On October 24, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released final regulations under section 45X, which provides a credit for the production and sale of certain "eligible components," such as solar and wind energy components. The final regulations maintained the structure of the proposed regulations released on December 14, 2023. See our prior coverage of the proposed regulations here. 

While Treasury and the IRS modified and clarified various provisions of the proposed regulations, the most notable change is the definition of two eligible components: "applicable critical minerals" and "electrode active materials." The credit for the production and sale of these eligible components is based on the costs incurred with respect to their production and the final regulations expand on the costs that are eligible.

Background

Enacted under the Inflation Reduction Act of 2022 (IRA), section 45X provides a credit to taxpayers producing and selling to unrelated persons certain eligible components, such as solar and wind energy components, inverters, qualifying battery components (which are battery cells, battery modules, and electrode active materials), and applicable critical minerals. Section 45X is not subject to the prevailing wage and apprenticeship requirements included in many other IRA tax credits, and is eligible for the direct pay election under section 6417 and for transfers to other taxpayers under section 6418.

Expanded Eligible Costs for Electrode Active Materials and Applicable Critical Minerals

The definitions of eligible components and the corresponding production activities are a central focus in the proposed and final regulations. Significantly, the final regulations expand on the costs eligible for the credit for two categories of eligible components: applicable critical minerals and electrode active materials. In both cases, the final regulations (Treas. Reg. §§ 1.45X-3(e)(2)(iv) and -4(c)(3)) provide that taxpayers may include in credit-eligible production costs the cost of extracting raw materials in the U.S., a change from the proposed regulations. However, these extraction costs may only be included as a credit-eligible production activity if the same taxpayer claiming the credit on the given eligible component is extracting, producing, and selling that eligible component. Extraction activities are considered completed when the raw product has been converted to a substance that can be readily used in critical mineral or electrode active material processing. Recycling and refining activities are not considered a part of extraction activities. 

The final regulations further expand the qualifying production activities for these two eligible components to include the direct and indirect costs of materials, as defined under Treas. Reg. §§ 1.263A-1(e)(2)(i)(A) and 1.263A-1(e)(3)(ii)(E), respectively, which had been excluded under the proposed regulations. The costs of materials consumed in the ordinary course of production, whether associated with specific property produced (direct) or not (indirect), may be included in the credit-eligible production costs for applicable critical minerals and electrode active materials (see Treas. Reg. §§ 1.45X-3(e)(3), 4(c)(3)). However, these material acquisition costs are not includible if the material is already a distinct eligible component at the time of the acquisition by the taxpayer. This limits potential "over-crediting": production costs for an initial eligible component may not then be included as a credit-eligible production cost for any secondary eligible components produced using the initial eligible component.

Anti-Abuse Rule Clarified for Sales to Related Persons 

To qualify for the section 45X credit, the taxpayer must complete production of the eligible component and then sell it to an unrelated person. However, an election can be made to deem certain sales to related persons as sales to unrelated persons that qualify for the credit. The related person election includes an anti-abuse rule which, in part, prevents the election—and thus the credit—if the eligible components were defective. The final regulations clarified in the preamble that a defect in a component only prevents the credit if the defect was present at the time of the deemed sale to a related person.

Effective Date: No Retroactivity to 2023

While the section 45X production credit has been statutorily available to eligible components produced and sold by taxpayers during the 2023 and 2024 calendar years, the final regulations are applicable to eligible components for which production is completed and sales occur after December 31, 2022, and during a taxable year ending on or after October 28, 2024 (which would include calendar year 2024, but not calendar year 2023). In addition, taxpayers may choose to apply the final regulations to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending before October 28, 2024 (i.e. the 2023 calendar tax year), provided that taxpayers follow the final regulations in their entirety and in a consistent manner. 

For more information, please contact:

Andy L. Howlett, ahowlett@milchev.com, 202-626-5821

Katherine Lewis, klewis@milchev.com, 202-626- 5894
 

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