Revised August 18, 2022

The Inflation Reduction Act of 2022 (the Act) has been celebrated for its proposed extension and expansion of credits for renewable energy project developers. However, there are also significant wins for US manufacturers of renewable energy technology. This post focuses on the proposed amendments to section 48C[1], a tax credit for the cost of factories to manufacture clean energy components, and the proposed enactment of section 45X, which is a tax credit that manufacturers earn for each unit of clean energy components manufactured.[2] An overview of the new investment tax credit for semi-conductor factories that was enacted in the CHIPS and Science Act of 2022 is also provided.

Section 48C Manufacturers’ Tax Credit

            Effective January 1, 2023, the Act expands section 48C to provide $10 billion in tax credits.  The tax credit is 30 percent of the amount invested in new or upgraded factories to build specified renewable energy components.

1. Types of Clean Energy Components that can be Built by a Factory Eligible for Section 48C Credit

            There are several notable expansions to the list of manufactured products that will qualify for the advanced energy project credit under section 48C.  First, the definition of “qualifying advanced energy project” for purposes of section 48C is expanded from strictly facilities that manufacture certain renewable energy components to include facilities that also recycle qualifying property.[3]  Second, qualifying property and components will include products designed to be used to produce energy from water,[4] along with those designed to be used to produce energy from the sun, wind, geothermal deposits, and other renewable resources.

            The new list also includes grid modernization equipment and components,[5] property designed to “capture, remove, use, or sequester carbon oxide emissions”[6], equipment designed to “refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low emission,”[7] products designed to produce energy conservation technologies[8], and technology, components, and materials for electric or fuel cell vehicles and their associated charging or refueling infrastructure,[9] including, specifically, heavy duty vehicles (those with a weight rating of over 14,000 pounds).[10]

            Finally, the proposed expansion of section 48C would broadly encompass all other such advanced energy property designed to reduce greenhouse gas emissions as may be determined by the IRS (including any property that re-equips existing infrastructure to reduce greenhouse gas emissions by at least 20 percent).[11] Such sweeping language may leave open the opportunity for new technologies to take advantage of these credits in the future.  

2. Section 48C’s Allocation Process and Cap

            Factory owners will need to apply to the IRS for an allocation of the section 48C credit.  That is, a factory may otherwise appear eligible for the section 48C credit, but the factory owner may not claim the credit without being awarded an allocation from the IRS.[12]  The IRS will have 180 days from the date of enactment of the Act to establish a program to consider and award certifications for qualified investments,[13] then applicants will have two years from the date of certification by the IRS to provide evidence that the requirements of the certification have been met and that the project has been placed in service.[14]  Once awarded, the IRS will publicly disclose the identity of the applicant and the amount of credit the applicant is to receive.[15]

            The section 48C credit is not subject to phaseouts, which are unnecessary given the certification system, credit amount cap, and the two year deadline to get the facility up and running.

3. Construction Labor Requirements

            The construction of, or upgrade to, the factory will have to be done by workers who are paid the equivalent of union wages with apprentices hired for the construction (unless an apprenticeship program is not available).  Unlike other tax credits regimes under IRA, a taxpayer cannot avoid these requirements by “beginning construction” on the factory within 59 days of the IRS publishing guidance addressing the wage and apprenticeship rules.[16]  These requirements do not apply to the factory workers who will fabricate the renewable energy components at the factory. [17] 

4. Energy Communities

            Forty percent of the $10 billion in credits is earmarked for factories located in “energy communities”[18] meaning those factories are built in a census tract (or a directly adjoining census tract), in which, after December 31, 1999, a coal mine has closed or a coal-fired electric generating unit has been closed.[19]

5. Impermissible Double Benefit

            The Act’s amendment to section 48C prohibits certain double tax credit benefits.  A taxpayer is not allowed to benefit from the expanded section 48C credit if the investment in the factory already qualifies for a tax credit under section 48D (clean electricity investment credit), section 45Q (carbon capture credit for carbon oxide sequestration), or section 45V (clean hydrogen production credit ).[20]  In any event, it is difficult to imagine how a factory could realistically have qualified for a section 48C credit and any of the prohibited credits.

Section 45X Advanced Manufacturing Production Credit

            The Act adds new section 45X that provides a tax credit for each eligible component, as described below, produced in the US and sold by a manufacturer to an unrelated person. The credit would apply to components produced and sold after December 31, 2022, and would begin to phase out starting in 2030.

1. Clean Energy Equipment that would Qualify for Credit Under Section 45X

            Eligible components under section 45X include photovoltaic cells and wafers, solar grade polysilicon, polymeric backsheets, solar modules, wind energy components, torque tubes, structural fasteners, electrode active materials, battery cells, battery modules, and certain critical minerals.[21] Subject to certain additional calculations, the amount of the total credit is the sum of the amounts corresponding to each eligible component reproduced in the table below. The tables below indicate the eligible component, the definition of such component, and its corresponding credit amount:[22]

Solar Components

Eligible Component	Definition	Credit Amount
Thin film photovoltaic cell or a crystalline photovoltaic cell	Smallest semiconductor element of a solar module which performs the immediate conversion of light into electricity.	Four cents multiplied by the capacity of such cell (expressed on a per direct current watt basis)
Photovoltaic wafer	A thin slice, sheet, or layer of semiconductor material of at least 240 square centimeters produced by a single manufacturer either directly from molten or evaporated solar grade polysilicon or deposition of solar grade thin film semiconductor photon absorber layer, or through formation of an ingot from molten polysilicon and subsequent slicing, and which comprises the substrate or absorber layer of one or more photovoltaic cells.	$12 per square meter
Solar grade polysilicon	Silicon which is suitable for use in photovoltaic manufacturing and is purified to a minimum purity of 99.999999 percent silicon by mass.	$3 per kilogram
Polymeric back sheet	A sheet on the back of a solar module which acts as an electric insulator and protects the inner components of such module from the surrounding environment.	40 cents per square meter
Solar module	Connection and lamination of photovoltaic cells into an environmentally protected final assembly which is suitable to generate electricity when exposed to sunlight, and is ready for installation without an additional manufacturing process.	Seven cents multiplied by the capacity of such module (expressed on a per direct current watt basis)
Torque tube	A structural steel support element (including longitudinal purlins) which is a part of a solar tracker, is of any cross-sectional shape, may be assembled from individually manufactured segments, spans longitudinally between foundation posts, supports solar panels and is connected to a mounting attachment for solar panels (with or without separate module interface rails), and is rotated by means of a drive system.	87 cents per kilogram
Structural fastener	A component which is used to connect the mechanical and drive system components of a solar tracker to the foundation of such solar tracker, to connect torque tubes to drive assemblies, or to connect segments of torque tubes to one another.	$2.28 per kilogram

Offshore Wind

Eligible Component	Definition	Credit Amount
Wind energy component (offshore wind vessel)	Any vessel which is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components.	10 percent of the sales price of such vessel
Offshore Wind foundation	The component (including transition piece) which secures an offshore wind tower and any above-water turbine components to the seafloor using fixed platforms, such as offshore wind monopiles, jackets, or gravity-based foundations or floating platforms and associated mooring systems.	Fixed platform: two cents multiplied by the rated capacity of the completed turbine Floating platform: four  cents multiplied by the rated capacity of the completed turbine

Wind Onshore and Offshore

Eligible Component	Definition	Credit Amount
Blade	An airfoil-shaped blade which is responsible for converting wind energy to low-speed rotational energy	Two cents multiplied by the rated capacity of the completed turbine
Nacelle	The assembly of the drivetrain and other tower-top components of a wind turbine (with the exception of the blades and the hub) within their cover housing.	Five cents multiplied by the rated capacity of the completed turbine
Tower	A tubular or lattice structure which supports the nacelle and rotor of a wind turbine.	Three cents multiplied by the rated capacity of the completed turbine

Inverters

Eligible Component	Definition	Credit Amount
Inverter	An end product which is suitable to convert direct current electricity from 1 or more solar modules or certified distributed wind energy systems into alternating current electricity.	An amount equal to the product of the applicable amount, provided below, with respect to such inverter, multiplied by the capacity of such inverter (expressed on a per alternating current watt basis)
Central Inverter	Central inverter means an inverter which is suitable for large utility-scale systems and has a capacity which is greater than 1,000 kW (expressed on a per alternating current watt basis)	One quarter of one cent multiplied by capacity (expressed on a per alternating current watt basis)
Commercial Inverter	Commercial inverter means an inverter which is suitable for commercial or utility-scale applications, has a rated output of 208, 480, 600 or 800 volt three-phase power, and has a capacity which is not less than 20 kW and not greater than 125 kW (expressed on a per alternating current watt basis)	Two cents multiplied by capacity (expressed on a per alternating current watt basis)
Distributed Wind Inverter	Inverter used in a residential or non-residential system which utilizes 1 or more certified distributed wind energy systems, and has a rated output of not greater than 150 kW	11 cents multiplied by capacity (expressed on a per alternating current watt basis)
Microinverter	An inverter which is suitable to connect with one solar module, has a rated output of 120 or 240 volt single-phase power, or 208 or 480 volt three-phase power, and has a capacity which is not greater than 650 watts (expressed on a per alternating current watt basis).	11 cents multiplied by capacity (expressed on a per alternating current watt basis)
Residential inverter	An inverter which is suitable for a residence, has a rated output of 120 or 240 volt single-phase power, and has a capacity which is not greater than 20 kW (expressed on a per alternating current watt basis).	Six and one half cents multiplied by capacity (expressed on a per alternating current watt basis)
Utility inverter	An inverter which is suitable for commercial or utility-scale systems, has a rated output of not less than 600 volt three-phase power, and has a capacity which is greater than 125 kW (expressed on a per alternating current watt basis).	One and one half cents multiplied by capacity (expressed on a per alternating current watt basis)

Batteries

Eligible Component	Definition	Credit Amount
Electrode active materials	Cathode materials, anode materials, anode foils, and electrochemically active materials, including solvents, additives, and electrolyte salts that contribute to the electrochemical processes necessary for energy storage.	Ten percent of the costs incurred by the taxpayer with respect to production of such materials
Battery cell	Electrochemical cell comprised of one  or more positive electrodes and one or more negative electrodes, with an energy density of not less than 100 watt-hours per liter, and capable of storing at least 20 watt-hours of energy.	$35 multiplied by the capacity of such battery cell (expressed on a kWh basis)
Battery module	A module with two or more battery cells which are configured electrically, in series or parallel, to create voltage or current, as appropriate to a specified end use (module using battery cells) or with no battery cells and with an aggregate capacity of not less than 7 kWh (or, in the case of a module for a hydrogen fuel cell vehicle, not less than 1 kWh).	$10 (or in the case of a battery module which does not use battery cells, $45) multiplied by the capacity of such battery module (expressed in kWh)

2. Produced Only in the United States

            It is important to note that the 45X credit is limited only to production of eligible components in the United States or in possession of the United States.[23]

3. Applicable Critical Minerals

            Those minerals considered “applicable critical minerals” are defined more specifically under section 45X(c)(6).  The allotted tax credit amount per mineral shall be 10 percent of the costs incurred by the taxpayer with respect to the production of such mineral.[24]  Section 45X(c)(6) also lists the purification minimums for each mineral, most of which have a minimum purity of 99 percent by mass to qualify for the tax credits.  Section 45X does not discuss mineral origin, however section 30D(e)(1)(A) (critical mineral and battery component requirements for vehicles eligible for credit) explicitly require all applicable critical minerals used in qualifying vehicle batteries be extracted or processed in a country with which the United States has a free trade agreement in effect or have been recycled in North America.[25]

4. Effective Date of the Section 45X Credit

            The credits available under section 45X the credit would apply to qualifying components produced and sold after December 31, 2022[26] and will phase out in 25 percent increments, beginning with eligible components sold after December 31, 2029, so that such components sold in 2030 will receive the aforementioned credits at 75 percent of the stated rate, components sold in 2031 at 50 percent of the rate, 2032 at 25 percent of the rate, ending with the complete phase out of components sold after December 31, 2032.[27]

a. Effective Date Clarified in Colloquy

            In a colloquy between Senator Mark Warner of Virginia and the chairman of the Senate Finance Committee, Senator Ron Wyden of Oregon, dated August 6, 2022, the Senators clarify that the advanced manufacturing tax credit is intended to apply to components for which production was completed after December 31, 2022 but are sold to an unrelated party after December 31, 2022.  Importantly, they confirm that, regardless of the portion of the component that was produced prior to the effective date of the Act, the entirety of the cost of production would be eligible for tax credits, not just the portion completed after December 31, 2022.

            Courts are often skeptical of any colloquy on the chamber floor.[28] They are often thought to be representative of an individual rather than an institutional view; further, giving credence to floor statements invites legislators to plant statements in the Congressional Record to swing the meaning of a statute. Nevertheless, courts regularly evaluate floor debates and other colloquies from the Senate and House floors.[29] Statements made by the bill's sponsors or managers are given more weight by the courts than other members' statements, and among the latter group, comments by supporters of the bill are often give more weight than those of opponents.[30] Given Senator Warner and Senator Wyden’s involvement in the drafting of the Act, it is likely courts will give credence to this discussion (or more immediately, the IRS will reflect it in guidance). 

5. Impermissible Double Benefit

          The section 45X credit is not available for components produced in a factory that benefited from the section 48C credit. [31] 

Transferability

          Additional good news for the manufacturers of clean energy equipment is that both the section 48C credit and the section 45X credit qualify for the new transferability regime introduced by the Act.  Under this new regime eligible taxpayers can transfer eligible credits to unrelated taxpayers for cash.  Also, the payment is not taxable income to transferor and not deductible to transferee.[32]  More on transferability regime can be found here.  However, it is important to note that the transferability regime is not available for tax-exempts, the credits cannot be transferred a second time, and transfer of carryforwards or carrybacks are not eligible.

Direct Pay

1. Direct Pay Under the Inflation Reduction Act

         The Act also includes an option of direct pay.  If the taxpayer, taking into account the deemed tax payment for the credits, had “overpaid” its taxes it could elect a cash refund from the IRS.  In general, direct pay is available only to entities exempt from tax and to government entities, except for the section 45X credit (as well as the section 45Q (carbon capture) and section 45V (clean hydrogen production credit)), which allows businesses to apply for direct pay. More on direct pay can be found in this article.

            As to whether a taxpayer would prefer to monetize its section 45X credits by selling them or applying for direct pay, direct pay means 100 cents on the dollar while a buyer is likely to pay something less than 100 cents on the dollar. However, a buyer may be willing to make its payment sooner than the IRS processes a direct payment application in connection with the tax return.

2. Direct Pay in the CHIPS and Science Act of 2022 (CHIPS Act)

            The Inflation Reduction Act of 2022 is not the only recent legislation containing a direct pay mechanism to monetize tax credits. On August 9, 2022, President Biden signed into law the CHIPS Act which also contains use of direct pay through new section48D, the advanced manufacturing investment credit. Section 48D provides a 25% investment tax credit for investments in semiconductor manufacturing and includes incentives for the manufacturing of semiconductors, as well as for the manufacturing of the specialized tooling equipment required in the semiconductor manufacturing process.[33]

            Taxpayers may elect to treat this credit as a payment against tax for which the IRS pays a deemed refund (i.e., the direct pay election). The credit is provided for property which is placed in service after December 31, 2022, and for which construction begins no later than December 31, 2026.[34] If the construction begins before January 1, 2023, the credit applies only to the basis of the property attributable to construction of the property after August 9, 2022.

            Further, the credit under 48D applies only to an “eligible taxpayer.” An Eligible taxpayer is a taxpayer that is not a “foreign entity of concern,”[35] for example an entity designated as a terrorist organization, engaged in espionage, or for which assets have been blocked.[36] Also, an eligible taxpayer cannot have made an “applicable transaction”[37] during the tax year. Further, an applicable transaction after claiming the tax credit results in recapture of the tax credit.  The specifics of the definition of an applicable transaction remain to be determined by Commerce and Defense, but the concept is they are transactions that involve the expansion of semiconductor manufacturing capacity in China or “a foreign country of concern.”[38]

            The section 48D credit is also subject to the same recapture rules, as the investment tax credit for clean energy generation projects for transfers and removal from service, due to transferring the factory or removing it from service during the first five years of its operations[39]  Those rules are found in section 50, which is already a challenge to decipher, but Congress opted to clutter section 50 further by adding the applicable transaction rules there.

 

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[1] Section references are to the Internal Revenue Code of 1986, as it would be amended by the proposed Inflation Reduction Act of 2022, unless otherwise noted.

[2] This article discusses proposed legislation, but for the reader’s ease refers to the Code sections the legislation would amend or add as if they had already been added to the Code.

[3] Section 48C(c)(1)(A)(i)

[4] Section 48C(c)(1)(A)(i)(I)

[5] Section 48C(c)(1)(A)(i)(III)

[6] Section 48C(c)(1)(A)(i)(IV)

[7] Section 48C(c)(1)(A)(i)(V)

[8] Section 48C(c)(1)(A)(i)(VI).

[9] Section 48C(c)(1)(A)(i)(VII).

[10] Section 48C(c)(1)(A)(i)(VIII).

[11] Section 48C(c)(1)(A)(i)(IX).

[12] Section 48C(e)(3).

[13] Section 48C(e).

[14] Section 48C(e)(3).

[15] Section 48C(e)(7).

[16] Cf. Section 45(b)(6)(B)(ii).

[17] Section 48C(e)(5)(A); Section 45(b)(8).

[18] Section 48C(e)(2).

[19] Section 45(b)(11)(B)(iii).

[20] Section 48C(f).

[21] Section 45X(c)(6).

[22] Section 45X(b)(1)(A)-(M).

[23] Pursuant to section 45X(d)(2)(A)-(B), the phrase “in the United States” includes the seabed and subsoil of submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, and “possession of the United States” includes the seabed and subsoil of submarine areas which are adjacent to the territorial waters of the foreign country or such possession and over which the foreign country (or the United States in case of such possession) has exclusive rights.

[24] Section 45X(b)(1)(M).

[25] Section 30D(e)(1)(A)(i).

[26] Section 45X(c).

[27] Section 45X(b)(3)(A) and (B).

[28] See, e.g., Texas Mun. Power Agency v. EPA, 89 F.3d 858 (D.C. Cir. 1996). See also Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605 (2010).

[29] See, e.g., Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 130 S. Ct. 1605 (2010).

[30] See North Haven Bd. of Educ. v. Bell, 456 U.S. 512, 524–27 (1982) (relying heavily on comments made by a sponsor); Chicago, Milwaukee, St. Paul & Pac. R.R. v. Acme Fast Freight, Inc., 336 U.S. 465, 473–476 (1949) (crediting a floor manager's renunciation of the completeness of language in a committee report); FEC v. Rose, 806 F.2d 1081, 1089–1090 (D.C. Cir. 1986) (same).

[31] Section 48X(c)(1)(B)

[32] Section 6418

[33] Section 48D(a).

[34] Section 48D(e).

[35] As defined in Section 9901(6) of the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021.

[36] Section 48D(c).

[37] As defined in newly renumbered section 50(a)(3) through (5).

[38] As defined in Section 9901(7) of the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021.

[39] Section 50(a)