such an agreement, typically only the taxpayer who directly performs the production activities which lead to substantial transformation is eligible to claim the credit.
• For purposes of the domestic production requirement of IRC section 45X, the proposed regulations state that eligible components must be produced within the United States, as defined in section 638(1) of the Code, or a U.S. territory, which is given the meaning of the term“possession” under IRC section 638(2). The domestic production requirement does not apply, however, to constituent elements, materials or subcomponents.
• The proposed regulations adopt the definition of trade or business used in applying IRC section 162.
• The proposed regulations address the overlap between the AMPC and the qualifying advanced energy project credit under IRC section 48C. Eligible components must be produced at an IRC section 45X facility, as defined by the proposed regulations. Additionally, an eligible component does not include any component produced at a facility if the basis of any property that is part of the “production unit” of the facility is eligible property that is taken into account for purposes of the credit allowed under IRC section 48C after August 16, 2022. A number of examples are included in the proposed regulations.
• A general anti-abuse rule is included in the proposed regulations for sales of eligible components that are determined to be inconsistent with the purposes of IRC section 45X; that is, the strengthening of U.S. supply chains. Under the general anti-abuse rule, the AMPC would be denied if, based on a consideration of all the facts and circumstances, the primary purpose of the production and sale of an eligible component is to obtain the benefit of IRC section 45X credit in a manner that is wasteful, such as discarding, disposing of or destroying an eligible component without putting it to a productive use.

§1.45X-2: Sales to Unrelated Persons through Related Persons

The proposed regulations provide definitions of the following terms: person, related person and unrelated person.

• The proposed regulations allow some sales by a related person to an unrelated person to qualify as a sale to an unrelated person for purposes of IRC section 45X.
• The proposed regulations also allow for taxpayers to make a related person election where actual sales to related persons will be treated as sales to unrelated persons. Under an anti-abuse rule, however, a related person election would not be allowed for sales that are considered wasteful or that involve defective components.
• A taxpayer who produces and sells eligible components to a related person who integrates, incorporates or assembles such component to a different eligible component is treated as selling that component to an unrelated person only when the related person makes a sale of those components to an unrelated person.
• The related person election must be made annually and applies for all sales during that year to a related person on a collective trade or business basis.

§1.45X-3: Definitions and Credit Amounts for Certain Eligible Components

• The proposed regulations provide detailed definitions, rules for determining the credit amount and documentation requirements for solar energy components, wind energy components, inverters and certain battery components.
• The proposed regulations address the scheduled phaseout of the AMPC beginning December 31, 2029, for all eligible components that are not applicable critical materials. Specifically, the relevant phase out percentages are: 75% for eligible components sold during calendar year 2030; 50% for eligible components sold during calendar year 2031; 25% for eligible components sold during calendar year 2032, and 0% for eligible components sold after calendar year 2032.

§1.45X-4: Definitions and Credit Amounts for Applicable Critical Minerals That Are Eligible Components

• The proposed regulations generally adopt the definition of applicable critical materials provided in IRC section 45X, with some additional clarity as to the definition of graphite and aluminum.

Final Points

The proposed regulations include important guidance for manufacturers of clean energy components and producers of critical minerals looking to take advantage of the AMPC. The proposed regulations will apply to eligible components for which both production is completed, and the relevant sales occur, after December 31, 2022, and during taxable years ending on or after the date of publication of the final regulations in the Federal Register. Comments on the proposed regulations are invited until February 13, 2024.

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