Summary
On October 24, 2024, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations (the Final Regulations) regarding the advanced manufacturing production credit under Section 45X (the 45X Credit) of the Internal Revenue Code of 1986, as amended (the Code) pursuant to changes authorized by the Inflation Reduction Act of 2022 (IRA). The Final Regulations provide specific updates to the proposed rules regarding the production of eligible components and applicable critical minerals, treatment of indirect and direct materials costs, substantiation requirements for credit eligibility, and revised definitions relevant to taxpayer production activities. Please see the previous alert published by Wilson Sonsini on December 20, 2023, for an in-depth discussion of the proposed rules for the 45X Credit.
Key Changes
The Final Regulations:
- update definitions of extraction activities and production activities of eligible components;
- clarify taxpayer production costs incurred with respect to electrode active material and applicable critical minerals;
- modify guidance relating to modules with and without battery cells; and
- introduce substantiation requirements regarding direct and indirect materials costs.
Definitions
- Extraction. The Final Regulations define “extraction” to mean the activities performed to harvest minerals or natural resources from the ground or from a body of water, including i) operating equipment to harvest minerals or natural resources from mines and wells and the physical processes involved in refining, and ii) operating equipment to extract minerals or natural resources from the waste or residue of prior extraction, including crude oil extraction to the extent that processes applied to that crude oil yield an applicable critical mineral or an electrode active material as a byproduct. Extraction concludes once activities are performed to convert raw mined or harvested products or raw well effluent to substances that can be readily transported or stored for direct use in critical mineral or electrode active material processing. The Final Regulations exclude from the definition of extraction activities that begin with a recyclable commodity, and the chemical and thermal processes involved in refining.
- Production of Eligible Components by the Taxpayer. The Final Regulations expand on the definition of “produced by the taxpayer” for purposes of the 45X Credit to include both “primary” and “secondary” production. Primary production involves producing an eligible component using non-recycled materials, while secondary production involves producing such component using recycled materials. For certain eligible components, including solar grade polysilicon, electrode active materials and applicable critical minerals, production by a taxpayer incorporates the conversion, refinement, or purification of source materials to substantially transform such materials to derive a distinct eligible component including both primary and secondary production processes.
Production Activities
- Production Costs Incurred. The Final Regulations clarify that production costs incurred by the taxpayer with respect to the production of either an electrode active material or an applicable critical mineral excludes direct or indirect materials costs that relate to the purchase of materials that are an eligible component at the time of acquisition (i.e., an electrode active material or applicable critical mineral). Such costs do include any costs incurred by the taxpayer relating to the extraction of raw materials in the U.S. or a U.S. territory, provided that such costs are paid or incurred by the taxpayer that claims the 45X Credit for such electrode active material or applicable critical mineral.
- Production Costs for Production of Incorporated Eligible Components. The production costs that a taxpayer pays or incurs in the production of an eligible component (whether or not domestically produced) that the taxpayer incorporates into a further distinct electrode active material or applicable critical mineral are not included in the costs incurred by taxpayer in producing such distinct electrode active material or applicable critical mineral. In addition, a taxpayer may not include the same production costs in the calculation of the credit amount for more than one eligible component. As an example of impermissible double-counting, if a taxpayer incurs production costs of $50 for eligible component 1 and an additional $100 of production costs for eligible component 2 that includes integrating eligible component 1, then the production costs of eligible component 1 equal $50 and the production costs for eligible component 2 equal $100, respectively.
Modules with Battery Cells
- Modules with Battery Cells. The Final Regulations modify the definition of modules which use two or more battery cells for a specified end-use configuration. Specifically, the Final Regulations provide that an end-use configuration of battery technologies is the product that combines battery cells into a module such that any subsequent manufacturing occurs at the module level, rather than to individual battery cells. If multiple supply chain points are eligible, only the first module produced and sold that meets the 45X Credit requirements, including the kilowatt-hour (kWh) requirements, will be eligible.
- Capacity Measurements for Modules Without Battery Cells. The Final Regulations provide that taxpayers producing thermal and thermochemical battery modules must convert the energy storage of such modules to a kWh basis and provide and maintain both methodology and testing regarding this conversion. Such conversion cannot exceed the total direct conversion of the total nameplate capacity of the thermal battery module to kWh and must be applied consistently, subject to any updated standard of the same methodology.
Contract Manufacturing Arrangements
- Contract Manufacturing Arrangements. For parties entering into contract manufacturing agreements with multiple fabricators to produce an eligible component, the parties may agree on which party may claim the 45X Credit. The Final Regulations provide that the IRS will not challenge such agreement, provided the parties submit signed certification statements in the manner required in IRS Form 7207, Advanced Manufacturing Production Credit or its applicable instructions. Further, the Final Regulations provide that, notwithstanding the terms of a contract manufacturing agreement, the tangible property that comprises a 45X Facility (as defined below) is determined by taking into account the tangible property used to produce the otherwise qualified property, regardless of which party to the arrangement claims the credit.
Section 45X Qualified Facilities and Section 48C
- Interaction of Sections 45X and 48C of the Code. The Final Regulations clarify that for purposes of the 45X Credit, property that would otherwise qualify as an eligible component is only an eligible component if the property is produced at a facility meeting the requirements of Section 45X (a 45X Facility). No part of such 45X Facility may be qualified as a facility under Section 48C of the Code. A 45X Facility comprises the independently functioning tangible property used by the taxpayer that is necessary for the taxpayer to be considered the producer of the otherwise qualified property. The tangible property that comprises such facility may be in multiple locations.
Substantiation Requirements of Production Costs of Incorporated Eligible Components
- Substantiation Requirements for Materials Costs. The Final Regulations provide that to include direct or indirect materials costs as production costs when calculating a 45X Credit for the production and sale of an electrode active material or the production and sale of an applicable critical mineral, a taxpayer must prepare and include certain information (as described below) on their applicable tax return filings and maintain such information in the taxpayer’s books and records, pursuant to Section 6001 of the Code. Failure to include the applicable documentation with a tax return (including by providing a statement indicating such materials are available upon request) will constitute a failure to substantiate the claim. The substantiation requirements include:
- certifications from any supplier from which the taxpayer purchased any constituent elements, materials, or subcomponents of the taxpayer’s electrode active material or applicable critical mineral, stating that the supplier is not claiming the 45X Credit, nor is such supplier aware that any prior supplier in the production chain of such material claimed a 45X Credit. This statement must include the applicable supplier’s employer identification number and a signed statement under penalties of perjury affirming the sworn information is true and complete;
- documentation providing analysis of any constituent elements, materials, or subcomponents that concludes the material did not meet the definition of an eligible component (e.g., the material did not meet the definition of an applicable critical mineral) at the time of acquisition by the taxpayer. Such documentation may be prepared by the taxpayer or ideally by an independent third-party;
- a list of all direct and indirect material costs and the amount of such costs that were included within the taxpayer’s total production cost for each electrode active material or applicable critical mineral;
- a document related to the taxpayer’s production activities with respect to the direct and indirect material costs that establishes the materials were used in the production of the electrode active material or applicable critical mineral. The document may be prepared by the taxpayer or ideally by an independent third-party; and
- any further information related to the direct or indirect materials specified in guidance issued by Treasury and the IRS.
The Final Regulations are effective December 27, 2024.
