Taxpayers Find Helpful Clarity in Final 45X Regulations, as Critical Minerals and Electrode Active Material Producers Strike Gold

On October 24, 2024, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) issued final regulations (the “Final 45X Regulations”) regarding the Advanced Manufacturing Production Tax Credit (the “AMP Credit”) under section 45X of the Internal Revenue Code of 1986, as amended (the “Code”). These Final 45X Regulations provide useful clarifications and important changes to regulations previously proposed by Treasury on December 15, 2023 (the “Proposed Regulations”).¹

Perhaps most importantly, the Final 45X Regulations provide a substantial uplift to domestic manufacturing and extraction of critical minerals and electrode active materials by substantially expanding the costs includable in the calculation of the AMP credit for these components. The Final 45X Regulations also revise and clarify certain issues for taxpayers and provide various examples to help taxpayers understand these important rules.  We have summarized below some of the more notable provisions in the Final 45X Regulations.

Critical Minerals and Electrode Active Materials

Generally, a taxpayer is eligible to receive the AMP Credit for any “eligible components” that are produced in the United States by such taxpayer and sold to an unrelated person. “Eligible components” include close to two dozen different types of components and range from solar-grade polysilicon to solar modules, electrolytes to battery modules, micro- to utility-scale inverters, offshore and onshore wind turbine components, approximately fifty critical minerals, and electrode active materials.

The AMP Credit for critical minerals and electrode active materials is calculated based on the “costs incurred” by the taxpayer to produce the critical mineral or electrode active material.² In making this calculation, the Proposed Regulations excluded all direct and indirect material costs, including extraction costs, and costs related to reagents and industrial chemicals consumed in refining and other processes. The Final 45X Regulations dramatically reverse course by instead permitting taxpayers to include substantiated direct and indirect material costs and domestic extraction costs for raw materials (if the extraction costs are paid or incurred by the taxpayer claiming the AMP Credit related to such raw materials). Obviously, these changes are likely to substantially increase the AMP Credit for taxpayers producing critical minerals and electrode active materials.

However, in order to avoid duplicative credits and abuse, under the Final 45X Regulations, taxpayers may not include the cost of other “eligible components” that are consumed in the production of an applicable critical mineral or electrode active material.³

In addition to other record keeping requirements, to include these expanded costs in AMP Credit calculations, taxpayers must substantiate such costs using certificates from suppliers, signed under penalty of perjury, stating that the supplier is neither claiming the AMP Credit with respect to any of the material acquired by the taxpayer nor is it aware that any prior supplier in the chain of production of such material claimed an AMP Credit for the material.

Definition of “Production”

The Final 45X Regulations largely adopt the Proposed Regulations definition of “production” as “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 minor assembly or superficial modification of elements or subcomponents….”⁴  However, Treasury and the Service specifically declined to define production by reference to the concept for capitalization found in section 263A of the Code.  The preamble explains that the definition of “produced by the taxpayer” is meant to broadly apply and provide flexibility.

The Final 45X Regulations also do not use the term “mere assembly” (when describing activities that do not qualify as production) and instead use the term “minor assembly.”  This subtle, but important, detail recognizes that production activities may include assembly – especially for battery modules and solar modules.⁵ The rules also reiterate that the taxpayer claiming the AMP Credit “must be the taxpayer that directly performs the production activities that bring about a substantial transformation ….”⁶

With respect to locational concerns regarding sourcing and sales, the Final 45X Regulations remove any doubt by directly stating that materials and subcomponents used to produce an eligible component need not be domestically manufactured and that eligible components need not be manufactured for sale or use within the United States.

Wind Repowering

Treasury explicitly notes that repowering a nacelle may constitute production of an eligible component, but it remains a facts-and-circumstances analysis.  If a taxpayer “manufactures and installs a new drivetrain and associated subcomponents within housing atop a wind tower, . . . that taxpayer will have produced an eligible nacelle.”  However, repowerings with a less expansive scope (for example, replacing a controller) may not amount to the substantial transformation of the new and existing components of the nacelle, and the taxpayer may not be treated as producing an eligible nacelle in such repowering.

Interactions between Sections 45X and 48C

Under Section 45X, the AMP Credit is not available for components “produced at a facility if the basis of any property which is part of such facility is taken into account for purposes of the credit allowed under section 48C [of the Code] after August 16, 2022” – that is, property that would otherwise qualify as an eligible component for an AMP Credit will not be entitled to an AMP Credit if such components are produced at a “section 45X facility” that includes “section 48C property.”⁷

The Final 45X Regulations clarify that a “section 45X facility” for this purpose includes only the independently functioning tangible property used by the taxpayer that is necessary to produce the relevant component. Accordingly, tangible property used to produce a subcomponent, but that is not otherwise used to produce an eligible component, is not part of a section 45X facility where the subcomponent is substantially transformed into an eligible component. Any 48C credit claimed on such tangible property will not taint the availability of an AMP Credit.⁸

Related Party and Anti-Abuse Rules

Generally, Section 45X is only available for eligible components produced and sold to an unrelated person.  However, there are a number of exceptions to this rule which permit sales to related persons (including circumstances in which the related person resells the component to an unrelated person or where a special election is made), so long as the eligible component is not put to an improper use or is defective.  The Final 45X Regulations clarify that the determination of whether a sale has occurred is based on general tax principles and that defects arising after the deemed sale are not defective components for purpose of this rule.

Technical Clarifications and Certifications

The Final 45X Regulations and its preamble include numerous technical updates and clarifications to certain eligible components.  A few of these are noted below:

• SEMI Specification PV17-1012 Category 1 will determine whether the silicon has met the purity requirements to be treated as solar grade polysilicon;
• The capacity of photovoltaic cells, if sold for use as a bottom cell in a tandem module, should be measured with the customer’s intended top cell placed between the bottom cell and the sunlight source;
• Inverters used for sources other than solar modules or distributed wind may still be treated as an eligible component if the inverter is “suitable to convert direct current electricity from one or more solar modules or certified distributed wind energy systems to alternating current electricity”; and
• The certification standards for wind turbines now includes AWEA 9.1-2009 and ANSI/ACP 101-1-2021.

¹ Proposed Regulation REG107423-23 (available here).  Our prior coverage of the proposed regulations regarding the 45X Credit can be found here.

² For other eligible components, the AMP Credit varies, but may be based on a dollar per kilogram amount (for example, the AMP Credit amount for a torque tube is $2.28 per kilogram) or a dollar per unit of capacity of the eligible component (for example, the AMP Credit amount for a solar module is equal to $0.07 per direct current watt of capacity of such module).

³ An example in the Final 45X Regulations provides that a taxpayer who produces battery-grade nickel salts may not include the cost of procuring nickel at 99% purity level (that is, nickel that meets the definition of an “eligible component”), but could include the cost of procuring nickel at 90% purity level because it does not meet the definition of an “eligible component.”

⁴ However, the Final 45X Regulations clarify the scope of this definition by including “both primary and secondary production.”  Primary production involves producing an eligible component using non-recycled materials, while secondary production involves producing an eligible component using recycled materials. The addition of secondary production has clear implications for the AMP Credit for critical mineral and electrode active material production. 

⁵ The Final 45X Regulations clarify that, where multiple points in a battery module supply chain may be eligible for the AMP Credit for the production of a battery module using battery cells, the first module produced that meets the requirements of Section 45X is the only eligible component that generates the AMP Credit.

⁶ The Final 45X Regulations discuss at length how this requirement may be satisfied by certain contract manufacturing arrangements wherein a contractor directly performs the production activities on the taxpayer’s behalf. 

⁷ Section 45X(c)(1)(B); Section 48C, the Qualifying Advanced Energy Project Credit, provides an investment tax credit for certain manufacturing and critical mineral processing facilities. 

⁸ However, if a subcomponent is of a type that the taxpayer must produce for the resulting eligible component to be considered produced by the taxpayer, then the equipment necessary to produce such subcomponent or other property must be included in the section 45X facility. For example, the rules require a single manufacturer to produce a photovoltaic wafer through formation of an ingot from polysilicon and subsequent slicing. Thus, the section 45X facility with respect to the photovoltaic wafers would include any equipment that is used to produce the ingot and any equipment that is used to perform the subsequent slicing. If the equipment used to produce the ingot is section 48C property, the AMP Credit will not be allowed for the photovoltaic wafers generated at the section 45X facility.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.