Manufacturer tax credits under section 45X

Manufacturer tax credits under section 45X

December 17, 2023 | By Keith Martin in Washington, DC, David Burton in New York, and Hilary Lefko in Washington, DC

Guidance the US Treasury released on December 14 for claiming section 45X tax credits for manufacturing components for solar, wind and storage projects will require checking whether the manufacturer had a significant enough role in manufacture of the product.

The tax credits are fixed amounts for making components that are listed in section 45X of the US tax code. For example, a tax credit of 4¢ per watt of capacity can be claimed for making solar cells, and another 7¢ per watt of capacity can be claimed for making solar panels or modules.

Tax credits can also be claimed for 10% of the cost incurred to process 50 types of critical minerals.

Mining companies are frustrated that the Treasury ruled out counting the costs to extract minerals, thereby limiting the tax credit to companies that process or refine minerals, but not mine the raw ore.

The guidance is in proposed regulations. The IRS will collect comments through February 13, 2024, and then try to finalize them by early fall 2024.

Senator Marco Rubio (R-Florida) and Representative Carol Miller (R-West Virginia) introduced a bill in December to deny section 45X tax credits to US manufacturers that are owned, controlled, directed or influenced by China, Russia, North Korea or Iran.


A company must "produce" and "sell" eligible components to claim section 45X tax credits.

The IRS said it is not enough to do "mere assembly," "superficial modifications" or a "partial transformation" of materials into the product. There must be a "substantial transformation" of raw materials into a different product or else the manufacturer must incorporate components made by others into a different product, such as where solar cells are used to make solar modules.

Examples of mere assembly are putting external casing around battery modules that have already been fully loaded with cells, battery management systems and other components or buying dry battery cells and filling them with electrolyte. An example of a superficial modification is buying wind turbine blades and finishing and painting the surfaces.

The company must make a complete eligible product. Thus, for example, section 45X tax credits can be claimed for making wind towers. However, the manufacturer must make the entire tower. If two different manufacturers make separate tower segments, then neither will qualify for a tax credit.

The IRS suggested in such cases that the manufacturers would do better to form a partnership to make the tower segments. Since the partnership would make a complete eligible product, it could claim the tax credit and allocate it to the partners.

An alternative is for one company to act as the primary manufacturer and to hire out the manufacturing of the various segments. The IRS said that in a "contract manufacturing arrangement," the parties can specify which party will claim the tax credit. Unlike with a partnership, one party will end up with the full tax credit.

Contract manufacturing is common in many industries. The most typical use is where a company that developed a patented product, but lacks the manufacturing facilities to make it, might hire a factory. Depending on the structure, either the company holding the intellectual property or the factory might be considered the manufacturer for tax purposes. (For more detail, see "Contract Manufacturing.")

The IRS adopted a much simpler definition for 45X purposes -- it is any contract to produce an eligible component -- and said the factory is entitled to the tax credits, unless the parties specify otherwise and sign certificates indicating all parties agree who will claim the tax credits. The contract must be signed before the eligible components are completed, as otherwise it is just a contract to buy inventory rather than a manufacturing arrangement.

The IRS said two types of arrangements are not contract manufacturing. One is a routine purchase order for off-the-shelf components that require no more than minimal tailoring. The other is where the factory knows when the contract is signed that it can satisfy the order out of existing stocks or normal production of finished goods.

The eligible components must be produced in the United States, Puerto Rico, the US Virgin Islands, Guam or the Northern Mariana Islands.

The origin of the inputs used to make them does not matter.   


The eligible components must be sold or incorporated by the manufacturer into other eligible components to trigger tax credits.

The IRS said to use general tax principles to determine when a sale occurs.

"Sale" is used in many places in the US tax code. A sale is usually considered to occur when ownership transfers from the manufacturer to the customer. The customer has risk of loss and control over the component. The item can still be in physical possession of the manufacturer such as when the customer takes delivery at the factory and has the manufacturer store the item for it, but the customer has the right to remove it.

There is no sale if the transfer is between two disregarded subsidiaries of a common parent. Nothing is considered to happen for income tax purposes. There can be a sale between two companies that join in filing a consolidated federal income tax return.    

The sales must normally be to third parties to qualify for section 45X tax credits.

 However, a sale to an affiliate works if a "related person election" is filed with the IRS. The election is made annually, and a separate election must be made for each "trade or business."  Without an election, a sale to an affiliate and resale by the affiliate to a third party triggers tax credits upon resale to the third party.


The tax credits stack. Thus, for example, if a battery maker makes more than one eligible component -- such as electrode active materials that it incorporates into battery cells, and then incorporates the cells into battery modules -- it can claim tax credits for making all three components. The tax credits are triggered by sale of the modules.

The Inflation Reduction Act offered two tax credits to manufacturers to induce them to manufacture in the United States. One is section 45X tax credits. The other is a so-called section 48C investment tax credit for 30% of the cost of a new factory or assembly line to make products for the green economy. Only $10 billion in section 48C tax credits may be claimed. Companies must apply to the IRS for an allocation of a section 48C tax credit. (For more detail, see "Manufacturer Tax Credits: Section 48C" and "New Tax Credits for Manufacturers of Clean Energy Equipment.")

A manufacturer must ordinarily claim one or the other tax credit.  However, the IRS said that if a section 48C credit is awarded on the cost of assembly line or factory A and a separate assembly line or factory B functions independently, then section 45X credits can be claimed on the output from separate line or factory B. An example is where one line makes photovoltaic wafers that are used by an independently functioning second line in the same factory to make solar cells.

However, both tax credits cannot be claimed if the two lines do not make separate eligible components. For example, factory A, on which a section 48C credit was claimed, makes polysilicon ingots. Factory B owned by the same manufacturer in a different location turns the ingots into photovoltaic wafers. The two factories are considered a single production unit since they work in tandem to produce a single eligible component: photovoltaic wafers.     


The components must be produced in 2023 or later.  Production could have started -- for example, on a wind tower -- before 2023 as long as the tower is completed in 2023.

Where an article is produced in year 1 and sold in year 2, the tax credit is claimed in year 2. For example, if X makes photovoltaic wafers and sells them to affiliate Y in 2023 to make cells, and then Y sells the cells to third party Z in 2024, X and Y can claim tax credits on the components they made, but not until 2024.

However, if a related person election is made where wafers are integrated into cells in 2023, and the cells are sold in 2024, X can claim its tax credit in 2023. Integration, where the component disappears in another, larger eligible component triggers the tax credit when combined with a related person election.

The Treasury is worried about two potential abuses.

It is worried that some manufacturers may find the tax credits make it worth producing components that are basically dumped to an accommodation buyer who does not use them, but is paid a fee to facilitate the sales. No tax credit can be claimed in such cases. The components must be put to a productive use.

Another abuse situation is where a manufacturer has some defective products and sells them to an affiliate that does not use them.

The tax credits for making solar, wind and storage components will start phasing out after 2029. Components sold in 2030 will qualify for tax credits at only 75% of the full rate, in 2031 at only 50%, and in 2032 at only 25%. No tax credits may be claimed on components sold after 2032. The tax credits for processing critical minerals are permanent.

Eligible Components

Table 1 shows the eligible components that qualify and the tax credit amounts. The amounts will not be adjusted for inflation.

Table 1

Eligible Component

Credit Amount



Thin-film or crystalline photovoltaic cells

4¢/watt of capacity

Photovoltaic wafers

$12/square meter

Solar grade polysilicon


Polymeric backsheets

40¢/square meter

Solar modules

7¢/watt of capacity

Torque tubes


Structural fasteners


Inverters for solar and distributed wind

0.25¢ to 11¢, depending on the inverter




2¢/watt of turbine capacity


5¢/watt of turbine capacity


3¢/watt of turbine capacity

Fixed offshore wind platforms

2¢/watt of turbine capacity

Floating offshore wind platforms

4¢/watt of turbine capacity

Offshore wind vessels

10% of sales price



Electrode active materials

10% of cost to produce

Battery cells

$35/KWh of capacity

Battery modules

$10/KWh of capacity (for modules w/ cells)

$45/KWh of capacity (modules w/o cells)

Critical minerals

10% of cost to produce

Some companies that make products that perform the same function as products listed in Table 1, but do not fit the product description in section 45X, hoped the Treasury would allow their products to qualify. It did not.

Inverters qualify only for solar and distributed wind projects, but not for storage and other types of projects. Inverters qualify only if they are suitable for DC-to-AC transformation.

Battery cells and battery modules qualify only if they have a capacity-to-power ratio no greater than 100:1. That is the ratio of the cell or module capacity to the maximum discharge amount.

The Treasury clarified that batteries do not require electricity in and electricity out. It said in the preamble to the regulations that its proposed definition of what qualifies "would allow battery technologies such as flow batteries and thermal batteries to be eligible for the section 45X credit."

However, to qualify as a battery module without cells, the module must have "a standardized manufacturing process and form that is capable of storing and dispatching useful energy, that contains an energy storage medium that remains in the module (for example, it is not consumed through combustion), and that is not a custom-built electricity generation or storage facility."  Standalone fuel storage tanks and fuel tanks connected to engines are not "battery modules."

The IRS said battery makers cannot claim tax credits on the cost of any of the following items as "electrode active materials": battery management systems, terminal assemblies, cell containments, gas release valves, module containments, module connectors, compression plates, straps, pack terminals, bus bars, thermal management systems and pack jackets.

Critical Minerals

Table 2 is a list of the 50 critical minerals that qualify for tax credits.

What qualifies is converting the mineral to a specific processed form, such as cobalt converted to cobalt sulphate, nickel turned into nickel sulphate or lithium converted to lithium carbonate or lithium hydroxide rather than the mining of raw ore, or purifying the mineral so that it is 99% to 99.99% pure. The required percentage varies by mineral.

Table 2




















































In cases where the tax credit is a percentage of cost or sales price, the credit may be calculated on less than the full cost or sales price.

The tax credit to make purpose-built or retrofitted ships to install offshore wind turbines or operate and maintain them is 10% of the sales price. However, the IRS said any part of the sales price that is a payment for maintenance or other services that are sold with the ship must be backed out of the sales price.

The extraction costs and costs of acquiring the minerals and of materials that are consumed during processing are excluded from the credit calculation for critical minerals.

Costs to transport or do further work after production of eligible components or critical minerals do not count.

However, the manufacturer can count costs to store the eligible component or mineral and labor, electricity, depreciation and overhead costs to produce it.

Foreign Influence

Senator Marco Rubio (R-Florida) and Representative Carol Miller (R-West Virginia) are urging Congress to deny tax credits to companies with ties to China, Russia, North Korea or Iran.

The two introduced bills in the Senate and House in mid-December that would deny tax credits to any "disqualified entity," defined as an entity that is incorporated or headquartered in one of the four countries or that is directly or indirectly "owned," "controlled," "directed" or "materially influenced" by the government of one of the four countries.

A US manufacturer would fall in the latter category if one of several things is true about it.

One is the government of one of the four countries directly or through a state-owned company owns at least 10% of the equity interests "by value, voting, governance, board appointment, or similar rights or influence."

More vaguely, another is the US manufacturer is "directly or indirectly controlled, directed, or materially influenced" by such a government or state-owned company.

Another is the "actions, management, ownership, or operations" of the US manufacturer are subject to "direct influence" by such a government or state-owned company.

Rubio and Miller are also interested in spotting influence exercised by holding a derivative financial instrument in a US manufacturer or having a contract with it that gives the government or state-owned company an equivalent financial return as if it held at least a 10% equity interest.

Finally, debt or other arrangements could sweep into the net a US manufacturer that has a "prohibited obligation or arrangement" with a government or state-owned company in one of the four countries -- or with another US manufacturer that is already in the net. An example of such an arrangement is acting as a contract manufacturer for such a manufacturer, or leasing it factory space or equipment or lending it money or licensing it the use of intellectual property if the arrangement provides a "substantial benefit" to the other manufacturer.

The bills would not bar tax credits merely for buying "equipment or manufacturing inputs" from Chinese or other state-owned companies.

Carol Miller is a Republican mid-ranking member of the House tax-writing committee. Republicans control the House. Marco Rubio is not on the Senate tax-writing committee and, therefore, is in less of a position to put the proposal through the Senate.

The proposal would take effect in tax years starting after it is enacted. Thus, if it were enacted in 2024, it would not affect any US manufacturer that uses a calendar tax year until 2025.

Bills like this must be folded into a larger tax bill to advance. Congress may pass a tax extenders bill in early 2024 that would extend a number of expiring tax provisions, but tax extenders bills are not usually good vehicles to make new policy. No other tax legislation is expected in the current Congress that runs through the end of 2024.