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December 21, 2023

Proposed regulations on advanced manufacturing credits clarify IRC Section 45X provisions

  • The proposed regulations provide taxpayers engaging in eligible production activities with clarity on the eligible components and types of production activities that are eligible for a credit under IRC Section 45X.
  • The proposed regulations also clarify that the definition of "production costs" would exclude direct and indirect material costs when calculating the credit for eligible critical minerals and electrode active materials.
  • Taxpayers claiming a credit must retain documentation that was used to determine the eligibility of their components, which includes, in some cases, testing of products based on industry-standard requirements as well as certifications.
  • The proposed regulations also clarify the rules on related-party sales integrating eligible components into other products and components, and the definition of an eligible producer under contract manufacturing arrangements.

In proposed regulations (REG-107423-23), the Treasury Department and IRS outlined the rules for claiming an IRC Section 45X advanced manufacturing production credit, which was created by the Inflation Reduction Act. The credit is intended to incentivize the domestic production of solar and wind components, inverters, battery components and applicable critical minerals. The proposed regulations mostly conform to IRC Section 45X and:

  • Specify which activities would qualify as producing eligible components
  • Clarify the rules on vertically integrated manufacturing and sales between related parties
  • Clarify procedures for electing to treat related-party sales the same as sales to an unrelated party
  • Establish rules on eligible components produced under contract manufacturing arrangements
  • Provide rules for calculating the credit and the recordkeeping and reporting requirements for eligible components and applicable critical minerals

The proposed regulations would apply to eligible components for which production is completed and sales occur after December 31, 2022, and during tax years ending on or after the date the final regulations are published in the Federal Register.


IRC Section 45X provides a new production tax credit (PTC) for each eligible component that is produced by the taxpayer in the United States and sold to an unrelated person during that tax year. To qualify, the taxpayer must be in the trade or business of producing and selling the eligible component. The term "eligible component" generally means (1) any solar energy component (such as photovoltaic cells, photovoltaic wafers, solar grade polysilicon, etc.), (2) any wind energy component, (3) an inverter (as described in the IRA), (4) any qualifying battery component (including battery cells and modules) and (5) any applicable critical mineral. Under the related-person election in IRC Section 45X(a)(3)(B), a taxpayer can elect to treat a related person as an unrelated person for purposes of selling eligible components if certain conditions are met.

The IRC Section 45X credit amount varies widely, depending on the eligible component. For example, for thin film photovoltaic cell or crystalline photovoltaic cell, the rate is 4 cents multiplied by the capacity of the cell. Conversely, for a photovoltaic wafer, the credit is $12 per square meter. For production unrelated to critical minerals, the IRC Section 45X PTC phases out in the following manner: (1) 75% for eligible components sold during 2030, (2) 50% for eligible components sold in 2031, (3) 25% for eligible components sold in 2032, and (4) no credit for components sold in 2033 or after.

Proposed regulations

The proposed regulations generally follow the provisions of IRC Section 45X and define how to interpret and implement those provisions.

General rules (Prop. Treas. Reg. Section 1.45X-1)

Produced by the taxpayer

The proposed regulations define many of the terms in IRC Section 45X, including the definition of "produced by the taxpayer" for 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 taxpayer claiming the credit must (1) directly produce the activities bringing about the substantial transformation that results in the eligible component, and (2) sell that component to an unrelated person. If an eligible component is produced under a contract manufacturing arrangement, the parties to the contract may determine by agreement who may claim the IRC section 45X credit. In the absence of such agreement, the contract manufacturer would claim the credit.

Prop. Treas. Reg. Section 1.45X-1(c) defines "produced by the taxpayer" 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 mere assembly or superficial modification of the elements, materials, or subcomponents."

The definition would exclude partial transformation, mere assembly or superficial modification. The proposed regulations give examples to illustrate how to interpret these terms.

The proposed regulations also include a special rule for solar-grade polysilicon, electrode active materials and applicable critical minerals. For these components, the term "produced by the taxpayer" means "processing, conversion, refinement, or purification of source materials, such as brines, ores, or waste streams, to derive a distinct eligible component."

Domestic production requirement

The proposed regulations specify that constituent elements, materials and subcomponents used in the production of eligible components are not subject to the domestic production requirement.

Anti-abuse rule

The proposed regulations also contain an anti-abuse rule under Prop. Treas. Reg. Section 1.45X-1(i)(1), which would make the IRC Section 45X credit unavailable in "extraordinary circumstances" if it is shown that the primary purpose of producing and selling the eligible component is to obtain the benefit of the IRC Section 45X credit in a "wasteful" manner, such as discarding, disposing of or destroying the eligible component without putting it to productive use.

Proposed rules for sales to unrelated persons (Prop. Treas. Reg. Section 1.45X-2)

Among other things, the IRC Section 45X credit requires the eligible component to be sold to an unrelated person. Unrelated persons are those that would not be treated as a single employer under IRC Section 52(b). For purposes of IRC Section 45X, however, a taxpayer can make a related-person election to treat the sale of an eligible component to a related person like a sale to an unrelated person, if the component is sold to the unrelated person by a person who is a related to the taxpayer. The proposed regulations give the following example: "X and Y are members of a group of trades or businesses under common control under [IRC S]ection 52(b), and thus are related persons under [IRC S]ection 45X(d)(1). Each of X and Y has a [calendar-year] [tax] year. Z is an unrelated person. X is in the trade or business of producing and selling solar modules. X produces and sells solar modules to Y in 2023. Y sells the solar modules to Z in 2024. X may claim a[n] [IRC S]ection 45X credit for the sale of the solar modules in 2024, the [tax] year of X in which Y sells the solar modules to Z."

Under Prop. Treas. Reg. Section 1.45X-2(d)(2), the related-person election must be made annually on the taxpayer's timely filed original federal income tax return (including extensions and under any other guidance). A separate related-person election must be made for each sale made by the taxpayer's eligible trades or businesses. A related-person election applies to all sales to related persons (including between members of the same consolidated group) of eligible components produced by the taxpayer during the tax year for which the related-person election is made and is irrevocable for that tax year.

The proposed regulations clarify that a taxpayer is treated as having produced and sold an eligible component to an unrelated person if the component is "integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person." Additionally, eligible components integrated into other distinct products and components, including those that are ineligible under IRC Section 45X, are eligible for a credit under IRC Section 45X in the tax year the product or component is sold.

Definition and credit amounts for certain eligible components (Prop. Treas. Reg. Section 1.45X-3)

Prop. Treas. Reg. Section 1.45X-3 defines and provides credit amounts for certain eligible components, including solar energy components, wind energy components, inverters and qualifying battery components, as well as substantiation requirements. For example, the proposed regulations specify items such as:

  • Photovoltaic cells (4 cents multiplied by the capacity of the cell)
  • Photovoltaic wafer ($12 per square meter)
  • Structural fastener ($2.28 per kilogram)
  • Wind turbine blades (2 cents multiplied by the total rated capacity of the completed wind turbine)
  • Wind towers (3 cents multiplied by the total rated capacity of the wind turbine)
  • Inverters (varies depending on whether they are central, commercial, residential, etc.)
  • Electrode active materials for battery components (10% of the production cost)
  • Battery cells ($35 multiplied by the capacity of the battery cell, subject to certain limitations)

The proposed regulations explain that a material qualifying as an electrode active material and an applicable critical material is eligible for the IRC Section 45X credit. A taxpayer could claim the credit either as an electrode active material or an applicable critical material, but not both.

The proposed regulations also clarify that eligible "battery modules" must be manufactured in an end-use configuration. An end-use configuration is a product that serves a specified end-use. For example, a credit would be available for the production and sale of a battery pack used in electric vehicles, but might not be available for the modules that go into the pack, as these are not in an end-use configuration.

The phase-out rules for eligible components in the proposed regulations confirm those in IRC Section 45X and are based on the year the component is sold, not produced: (1) 75% for eligible components sold during 2030, (2) 50% for eligible components sold in 2031, (3) 25% for eligible components sold in 2032 and (4) no credit for components sold in 2033 or after. The phase-out rules would not apply, however, to applicable critical minerals.

A facility receiving an allocation and claiming a credit under IRC Section 48C generally could not also receive an IRC Section 45X manufacturing production tax credit for components produced at the facility. The proposed regulations supersede part of Notice 2023-44, but largely adopt the same definition of a "facility," which had been defined as all tangible property that makes up an independently functioning production unit and allowed a facility with different independently functioning production units to claim the IRC Section 45X tax credit for units that were not receiving the IRC Section 48C credit (see Tax Alert 2023-1012). Prop. Treas. Reg. Section 1.45X-1(g)(3)(i) defines an IRC Section 48C facility to include all eligible property included in a qualifying advanced energy project for which a taxpayer receives and claims IRC Section 48C credits after August 16, 2022.

Definition and credit amounts for applicable critical minerals (Prop. Treas. Reg. Section 1.45X-4)

The proposed regulations would apply to the applicable critical minerals used in the eligible components. The applicable critical minerals are listed and defined in Prop. Treas. Reg. Section 1.45X-4(b). The proposed regulations also include certain modifications to the definitions of critical minerals, such as the inclusion of "commodity-grade" aluminum, which is defined as aluminum in a form that is sold on international commodity exchanges, including aluminum that is 99.7% aluminum by mass.

The credit is 10% of the costs incurred by the taxpayer in producing the materials. The proposed regulations define the production processes for the applicable critical minerals, such as conversion (a chemical transformation from one species to another) and purification (increasing the mass fraction of a certain element).

The proposed regulations define production costs as costs under Treas. Reg. Section 1.263A-1(e), except for direct and indirect material costs, including costs related to extraction or acquisition of raw materials. Costs would have to be paid or incurred under IRC Section 461 to be eligible. Additionally, only costs related to the production of the eligible critical mineral would be considered eligible. Subsequent costs, such as those related to the incorporation of a critical mineral into another product, would not be taken into account when calculating a credit under IRC Section 45X.

A similar definition has been applied for production costs for electrode active materials. Specifically, the cost of acquiring the raw material used to produce the electrode active material, the cost of materials used for conversion, purification, or recycling of the raw material, and other material costs related to the production of the electrode active material would not be taken into account for purposes of computing the IRC Section 45X tax credit.

Taxpayers would have to substantiate that the applicable critical minerals meet the requirements of IRC Section 45X(c)(6) by providing a certificate of analysis to the person buying the applicable critical mineral.

The phase-out rules would not apply to the applicable critical mineral requirements.


The highly anticipated proposed regulations provide several important clarifications for taxpayers with IRC Section 45X eligible production activities. For taxpayers expecting to claim a credit based on production costs, the exclusion of direct and indirect material costs is likely to impact any anticipated credit amounts, as this term was previously undefined. For taxpayers involved in the production of critical minerals, the exclusion of costs for the extraction or acquisition of the raw materials is not expected to be well received.

Conversely, clarifications regarding the testing standards for battery cells and modules, as well as the broadening of the definition of certain critical minerals, is likely to create IRC Section 45X credit opportunities for those that previously determined they were ineligible based on a plain reading of the statute.

Extending the vertically integrated manufacturing exception to ineligible components provides taxpayers manufacturing eligible components but integrating those components into other products with an opportunity to claim a credit based on the sale of the product into which the components were integrated. Whether such a situation was allowable was previously unclear based on the language in IRC Section 45X.

Finally, taxpayers currently engaged in or contemplating a contract manufacturing arrangement for eligible components should seek to include language in those contracts to clarify which party is eligible to claim the credit under IRC Section 45X.


Contact Information
For additional information concerning this Alert, please contact:
National Tax
   • Greg Matlock, EY’s Global Energy & Resources Industry Tax Leader (
Tax Credit Investment Advisory Services
   • Michael Bernier (
Credits and incentives and sustainability
   • Paul Naumoff (
   • Akshay Honnatti (
   • David Camerucci (
National Tax – Accounting Periods, Methods, and Credits
   • Alison Jones (
   • Sam Weiler (
   • Susan Grais (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor