Claiming the Advanced Manufacturing Production Credit
by Sudarsanan Sivakumar, Law Clerk
This is a proposed regulation that is not in effect yet. This blog states what compliance must be prepared for by a Manufacturer of clean energy so that they would be able to qualify to get a tax credit once this regulation comes into effect.
Do you Manufacture clean energy components? Then you may be able to qualify to claim a production tax credit.
Section 45X is a general business credit under Internal Revenue Code Section 38. The proposed regulations, issued by the IRS cover eligible components such as solar and wind energy, inverters, qualifying battery components, and applicable critical minerals. These regulations allow eligible taxpayers who produce and sell eligible components to an unrelated person in the taxpayer’s trade or business to claim the benefit of an advanced manufacturing production credit; it also include making elective payments or credit transfer elections.
Section 45X(d)(2) provides that sales of eligible components are taken into account under Section 45X only for eligible components that are produced within the United States (including continental shelf areas described in Section 638(1) of the Code), or a U.S. territory (including continental shelf areas described in Section 638(2)). Therefore, if you manufacture these components within the U.S. and you sell to an unrelated person in the taxpayer’s trade or business, then you can likely claim the tax credit.
If you manufacture these products outside the U.S., you may still be able to claim the Section 45X tax credit for your components by fulfilling the Substantial Transformation Test. The principle of “Substantial Transformation” is used to determine the country of origin of a product (this can be both a component and an end product) when it is comprised of different input components (see Federal Acquisition Regulations Part 25.001(2)). “Substantial Transformation” refers to a significant change in the form, nature, or character of a product, resulting in an increase in its value by a significant amount or percentage compared to its original value when it was first exported. (FAR 25.003). In essence, a Substantial Transformation results in the item becoming a new article of commerce and end product, usually with a different name, character and distinct use. For more on the Substantial Transformation, check out our prior blog post.
A taxpayer would be able to claim the Section 45X tax credit by making the components eligible through substantially transforming the foreign manufactured components into a new and different eligible component.
However, the term produced by a taxpayer does not include ‘Partial’ Transformation or a Minor Assembly or Superficial Modification. Proposed § 1.45X–1(c)(1)(i) would state that partial transformation that does not result in a Substantial Transformation of inputs into a complete and distinct eligible component and is not included in the definition of “produced by the taxpayer.” Similarly, a minor assembly or superficial modification will not rise to be an eligible component to claim a tax credit under this regulation.
This blog is only a brief outline of the regulation. To know more about solar grade polysilicon, electrode active materials, and applicable critical minerals or contract management arrangement, see the special rules at: Federal Register :: Section 45X Advanced Manufacturing Production Credit.
Do you want to know if your clean energy components are substantially transformed to claim the benefit of this regulation? Feel free to contact the author or any experts at Centre Law and Consulting, LLC.