Treasury and IRS Issue Final Regulations on Section 45X
On October 24, 2024, the US Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) released final regulations (the “Final Regulations”)1 on the Section 45X Advanced Manufacturing Production Credit of the Internal Revenue Code (the “Code”).2 Section 45X, which was enacted in 2022 as part of the Inflation Reduction Act (the “IRA”), provides a production tax credit for “eligible components” of clean energy property, which include solar- and wind-energy components, inverters, qualifying battery components, and applicable critical minerals. The Final Regulations modify the proposed regulations that were published in December 2023 in a number of significant and taxpayer-favorable ways.3 This Legal Update discusses some key aspects of the Final Regulations—particularly as they relate to the proposed regulations—but does not address numerous refinements relating to certain technical requirements included in the Final Regulations.
In particular, the Final Regulations modify the treatment of “production costs,” a change which will permit extraction costs for critical minerals, in an effort to boost domestic production of critical minerals. The Final Regulations also update the definition of “eligible manufacturing,” by replacing “mere assembly” with “minor assembly,” acknowledging that assembly serves as the primary manufacturing process for items like solar modules and battery modules and should be treated as an eligible process qualifying for tax credits under Section 45X. This inclusion of extraction costs will be significant for US critical mineral producers, and should help incentivize mining companies and further spur investment in domestic critical-mineral producers, ultimately strengthening the US supply chain. The Final Regulations also simplify the rules and examples governing the interaction between the Section 45X production tax credit and the qualifying advanced energy project credit under Section 48C. In addition, the Final Regulations specify that certain eligible components are not subject to the domestic-production rule.
The Final Regulations apply to tax years ending on or after October 28, 2024, although taxpayers may choose to apply the regulations to earlier periods.
Clarifications Provided by the Final Regulations
Clarification of the meaning of “production costs” incurred for purposes of calculating the Section 45X tax credit for certain components
The proposed regulations had limited the scope of expenses that could be included in the definition of “production costs,” for purposes of the Section 45X production tax credit with respect to the production of critical-minerals and electrode-active materials.4 The proposed regulations excluded a number of direct and indirect costs, but had requested comments on this issue. In response to public comments received, the Final Regulations take a more expansive approach to the costs included, and allow the inclusion of certain direct and indirect material costs, including domestic extraction costs, for applicable critical minerals and electrode active materials. However, these additional costs are not eligible for inclusion if the acquired material is, itself, eligible for a credit under Section 45X, in order to prevent duplication. The extraction costs must be paid or incurred by the taxpayer claiming the AMP Credit related to such raw materials. Furthermore, the Final Regulations provide that production costs are as defined in Section 263A and the applicable Treasury Regulations thereunder, and therefore include direct or indirect material costs incurred by a taxpayer from the acquisition of raw materials, regardless of whether the material is sourced domestically or internationally.
The Final Regulations impose a range of substantiation and documentation requirements that may be challenging for taxpayers to meet.5 These include obtaining an employer identification number from suppliers and securing a certification—under penalties of perjury—that suppliers are not claiming a credit for any constituent elements, materials, or subcomponents of an electrode-active material or critical mineral. Additionally, taxpayers must provide an analysis explaining why any constituent elements, materials, or subcomponents do not qualify for a credit from suppliers, list all direct and indirect material costs, and create a report on production activities, ideally prepared by an independent third party. Further, they must document the testing standards and methodologies used to determine component capacity, ensure that components meet core engineering specifications and capacity requirements (evidenced by a bill of sale or similar documentation), and confirm that components like torque tubes and structural fasteners are used as required, also supported by documentation.
Clarification of battery module definition
The Final Regulations clarify the definitions of “module with no battery cells” and “module using battery cells,” addressing industry concerns and aligning the interpretation with the statutory text.6 For modules using battery cells, the proposed regulations defined them as interconnected cells designed to serve a specified end use (i.e., generally as battery packs for electric vehicles). The Final Regulations state that a battery module using cells qualifies as an eligible component once it meets the statutory requirements, regardless of whether it is commonly called a “battery module” or “battery pack” in the industry. This clarification aims to address confusion regarding end-use requirements, ensuring alignment with industry practices without modification to the statutory language.
The proposed regulations defined modules without cells as products capable of storing and dispatching energy, with a permanent energy storage medium that remains in the module, and not as custom-built electricity-storage facilities. This includes technologies such as thermal and flow batteries.7 The Final Regulations clarify that battery modules without cells must be self-contained and modular, excluding custom-built solutions like standalone fuel tanks. The Final Regulations retain the requirement that the storage medium remain in the module to ensure a standardized approach, distinguishing qualifying modules from custom-built facilities.8
Definition of “produced by the taxpayer” (substantial transformation)
The proposed regulations established the meaning of “produced by the taxpayer.”9 Under the proposed regulations, “produced by the taxpayer” means 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 the elements, materials, or subcomponents, and includes both primary and secondary production. Specifically, for materials like solar-grade polysilicon, electrode active materials, and critical minerals, production by the taxpayer includes processing, converting, refining, or purifying source materials.10 However, mere extraction does not qualify as production, since it does not yield a distinct component.
The Final 45X Regulations largely adopt the proposed regulations definition of “production.” The definition ultimately aligns with a broad, flexible approach meant to encompass various production methods without causing technical inconsistencies, such as with Section 263A, which serves different capitalization purposes. In cases where production primarily involves assembly—such as battery or solar modules—the Final Regulations affirm that substantial transformation through assembly is sufficient for eligibility, distinguishing it from “minor assembly.” This standard allows the Section 45X credit to be appropriately allocated to the taxpayer responsible for the primary production activity within the United States. Notably this is a change from the proposed regulations which used the term “mere assembly” rather than “minor assembly.” This change is primarily focused on eligible components that may be produced by assembling other components, but which should be eligible for the Section 45X tax credit, even though no production beyond assembly is performed by the taxpayer.
In addition, the Final Regulations follow the proposed regulations in that the domestic production requirement does not apply to constituent elements, materials and subcomponents used in the production of eligible components.11
However, it is anticipated that mining companies and other market participants will challenge the regulation, arguing that extraction of the critical minerals alone should be sufficient for coverage, as the extraction itself is arguably the most important step in the critical-mineral production process, and this step of extraction is mandatory for the United States to reach its net-zero goals.
Clarification regarding the related-person sale election
Generally, Section 45X applies only to eligible components that are produced and sold to an unrelated person. However, there are several exceptions to this rule, allowing sales to related persons in cases where the related person resells the component to an unrelated party or makes a special election, provided the component is neither put to an improper use nor defective (defects arising after the deemed sale do not render the component defective).12 The Final Regulations generally adopt the approach taken in the proposed regulations and clarify that applicable federal income-tax principles apply to the determination of a sale, rather than adopting a special set of rules defining sales for purposes of the Section 45X tax credit.
Inclusion of secondary production
The Final Regulations broaden the definition of “produced by the taxpayer” to include secondary production, which can involve using recycled materials to produce eligible components.13 In response to commenters seeking clarification on whether recycling qualifies as production, the Treasury and IRS explicitly included both primary (non-recycled) and secondary (recycled) production in the definition.
Revisions to the rules regarding the interaction between Section 45X and Section 48C
Under Section 45X, a credit is not available for an eligible component produced at a facility, if the basis of any property which is part of such facility is also taken into account for purposes of a Section 48C tax credit granted after August 16, 2022. Under the proposed regulations, property that would otherwise qualify as an eligible component under Section 45X will not be eligible if it is also produced at a facility that incorporates Section 48C property.
The Final Regulations clarify that a Section 45X facility will include only the independently functioning tangible property used by the taxpayer that is necessary to produce the relevant component. Accordingly, tangible property used to produce at a Section 45X facility where the subcomponent is substantially transformed into an eligible component will qualify for the Section 45X tax credit.14 Any Section 48C tax credit claimed on such tangible property will not void the availability of tax credits under Section 45X.
Conclusion
The changes introduced in the Final Regulations reflect a generally favorable and practical approach for taxpayers seeking to benefit from the Section 45X production tax credit. By broadening the scope of eligible production costs, clarifying eligible manufacturing processes, and streamlining interactions with Section 48C, these regulations should provide meaningful incentives for US producers of critical minerals and clean-energy components, further supporting domestic production and investment.
1 Treasury Regulation § 1.45X.
2 References to “Section” refer to sections of the Code unless otherwise specified.
3 See Proposed Regulations on Section 45X Advanced Manufacturing Production Tax Credit | Insights | Mayer Brown for a summary of the proposed Treasury Regulations on Section 45X.
4 The amount of the Section 45X tax credit for critical minerals and electrode active materials is 10% of the costs incurred by the taxpayer with respect to their production; § 1.45X-4(c)(3); § 1.45X-3(e)(2)(iv).
5§ 1.45X-1(c)(3)(iv); § 1.45X-3(e)(2)(iv)(C); and § 1.45X-4(c)(4).
