The passage of the Inflation Reduction Act (IRA) this past August saw the introduction of a number of new and expanded tax credits aimed at onshoring American manufacturing. These changes in the tax code represent opportunities for manufacturing within critical industries, in particular those industries that are key players in the administration's goal to address climate change. The incentives range from tax credits directly to manufacturers of certain equipment to incentives for taxpayers to purchase equipment from American manufacturers.
The Treasury Department and Internal Revenue Service are currently working to implement the changes to the tax code, as many of them will go into effect on January 1, 2023. Treasury and the White House have stated that they will work with industry to ensure that the regulations have a broad consensus and can benefit both large and small manufacturers.
We expect the tax incentives described below will stimulate growth in domestic manufacturing of renewable energy components and facilitate financings and joint ventures that utilize such tax incentives.
Section 45X Advanced Manufacturing Tax Credit
A new production tax credit that was introduced with the IRA, the Section 45X Advanced Manufacturing Tax Credit, is a credit for manufacturers of eligible components produced by a taxpayer within the United States and sold to an unrelated party. Eligible components include components within wind, solar, and battery projects, such as PV cells, PV wafers, solar modules, blades, nacelles, inverters, and battery cells and modules, among many others. Credit rates vary depending on the component, with some rates depending on the cost of production and others based on certain capacity factors.
The tax credits are available to the taxpayer who manufacturers the equipment in the United States or a possession of the United States. Credits are available on an annual basis for eligible components sold beginning in 2023, going through 2032 (with a phaseout beginning in 2030).
Section 48C Advanced Energy Project Investment Tax Credit
The IRA expanded a tax credit that provides incentives for solar manufacturers, among other clean energy producers, for purchasing and commissioning property to build a manufacturing facility before January 1, 2025. The credit was expanded under the IRA and includes additional types of qualified investments for up to $10 billion in credits. Section 48C offers a tax credit up to 30% on investments into production facilities. Qualified facilities may elect to claim the Section 48C investment tax credit in lieu of the Section 45X production tax credit.
Credit Adders for Domestic Content
The investment tax credit under Section 48 of the Code and the production tax credit under Section 45 of the Code provide taxpayers with credits for certain renewable energy facilities and the production of electricity from such facilities. The IRA includes adders for both of these credits if (i) 100% of any steel or iron that is a component of the facility was produced in the United States, and (ii) 40% of manufactured products that are components of the facility were produced in the United States. These domestic content adders will provide incentive for renewable energy project developers to buy equipment manufactured in the United States.
See our prior summary of the domestic content adder and IRA changes for the Section 48 and Section 45 credits here.
Direct Pay and Transfer of Credit
For taxpayers that don't have the tax appetite to claim the credits on their returns directly, the IRA enacted two new provisions that may help taxpayers take advantage of these credits. In the case of the Section 45X production tax credit, manufacturers can receive a direct cash payment from Treasury for 45X production tax credits for the first five years for which the manufacturer would otherwise have been eligible for the credit. This five-year limitation does not apply if the manufacturer is a tax-exempt organization. For the Section 48C investment tax credit, manufacturers can receive a direct cash payment only if they are tax-exempt organization.
For the Section 45X production tax credit and the Section 48C investment tax credit, manufacturers can also elect to transfer in exchange for cash all or a portion of credits for a given year to an unrelated eligible taxpayer. Cash payments would not be included in the transferor's taxable income.
Implementation
These provisions are currently undergoing the rule-making process within the Department of Treasury. On September 12, 2022, President Joe Biden signed an Executive Order (EO) designating the White House Office on Clean Energy Innovation and Implementation to implement the energy and infrastructure provisions of the IRA. The EO also established a National Climate Task Force, which will play a key role the in law's implementation. The Treasury Department released six notices with respect to various IRA provisions, including manufacturing credits, domestic content adders, direct pay, and transferability, on which Treasury is requesting comments on technical language and interpretation of the new law. The Treasury Department has indicated that it expects to provide rules with respect to some of these issues by the end of this year.
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