At a Glance
Signed into law in August 2022, the Inflation Reduction Act is one of the most comprehensive acts of climate legislation in U.S. history. It offers various appropriated funds to incentivize businesses across all sectors to invest in green manufacturing and renewable energy sources such as solar and wind energy.
If you own a business in the manufacturing sector, understanding the tax credits and incentives offered under the Inflation Reduction Act and whether you qualify can help lower your tax liability.
What is the IRC Section 45X Tax Credit?
The Inflation Reduction Act implemented a new tax credit into the Internal Revenue Code (IRC), Section 45X Advanced Manufacturing Production Tax Credit (Section 45X PTC). The Section 45X Tax Credit offers a financial incentive for manufacturing businesses to develop a wholly domestic, renewable energy supply chain.
The Section 45X Tax Credit provides an income tax credit based on the production of eligible green manufacturing components. Eligible components fall into the following categories:
- Solar energy components
- Wind energy components
- Batteries & Inverters
- Critical minerals
To qualify for the 45X tax credit, several requirements defined under IRC 45X must be met. First, a company must produce and sell eligible parts within the United States or its territories and possessions. This condition is intended to help U.S. manufacturers meet the Act’s objective of building a domestic supply chain. Second, there is a requirement to sell eligible components to unrelated parties. An election to sell to related parties was also introduced, but the specifics have yet to be determined. Finally, the manufacturing of the components must be part of the taxpayer’s trade or business.
Section 45X credit rates vary depending on the type and quantity of eligible parts produced for each component.
Section 45X Tax Credit Phase-Out Period
With the exception of the tax credit for producers of critical minerals, the credit has a planned phase-out period that begins after December 31, 2029, regardless of the tax year-end. After this date, the credit percentage is reduced for each subsequent calendar year by 25%.
What is the IRC Section 48C Tax Credit?
The tax credit under IRC Section 48C is the Qualifying Advanced Energy Project Credit. Although initially established in 2009 with the American Recovery and Reinvestment Act, the Inflation Reduction Act has expanded the section with a $10 billion appropriation.
The Section 48C Tax Credit is an investment tax credit designed to incentivize advanced renewable energy projects. Its objective is to prioritize clean energy technologies and reduce U.S. industrial greenhouse gas emissions.
The Qualifying Advanced Energy Project Credit features two tax credit rates: 30% of qualified investment costs for a qualifying advanced energy project that meets IRC Section 48C wage and apprenticeship and 6% for other qualifying projects. Low-income and energy communities may qualify for additional benefits.
Section 48C Advanced Energy Criteria
To benefit from the 48C Inflation Reduction Act tax credit, a qualifying advanced energy project must
- Establish, expand, or re-equip an industrial or manufacturing facility to produce or recycle advanced energy property.
- Install technology designed to reduce an industrial or manufacturing facility’s greenhouse gas emissions by 20% or more.
- Establish, expand, or re-equip an industrial facility to refine, process, or recycle critical materials.
Can I Claim Both Section 45X and 48C Tax Credits?
If a taxpayer claims 48C tax credits for a given facility, the taxpayer cannot claim any production tax credits, including Section 45X credits, for components produced and sold at that facility.
Understand the New Tax Credits with Windes
If you operate or manage a business in the industrial or manufacturing sector, taking advantage of the new Inflation Reduction Act tax credits can reduce your tax liability and boost your cash flow.
However, it can be challenging to understand the rules and determine if your business meets the eligibility requirements of each section of the Act. Our energy industry tax credits and incentives experts can help determine if you qualify for the 45X or 48C tax credits the Inflation Reduction Act offers.
Connect with our team today.