Rule2024-24840
Advanced Manufacturing Production Credit
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 28, 2024
Effective
December 27, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth final regulations regarding the advanced manufacturing production credit established by the Inflation Reduction Act of 2022 to incentivize the production of eligible components within the United States. Eligible components include certain solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals. These final regulations also address specific recordkeeping and reporting requirements. These final regulations affect eligible taxpayers who produce and sell eligible components and intend to claim the benefit of an advanced manufacturing production credit, including by making elective payment or credit transfer elections.
Full Text
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<title>Federal Register, Volume 89 Issue 208 (Monday, October 28, 2024)</title>
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[Federal Register Volume 89, Number 208 (Monday, October 28, 2024)]
[Rules and Regulations]
[Pages 85798-85846]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-24840]
[[Page 85797]]
Vol. 89
Monday,
No. 208
October 28, 2024
Part V
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 1
Advanced Manufacturing Production Credit; Final Rule
Federal Register / Vol. 89, No. 208 / Monday, October 28, 2024 /
Rules and Regulations
[[Page 85798]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10010]
RIN 1545-BQ85
Advanced Manufacturing Production Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document sets forth final regulations regarding the
advanced manufacturing production credit established by the Inflation
Reduction Act of 2022 to incentivize the production of eligible
components within the United States. Eligible components include
certain solar energy components, wind energy components, inverters,
qualifying battery components, and applicable critical minerals. These
final regulations also address specific recordkeeping and reporting
requirements. These final regulations affect eligible taxpayers who
produce and sell eligible components and intend to claim the benefit of
an advanced manufacturing production credit, including by making
elective payment or credit transfer elections.
DATES:
Effective date: These regulations are effective December 27, 2024.
Applicability date: For date of applicability, see Sec. Sec.
1.45X-1(j), 1.45X-2(f), 1.45X-3(g), and 1.45X-4(d).
FOR FURTHER INFORMATION CONTACT: Mindy Chou, John Deininger, Derek
Gimbel, or Alexander Scott at (202) 317-6853 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains final regulations (final regulations) that
amend the Income Tax Regulations (26 CFR part 1) to implement the
statutory provisions of section 45X of the Internal Revenue Code
(Code). The final regulations are issued by the Secretary of the
Treasury or her delegate (Secretary) under the authority granted under
sections 45X(a)(3)(B)(i) and (ii), 1502, 6001, 6417(h), 6418(h), and
7805(a) of the Code.
Section 45X(a)(3)(B)(i) of the Code provides a specific delegation
of authority to the Secretary to prescribe the form and manner for a
taxpayer to make an election such that ``a sale of components by such
taxpayer to a related person shall be deemed to have been made to an
unrelated person.'' Section 45X(a)(3)(B)(ii) provides a specific
delegation of authority to the Secretary, ``[a]s a condition of, and
prior to, any election described in [section 45X(a)(3)(B)(i)],'' to
``require such information or registration as the Secretary deems
necessary for purposes of preventing duplication, fraud, or any
improper or excessive amount determined under [section 45X(a)(1)].''
Section 1502 of the Code requires the Secretary to ``prescribe such
regulations as he may deem necessary in order that the tax liability of
any affiliated group of corporations making a consolidated return and
of each corporation in the group, both during and after the period of
affiliation, may be returned, determined, computed, assessed,
collected, and adjusted, in such manner as clearly to reflect the
income-tax liability and the various factors necessary for the
determination of such liability, and in order to prevent avoidance of
such tax liability.'' Section 1502 of the Code also provides that the
Secretary ``may prescribe rules that are different from the provisions
of chapter 1 that would apply if such corporations filed separate
returns.''
Section 6001 of the Code provides an express delegation of
authority to the Secretary, stating that, ``[e]very person liable for
any tax imposed by this title, or for the collection thereof, shall
keep such records, render such statements, make such returns, and
comply with such rules and regulations as the Secretary may from time
to time prescribe. Whenever in the judgment of the Secretary it is
necessary, [s]he may require any person, by notice served upon such
person or by regulations, to make such returns, render such statements,
or keep such records, as the Secretary deems sufficient to show whether
or not such person is liable for tax under this title.''
Sections 6417(h) and 6418(h) of the Code direct the Secretary to
issue such regulations or other guidance as may be necessary to carry
out the purposes of each section, respectively.
Finally, section 7805(a) of the Code authorizes the Secretary ``to
prescribe all needful rules and regulations for the enforcement of [the
Code], including all rules and regulations as may be necessary by
reason of any alteration of law in relation to internal revenue.''
Background
I. Overview of Section 45X
Section 45X was added to the Code by section 13502(a) of Public Law
117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the
Inflation Reduction Act of 2022 (IRA). In general, for purposes of the
general business credit under section 38 of the Code, section 45X
provides for the advanced manufacturing production credit (section 45X
credit) with respect to eligible components produced by the taxpayer
and sold during the taxable year to an unrelated person. Section 45X
applies to eligible components produced and sold after December 31,
2022.
Under section 45X(a)(1), the total section 45X credit amount for
the taxable year equals the sum of the credit amounts determined under
section 45X(b) with respect to each eligible component (as defined in
section 45X(c)(1)). Under section 45X(a)(2), any eligible component
produced and sold by the taxpayer is taken into account only if the
production and sale is in a trade or business of the taxpayer.
Section 45X(a)(3) generally provides rules regarding the sale of
eligible components to an unrelated person. However, section
45X(a)(3)(B) provides a special rule whereby if a taxpayer makes an
election in the form and manner prescribed by the Secretary, a sale of
eligible components by the taxpayer to a related person will be treated
as if made to an unrelated person, referred to in these final
regulations as the related person election (Related Person Election).
As a condition of, and prior to, a taxpayer making the Related Person
Election, the Secretary may require such information or registration as
the Secretary deems necessary for purposes of preventing duplication,
fraud, or any improper or excessive credit amount.
II. Credit Amounts for Eligible Components
Section 45X(b)(1) generally provides the credit amount determined
with respect to any eligible component, including any other eligible
component it incorporates, subject to the credit phase out rules
provided at section 45X(b)(3). Section 45X(b)(1)(A) through (M) and
section 45X(b)(2) set forth the credit amounts for each type of
eligible component. The credit amounts are generally subject to phase
out rules under section 45X(b)(3), but the phase out rules do not apply
to any applicable critical mineral. For any eligible component (except
applicable critical minerals) sold after December 31, 2029, the credit
amount for such component equals the product of the amount determined
under section 45X(b)(1) for such component multiplied by the applicable
phase out percentage under section 45X(b)(3)(B)(i) through (iv). In the
case of an eligible component sold during calendar year 2030, 2031, and
[[Page 85799]]
2032, the phase out percentages are 75 percent, 50 percent, and 25
percent, respectively. For any eligible component sold after December
31, 2032, the phase out percentage is zero percent, and no section 45X
credit is allowed other than for applicable critical minerals.
Section 45X(b)(4) provides capacity limitations used to compute the
credit amount for battery cells under section 45X(b)(1)(K)(ii) and
battery modules under section 45(b)(1)(L)(ii). Section 45X(b)(4)(A)
provides that the capacity determined with respect to a battery cell or
battery module must not exceed a capacity-to-power-ratio of 100:1.
Section 45X(b)(4)(B) defines ``capacity-to-power-ratio'' as the ratio
of the capacity of a battery cell or battery module to the maximum
discharge amount of such cell or module.
III. Eligible Components
Section 45X(c)(1)(A) defines an eligible component to mean any
solar energy component, any wind energy component, any inverter
described in section 45X(c)(2)(B) through (G), any qualifying battery
component, and any applicable critical mineral. Section 45X(c)(1)(B)
clarifies that eligible components do not include any property that is
produced at a facility if the basis of any property that is part of
such facility is taken into account for purposes of the qualifying
advanced energy project credit allowed under section 48C after August
16, 2022 (the date of enactment of the IRA).
Section 45X(c)(2)(A) generally defines an inverter as an end
product that is suitable to convert direct current (DC) electricity
from one or more solar modules or certified distributed wind energy
systems into alternating current (AC) electricity. Section 45X(c)(2)(B)
through (G) defines the following different types of eligible
inverters: central inverter, commercial inverter, distributed wind
inverter, microinverter, residential inverter, and utility inverter.
Section 45X(c)(3)(A) defines a solar energy component as a solar
module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon,
torque tube, structural fastener, or polymeric backsheet. Section
45X(c)(3)(B) defines these different types of eligible solar energy
components as well as a solar tracker.
Section 45X(c)(4)(A) defines a wind energy component as blades,
nacelles, towers, offshore wind foundations, and related offshore wind
vessels. Section 45X(c)(4)(B) defines these different types of eligible
wind energy components.
Section 45X(c)(5)(A) defines a qualifying battery component as
electrode active materials, battery cells, and battery modules. Section
45X(c)(5)(B) defines these different types of qualifying battery
components.
Section 45X(c)(6) defines applicable critical minerals. The
following minerals are eligible for the section 45X credit if converted
or purified to specified purities or forms: aluminum, antimony,
arsenic, barite, beryllium, bismuth, cerium, cesium, chromium, cobalt,
dysprosium, erbium, europium, fluorspar, gadolinium, gallium,
germanium, graphite, hafnium, holmium, indium, iridium, lanthanum,
lithium, lutetium, magnesium, manganese, neodymium, nickel, niobium,
palladium, platinum, praseodymium, rhodium, rubidium, ruthenium,
samarium, scandium, tantalum, tellurium, terbium, thulium, tin,
titanium, tungsten, vanadium, ytterbium, yttrium, zinc, and zirconium.
IV. Special Rules
Section 45X(d)(1) provides that persons are related to each other
for purposes of the section 45X credit if they would be treated as a
single employer under section 52(b) of the Code and Sec. 1.52-1(b).
Section 52(b) and Sec. 1.52-1(b) generally provide that trades or
businesses that are partnerships, trusts, estates, corporations, or
sole proprietorships under common control are members of a controlled
group and are treated as a single employer. Section 52(b) requires the
regulations under section 52(b) to be based on principles similar to
the principles that apply under section 52(a), which generally provide
that corporations that are members of a controlled group of
corporations are treated as a single employer. Section 52(a) provides
that a controlled group of corporations is defined with reference to
section 1563(a) of the Code. Section 52(b) and Sec. 1.52-1 provide
rules based on principles similar to those under section 52(a), but
with certain modifications to account for different types of ownership
interests.
Section 45X(d)(2) provides that sales of eligible components are
taken into account under section 45X only for eligible components that
are produced within the United States (including continental shelf
areas described in section 638(1) of the Code), or a U.S. territory
(including continental shelf areas described in section 638(2)).\1\
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\1\ The preamble to these section 45X final regulations refers
to U.S. territory to mean a possession as defined in section 638(2).
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Section 45X(d)(3) directs the Secretary to promulgate regulations
adopting rules similar to the rules of section 52(d) to apportion
credit amounts between estates or trusts and their beneficiaries on the
basis of the income of the estates or trusts allocable to each, and to
pass-thru any apportioned credit amounts to the beneficiaries.
Section 45X(d)(4) provides that a person is treated as having sold
an eligible component to an unrelated person if such component is
integrated, incorporated, or assembled into another eligible component
that is sold to an unrelated person.
V. Prior Guidance
On October 24, 2022, the Department of the Treasury (Treasury
Department) and the IRS published Notice 2022-47, 2022-43 IRB 312,
requesting comments on issues arising under section 45X that may
require guidance. On December 15, 2023, after full consideration of all
the stakeholder input received in response to Notice 2022-47, the
Treasury Department and the IRS published a notice of proposed
rulemaking and a notice of public hearing (REG-107423-23) in the
Federal Register (88 FR 86844) to provide guidance on the advanced
manufacturing production credit under section 45X (Proposed
Regulations). While the Proposed Regulations are summarized in the
Summary of Contents and Explanation of Revisions portion of this
preamble, the provisions of the Proposed Regulations are explained in
greater detail in the preamble to the Proposed Regulations.
On March 6, 2023, the Treasury Department and the IRS published
Notice 2023-18, 2023-10 IRB 508, establishing the qualifying advanced
energy project allocation program (section 48C(e) program). On June 20,
2023, the Treasury Department and the IRS published Notice 2023-44,
2023-25 IRB 924, providing additional guidance on the section 48C(e)
program, including rules for the interaction between sections 45X and
48C. The rules regarding the interaction between sections 45X and 48C
provided in Notices 2023-18 and 2023-44 were addressed in the Proposed
Regulations and have been incorporated into these final regulations.
Section 5.05(2) of Notice 2023-18 and section 3 of Notice 2023-44 are
superseded by these final regulations.
[[Page 85800]]
Summary of Comments and Explanation of Revisions
I. Overview
This Summary of Comments and Explanation of Revisions summarizes
the Proposed Regulations, all substantive comments submitted in
response to the Proposed Regulations, and revisions adopted by these
final regulations. The Treasury Department and the IRS received 193
written comments in response to the Proposed Regulations. The comments
are available for public inspection at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or
upon request. A public hearing was held in person and telephonically on
February 22, 2024. After full consideration of the comments and
testimony, these final regulations adopt the Proposed Regulations with
modifications in response to the comments and testimony as described in
this Summary of Comments and Explanation of Revisions.
Comments merely summarizing the statute or the Proposed
Regulations, recommending statutory revisions to section 45X or other
statutes, and addressing issues that are outside the scope of this
rulemaking (such as revising other Federal regulations and recommending
changes to IRS forms) are generally not addressed in this Summary of
Comments and Explanation of Revisions or adopted in these final
regulations. Some commenters requested additional time to submit
comments. The Proposed Regulations required all comments to be received
by February 13, 2024; however, comments received later but before these
final regulations were substantially developed were carefully
considered in drafting these final regulations. The final regulations
retain the same basic structure as the Proposed Regulations with
certain revisions.
II. General Rules Applicable to the Advanced Manufacturing Production
Credit
A. In general
Proposed Sec. 1.45X-1 would have provided general rules regarding
the section 45X credit including generally applicable definitions,
rules regarding the computation of the credit amount, the definition of
``produced by the taxpayer,'' the requirement to produce eligible
components in the United States, the production and sale in a trade or
business requirement, the sale of integrated components, the
interaction between sections 45X and 48C, and an anti-abuse rule.
Commenters addressed certain aspects of these proposed rules, as
described in Part II. of this Summary of Comments and Explanation of
Revisions. These final regulations generally adopt proposed Sec.
1.45X-1, with the modifications described in this Part II. of the
Summary of Comments and Explanations of Revisions.
B. Definition of Produced by the Taxpayer
1. In General
Section 45X(a)(1) allows a section 45X credit with respect to each
eligible component which is produced by the taxpayer and sold to an
unrelated person during the taxable year. Proposed Sec. 1.45X-1(c)(1)
would have defined ``produced by the taxpayer'' to mean 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 mere assembly or superficial modification of the elements,
materials, or subcomponents. Proposed Sec. 1.45X-1(c)(1)(i) would have
provided that ``produced by the taxpayer'' does not include partial
transformation that does not result in substantial transformation of
constituent elements, materials, and subcomponents into a complete and
distinct eligible component as described in proposed Sec. 1.45X-
1(c)(1). Proposed Sec. 1.45X-1(c)(1)(ii) would have provided that
``produced by the taxpayer'' does not include minor assembly of two or
more constituent elements, materials, or subcomponents, or superficial
modification of the final eligible component, if the taxpayer does not
also engage in the process resulting in a substantial transformation
described in proposed Sec. 1.45X-1(c)(1). Proposed Sec. 1.45X-
1(c)(1)(iii) would have provided examples illustrating the definition
of ``produced by the taxpayer.''
Several commenters requested that the final regulations
specifically state that taxpayers may produce eligible components using
recycled materials. While the preamble to the Proposed Regulations
stated that primary and secondary production are included in the
definition of ``produced by the taxpayer,'' that issue was not
addressed in the text of the Proposed Regulations. The preamble to the
Proposed Regulations further stated that primary production involves
producing an eligible component using non-recycled materials while
secondary production involves producing an eligible component using
recycled materials.
The Treasury Department and the IRS agree with the request to
clarify the general rule that production includes primary and secondary
production, and these final regulations revise proposed Sec. 1.45X-
1(c)(1) and (2) to add secondary production to the definition of
produced by the taxpayer.
A few commenters stated the definition of ``produced by the
taxpayer'' should be defined consistently with section 263A of the Code
to the extent possible and expressed concern that using different
definitions will cause ``increased technical uncertainty, additional
compliance burden, especially for small business taxpayers, and
unnecessary litigation and controversy.'' Another commenter stated that
the Proposed Regulations introduced new definitions, such as
``substantial transformation'' as production qualifiers, ``raising
concerns about its apparent conflict with the enacted statutes.''
The term ``produced by the taxpayer'' is not defined in section
45X, nor is there any indication in section 45X suggesting that
Congress intended the use of any existing statutory definition, such as
the standard in section 263A. Section 45X provides a credit based on
the production of numerous eligible components and a variety of
production processes are utilized by manufacturers in the production of
these eligible components.
Given the variety of production processes and the highly technical
nature of production, the Treasury Department and the IRS, in close
coordination with the Department of Energy, proposed a definition that
would apply broadly to eligible components. In addition, the proposed
definition of ``produced by the taxpayer'' focused on requiring
production of a complete and distinct eligible component and,
accordingly, introduces a substantial transformation requirement to
distinguish production from partial transformation, mere assembly, and
superficial modification. The proposed definition of ``produced by the
taxpayer'' along with the amendment clarifying that production includes
secondary production is the appropriate standard to implement the
section 45X credit. The definition provides the necessary flexibility
to account for the highly technical nature of the production processes
associated with eligible components. This standard also ensures that
the section 45X credit is claimed by the taxpayer responsible for the
key production activity and that such activity occurs in the United
States or a United States territory. In contrast to section 45X,
section 263A is designed
[[Page 85801]]
to ensure that taxpayers capture the direct and indirect costs
associated with producing inventoriable goods for capitalization
purposes. Moreover, in section 263A, the definition of production
applies to a broad range of produced items, whereas the definition in
section 45X applies to a limited number of statutorily enumerated
eligible components. For these reasons, the Treasury Department and the
IRS have concluded that the definition of ``produced by the taxpayer''
in the Proposed Regulations with the clarifying amendment addressing
secondary production appropriately implements section 45X(a)(1)(A), and
thus decline to accept the commenter's recommendation to define
``produced by the taxpayer'' for purposes of section 45X consistent
with the similar term under section 263A.
Several commenters requested that the final regulations provide
more specific guidance for certain eligible components to illustrate
whether certain activities or processes result in substantial
transformation versus partial transformation, mere assembly, or
superficial modification. One commenter, for example, requested that
the final rules confirm that the term ``produced'' in the phrase
``produced by the taxpayer'' is applied within the context of the
standard production process of each eligible component, such that the
standard production process for each eligible component is deemed to be
``substantial transformation'' that meets the requirements of proposed
Sec. 1.45X-1(c)(1). The commenter provided an example of the
production of a solar module, which ``involves the final assembly of
the other solar components, many of which separately qualify for their
own section 45X credit, into the overall module.'' The Treasury
Department and the IRS recognize that certain eligible components, such
as solar modules and battery modules using battery cells, are produced
primarily by assembling other components. In these limited cases, the
substantial transformation requirement is met by the taxpayer that
assembles the constituent components to produce the solar module or
battery module using battery cells. Because assembly is the activity
that primarily produces these eligible components, the assembly
necessary to achieve production of a solar module or battery module
using battery cells should not generally be viewed as disqualifying
``minor assembly.'' The Treasury Department and the IRS also recognize
that certain eligible components, such as nacelles, that have undergone
substantial transformation to be considered ``produced by the
taxpayer'' may be produced and sold to a third party in a manner in
which only minor assembly remains left to complete. In these cases,
provided all other requirements of section 45X are met, the party that
produces and sells the eligible components in such manner is not
precluded from claiming the section 45X credit. The third party that
completes the eligible component by performing minor assembly is not
entitled to the section 45X credit because that third party is not
considered to produce the eligible component. For these reasons, and
for clarity and consistency, the final regulations replace each
instance of ``mere assembly'' in the Proposed Regulations, with ``minor
assembly.''
A commenter suggested adding an additional example to proposed
Sec. 1.45X-1(c)(1)(iii) to clarify whether the integration of
electrical subcomponents and software necessary to enable the
functionality of an inverter is disqualifying minor assembly, and
another commenter requested clarification on whether the coating of a
battery separator is ``superficial modification'' or ``substantial
transformation.'' A few commenters also requested that the final rules
further clarify ``substantial transformation'' to ensure manufacturers
claiming section 45X credits are actually producing an eligible
component in the United States and suggested using examples to
differentiate between substantial and partial transformation for
specific components, such as inverters for solar energy.
As previously discussed, section 45X provides a credit based on the
production of numerous eligible components and a variety of production
processes are utilized by manufacturers in the production of these
eligible components. Thus, listing specific production processes for
each eligible component is not practicable and could also imply that
other variations of production processes do not qualify as production.
The Treasury Department and the IRS have determined that the inquiry
into whether production activities or processes result in substantial
transformation for a specific eligible component is highly fact
dependent and conclude that the examples in proposed Sec. 1.45X-
1(c)(1)(iii), which are included in the final regulations, provide
sufficient guidance to determine what types of activities or production
steps do not qualify as substantial transformation.
2. Special Rule for Production of Certain Eligible Components
Proposed Sec. 1.45X-1(c)(2) would have provided that for solar
grade polysilicon, electrode active materials, and applicable critical
minerals, produced by the taxpayer means processing, conversion,
refinement, or purification of source materials, such as brines, ores,
or waste streams, to derive a distinct eligible component. Several
commenters requested that in addition to processing, conversion,
refinement, and purification, the final regulations clarify that the
production process includes extraction, while others requested
maintaining the position in the Proposed Regulations to exclude costs
of extraction. The Treasury Department and the IRS decline to amend the
final regulations to expressly include the term ``extraction,'' as the
action of extraction alone does not produce an eligible component. For
the discussion and analysis of whether extraction costs are includible
as production costs in the production of electrode active materials or
applicable critical minerals, see Part IV.E.1.e. of this Summary of
Comments and Explanation of Revisions.
Another commenter asked whether recycling aluminum transformer wire
(cleaning, melting, and bailing it) to send to an aluminum smelter
constitutes ``secondary aluminum production.'' The Treasury Department
and the IRS note that under both proposed Sec. 1.45X-1(c)(2) and Sec.
1.45X-1(c)(2) of these final regulations, substantial transformation
for an applicable critical mineral requires that the applicable
critical mineral be ``processed, converted, refined, or purified to
derive a distinct eligible component.'' Because a taxpayer in these
circumstances would not derive a distinct eligible component, this
would not be an eligible component produced by the taxpayer within the
meaning of section 45X(a)(1)(A).
These final regulations make a clarifying revision to the
definition of produced by the taxpayer under proposed Sec. 1.45X-
1(c)(2) so that it references substantial transformation. While no
comments were received on this issue, this revision is needed to
appropriately align the definition of ``produced by the taxpayer'' in
Sec. 1.45X-1(c)(2) with the requirements to qualify as an eligible
taxpayer in Sec. 1.45X-1(c)(3).
3. Eligible Taxpayer
a. In General
Proposed Sec. 1.45X-1(c)(3)(i) would have provided that the
taxpayer
[[Page 85802]]
claiming a section 45X credit with respect to an eligible component
must be the person that performs the actual production activities that
bring about a substantial transformation resulting in the eligible
component and that sells such eligible component to an unrelated
person.
b. Contract Manufacturing Arrangement
Proposed Sec. 1.45X-1(c)(3)(ii)(A) would have provided that, if
the production of an eligible component is performed in whole or in
part subject to a contract that is a contract manufacturing
arrangement, then the party to such contract that may claim the section
45X credit with respect to such eligible component, provided all other
requirements in section 45X are met, is the taxpayer that performs the
actual production activities that bring about a substantial
transformation resulting in the eligible component. The preamble to the
Proposed Regulations stated that this proposed rule was intended to
provide an administrable rule that provides clarity and certainty in
determining which taxpayer may claim the section 45X credit in a
contract manufacturing arrangement.
c. Contract Manufacturing Defined
Proposed Sec. 1.45X-1(c)(3)(ii)(B) would have defined the term
``contract manufacturing arrangement'' to mean any agreement providing
for the production of an eligible component if the agreement is entered
into before the production of the eligible component to be delivered
under the contract is completed. Proposed Sec. 1.45X-1(c)(3)(ii)(B)
would have further provided that a routine purchase order for off-the-
shelf property is not treated as a contract manufacturing arrangement.
Proposed Sec. 1.45X-1(c)(3)(ii)(B) also would have provided that an
agreement will be treated as a routine purchase order for off-the-shelf
property if the contractor is required to make no more than de minimis
modifications to the property to tailor it to the customer's specific
needs, or if at the time the agreement is entered into, the contractor
knows or has reason to know that the contractor can satisfy the
agreement out of existing stocks or normal production of finished
goods. This definition of the term ``routine purchase order'' is based
on the definition found in Sec. 1.263A-2(a)(1)(ii)(B)(2)(ii). The
Treasury Department and the IRS requested comments in the preamble to
the Proposed Regulations on whether this definition should be further
clarified or modified. Comments on the definition of manufacturing
arrangements are discussed in Part II.B.3.d. of this Summary of
Comments and Explanation of Revisions.
d. Special Rule for Contract Manufacturing Arrangements
Proposed Sec. 1.45X-1(c)(3)(iii) would have explained the special
rule allowing parties to a contract manufacturing arrangement to agree
on which party to the contract will claim the section 45X credit for
eligible components produced subject to such contract. Proposed Sec.
1.45X-1(c)(3)(iv) would have explained the certification requirements
for the special rule. Several commenters expressed support for the
contract manufacturing rules, but one commenter expressed concern about
the treatment of contract manufacturing arrangements in effect prior to
the applicability date of the Proposed Regulations. This commenter
recommended that the final regulations adopt a safe harbor rule that
would function as an exception to the general rule and provide that
when one party is contractually entitled to purchase all or
substantially all (for example, at least 90 percent) of the output of
the fabricator's production of a given component for the taxable year,
the purchaser would be treated as the producer for purposes of section
45X. The Treasury Department and the IRS decline to adopt the
commenter's request to add a safe harbor for contract manufacturing
arrangements in place before the applicability date of the Proposed
Regulations, but note that a taxpayer may still have the option of
applying the special rule in Sec. 1.45X-1(c)(3)(iii) of these final
regulations for contract manufacturing arrangements entered into before
the applicability date, provided all requirements of the special rule
are met.
The preamble to the Proposed Regulations stated that the Treasury
Department and the IRS intend for the production cost incurred rules in
proposed Sec. 1.45X-3(e)(2) to apply to a credit claimant in a
contract manufacturing arrangement. The Treasury Department and the IRS
requested comments on whether the proposed rules need further
clarification or modification as applied to contract manufacturing
arrangements. One commenter requested allowing taxpayers that extract
and recycle raw materials and taxpayers that process such materials and
incorporate them into applicable critical minerals to apply the
contract manufacturing arrangement provisions, in the event that costs
of extraction and direct and indirect material costs are not includible
in the eligible production costs of producing an applicable critical
mineral. The Treasury Department and the IRS think that the
clarification requested by this commenter is no longer necessary
because these final regulations permit the inclusion of extraction and
certain material costs in the cost of producing an applicable critical
mineral if certain requirements are met. See Parts IV.E.1.e. and V.C.
of this Summary of Comments and Explanation of Revisions for further
discussion.
Proposed Sec. 1.45X-1(c)(3)(v) would have provided examples
illustrating the application of the special rule. One commenter
requested that proposed Sec. 1.45X-1(c)(3)(v)(C) (Example 3)
specifically state that the domestic production requirement requires
that each wind tower section must be produced in the United States.
Proposed Sec. 1.45X-(1)(c)(3)(v)(C) (Example 3) states that a taxpayer
could claim a credit for a tower for which it had three different
producers each produce one section, provided that the parties all agree
that the taxpayer is the sole party that can claim the credit and ``all
other requirements of section 45X are met.'' The Treasury Department
and the IRS have determined that the domestic production requirement is
already included by this language and thus, additional clarification is
not necessary.
Another commenter questioned whether, in proposed Sec. 1.45X-
1(c)(3)(v)(C) (Example 3), V must sell the completed wind tower to Z
for the special rule in proposed Sec. 1.45X-1(c)(3)(iii) to apply. In
the example, V enters into a contract manufacturing arrangement with W,
X, and Y to make the wind tower, which V sells to Z. All parties to the
contract manufacturing arrangement and Z are unrelated. The commenter
stated that if V, W, X, and Y sign a certification statement and Y
claims the section 45X credit, Y could claim the section 45X credit in
2025 because that is when it sold the eligible component to V. Contrary
to the commenter's conclusion with respect to Y's ability to claim a
section 45X credit in 2025, Y is not eligible for the section 45X
credit until the eligible component, which is the wind tower comprised
of all three wind tower sections, is produced and then sold to an
unrelated person (in this case Z). Under the contract manufacturing
arrangement, W, X, and Y are collectively viewed as producing the
entire eligible component (wind tower) because all three sections
together result in a single eligible component. Along with the
production of the entire wind tower, V has to sell the completed wind
tower to an
[[Page 85803]]
unrelated person before the designated party is eligible for a section
45X credit.
A commenter suggested revisions to the proposed rules to allow an
allocation of any portion of the credit to parties who extract the
mineral and perform initial refining processes, rather than allowing a
credit to the taxpayer that purifies the critical mineral to the
statutory minimum. Section 45X(c)(6) defines a list of applicable
critical minerals with specific minimum purity levels which must be met
for the taxpayer to have produced an eligible component. The Treasury
Department and the IRS do not have the authority to modify these
statutory requirements. However, the Treasury Department and the IRS
seek to clarify that a taxpayer who performs extracting and refining
activities may benefit from the contract manufacturing provisions
described in this section. The final regulations accordingly add Sec.
1.45X-1(c)(3)(v)(D) (Example 4) to demonstrate how the contract
manufacturing provisions may apply in the situation described by the
commenter.
4. Timing of Production and Sale
Proposed Sec. 1.45X-1(c)(4)(i) would have provided that production
of eligible components for which a taxpayer is claiming a section 45X
credit may begin before December 31, 2022, but production of eligible
components must be completed, and the eligible components must be sold,
after December 31, 2022. Proposed Sec. 1.45X-1(c)(4)(ii) would have
provided an example illustrating the timing of the production and sale
rule in proposed Sec. 1.45X-1(c)(4)(i).
Some commenters requested further clarity on when production and
sale of an eligible component may take place. One commenter requested
that the final rules provide that a specific minimum percentage of
production of an eligible component must occur after 2022 and that no
sale of the eligible component be reported by the taxpayer before 2023.
The Treasury Department and the IRS decline to adopt these percentage
test suggestions because Congress clearly recognized that some
production could occur prior to 2023 but did not specify an exact
amount of production that must occur in taxable years either before or
after 2023. Moreover, if a sale occurred before 2023, which requires a
facts and circumstances analysis based in part on contractual terms,
the component sold is not eligible for the section 45X credit.
Accordingly, the final regulations adopt proposed Sec. 1.45X-
1(c)(4)(i) and the example in proposed Sec. 1.45X-1(c)(4)(ii) without
modification.
Another commenter stated that the Proposed Regulations do not
specify whether production activities that qualify for the section 45X
credit have to occur after the effective date of the rule or whether
the activities can be retroactive. The commenter suggests the final
rule specify the applicable period for the production activities and
provide a reasonable transition rule for taxpayers who produce eligible
components before the effective date of the final regulations. The
Treasury Department and the IRS have determined that the Proposed
Regulations and these final regulations are clear as to the timing of
production and sale requirements under section 45X. For clarification,
and as described earlier, section 13502(c) of the IRA provides that
section 45X applies to components produced and sold after December 31,
2022. The preamble to the Proposed Regulations clarified application of
the section 45X effective date, stating that each of proposed
Sec. Sec. 1.45X-1 through 1.45X-4 would have applied to eligible
components for which production is ``completed'' and sales occur after
December 31, 2022, and during taxable years ending on or after the date
of publication of these final regulations. Proposed Sec. 1.45X-
1(c)(4)(i) would have provided that production of eligible components
may begin before December 31, 2022, and only required production of
eligible components be completed, and sales must occur, after December
31, 2022. Proposed Sec. 1.45X-1(c)(4)(ii) would have provided an
example illustrating proposed Sec. 1.45X-1(c)(4)(i). These final
regulations adopt these proposed rules. The Treasury Department and the
IRS do not have statutory authority to provide for a section 45X credit
in a situation in which production was completed on or before December
31, 2022.
C. Produced in the United States
Consistent with section 45X(d)(2), proposed Sec. 1.45X-1(d)(1)
would have provided that sales are taken into account for purposes of
the section 45X credit only for eligible components that are produced
within the United States, as defined in section 638(1) of the Code, or
a United States territory. Proposed Sec. 1.45X-1(d)(2) would have
clarified that constituent elements, materials, and subcomponents used
in the production of eligible components are not subject to the
domestic production requirement provided in proposed Sec. 1.45X-
1(d)(1). Thus, while the eligible component must be produced
domestically, its constituent elements, materials, and subcomponents
need not be.\2\
---------------------------------------------------------------------------
\2\ See Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in the 117th Congress, JCS-1-23 (December 21,
2023) at 267 (``The credit only applies to sales where the eligible
components are produced within the United States or U.S.
territories. This requirement is not intended to apply to
subcomponents or materials used to produce eligible components.'').
---------------------------------------------------------------------------
Some commenters agreed with this approach in the Proposed
Regulations. According to these commenters, the Proposed Regulations
appropriately allowed the credit for eligible components produced in
the United States provided that the activities necessary to transform
them into eligible components are conducted in the United States.
Furthermore, these commenters expressed concern that a contrary rule
ignores the reality that some constituent elements, materials, and
subcomponents cannot be sourced in the United States and would
discourage investment in production activities that rely on foreign-
sourced constituent elements, materials, and subcomponents. However,
other commenters disagreed with the proposed approach, suggesting that
allowing eligible components to be produced using foreign subcomponents
is inconsistent with the section 45X credit's objective of
incentivizing domestic production of eligible components.
The Treasury Department and the IRS note that, while section 45X
specifically requires domestic production of an eligible component for
credit eligibility, it is silent regarding the location of production
or sourcing of constituent elements, materials, and subcomponents.
Accordingly, imposing a domestic production requirement for constituent
elements, materials, and subcomponents is not supported by the
statutory language of section 45X. For these reasons, the Treasury
Department and the IRS decline to adopt these suggestions and adopt the
proposed rule without change.
Beyond agreement or disagreement with this proposed rule, some
commenters inquired about its scope. One commenter asked whether the
domestic production rule applicable to eligible components also applies
to eligible components that are both an eligible component and a
``constituent element, material or subcomponent'' of another eligible
component. Another commenter asked whether raw materials and
intermediate products used to produce eligible components are included
in the definition of ``constituent elements, materials or
subcomponents.''
[[Page 85804]]
The Treasury Department and the IRS confirm that all three of these
categories of items are included in the definition of ``constituent
elements, materials, and subcomponents.'' An eligible component that is
a ``constituent element, material or subcomponent'' of another eligible
component is not subject to the domestic production rule, and thus, an
eligible component may incorporate another eligible component that is
also a foreign-sourced ``constituent element, material or
subcomponent'' and still be eligible for a section 45X credit. In
addition, raw materials and intermediate products generally qualify as
constituent elements, materials, or subcomponents.
A commenter also requested confirmation in the final regulations
that there is no requirement that eligible components be used in the
United States for section 45X credit eligibility. Consistent with
section 45X(d)(2), proposed Sec. 1.45X-1(d)(1) would have provided
that sales are taken into account for purposes of the section 45X
credit only for eligible components that are produced within the United
States (or a United States territory). Thus, the Proposed Regulations
specify only the location of production of the eligible component, and
not the location of the sale or the use of such eligible component.
Accordingly, the Treasury Department and the IRS conclude that the
additional confirmation requested by the commenter is unnecessary, as
there would be no statutory basis for requiring domestic sale or use.
D. Production and Sale in a Trade or Business
Proposed Sec. 1.45X-1(e) would have stated that an eligible
component must be produced and sold in a trade or business of the
taxpayer, with the term ``trade or business'' defined as a trade or
business within the meaning of section 162 of the Code.
A commenter requested that proposed Sec. 1.45X-1(e) expressly
include eligible components that are produced and then used to replace
defective units pursuant to a contractual obligation entered into at
the time of the original sale. The commenter stated that these warranty
transactions do not appear to violate any of the anti-abuse provisions
at proposed Sec. 1.45X-1(i). If an eligible component is produced and
sold to an unrelated person in the normal course of a trade or
business, and the eligible component is then replaced with a new
eligible component produced by the same taxpayer, there is no new sale
to an unrelated person for the replacement eligible component, but the
replacement eligible component relates back to the original sales
transaction. The precise issue is whether section 45X should be read to
effectively incentivize the production of two eligible components where
each is related to a single sales transaction. The Treasury Department
and the IRS decline to adopt this suggestion because only one credit
may be claimed with respect to the sale of an eligible component.
E. Sale of Integrated Components
1. In General
Section 45X(d)(4) provides that, for purposes of section 45X, a
person is treated as having sold an eligible component to an unrelated
person if such component is integrated, incorporated, or assembled into
another eligible component which is sold to an unrelated person.
Proposed Sec. 1.45X-1(f)(1) was intended to be consistent with section
45X(d)(4), and thus would have provided that a taxpayer is treated as
having produced and sold an eligible component to an unrelated person
if such component is integrated, incorporated, or assembled into
another eligible component that is then sold to an unrelated person.
Although no comments were received regarding this general rule in
the Proposed Regulations, the Treasury Department and the IRS want to
clarify that section 45X(d)(4) provides only for deemed sale treatment
and not deemed production. A taxpayer must produce (rather than merely
purchase or acquire) an eligible component that is integrated,
incorporated, or assembled into another eligible component that is then
sold to an unrelated person in order for the deemed sale rule to apply.
Thus, these final regulations clarify that a taxpayer is ``treated as
having sold'' an eligible component to an unrelated person if the
taxpayer produced such component and the component is integrated,
incorporated, or assembled into another eligible component that is then
sold to an unrelated person, rather than ``treated as having produced
and sold'' an eligible component that the taxpayer did not itself
produce that is then integrated, incorporated, or assembled into
another eligible component and then sold to an unrelated person.
Proposed Sec. 1.45X-1(f)(1) is clarified accordingly in these final
regulations.
2. Application of Section 45X(d)(4) to Produced Products
Proposed Sec. 1.45X-1(f)(2)(i) would have clarified that a
taxpayer may claim a section 45X credit for each eligible component
that the taxpayer produces and sells to an unrelated person, including
any eligible component the taxpayer produces that was used as an
element, material, or subcomponent and integrated, incorporated, or
assembled into another complete and distinct eligible component or
another complete and distinct product (that is not itself an eligible
component) that the taxpayer also produces and sells to an unrelated
person. Proposed Sec. 1.45X-1(f)(2)(ii) would have provided an example
of the credit eligibility of a sale of a product with incorporated
eligible components to a related person.
Commenters expressed agreement with proposed Sec. 1.45X-
1(f)(2)(i). One commenter stated that the clarification in Sec. 1.45X-
1(f)(2)(i) avoids the need for some vertically integrated producers of
eligible components that incorporate the eligible components into
another product that is not an eligible component to artificially
restructure in order to create an intercompany sale. Another commenter
requested a flexible interpretation of section 45X(d)(4) that would
apply the section 45X credit as an additive credit across the supply
chain to the final assembler. The commenter stated such an
interpretation is consistent with the language in section 45X(b)(1),
which provides that the section 45X credit amount is determined with
respect to any eligible component, including any eligible component it
incorporates. For example, in the commenter's view, a taxpayer that
produces a structural fastener would be eligible to receive a credit
for its production of an eligible component as would the integrator,
incorporator, assembler of the structural fastener into another
eligible component. Although the Treasury Department and the IRS agree
that section 45X(b)(1) provides that the credit amount is determined
with respect to any eligible component produced by the taxpayer,
including any eligible component the taxpayer incorporates that was
also produced by the taxpayer, the Treasury Department and the IRS
disagree with the implication that the calculation of the section 45X
credit should be additive based on the number of eligible components
used to produce an item in a case in which each eligible component is
not produced by the taxpayer. Only the producer of an eligible
component would be eligible for a section 45X credit. Proposed Sec.
1.45X-1(f)(1) and (2) are finalized with no modifications because the
Treasury Department and the IRS conclude the rules provide clarity as
currently written.
[[Page 85805]]
F. Interaction Between Sections 45X and 48C
1. In General
Consistent with section 45X(c)(1)(B), proposed Sec. 1.45X-1(g)(1)
would have provided that, for purposes of section 45X, an eligible
component must be produced at a section 45X facility and does not
include any property (produced property) that is produced at a facility
if the basis of any property that is part of the production unit that
produces the produced property is eligible property that is included in
a section 48C facility and is taken into account for purposes of a
credit allowed under section 48C (section 48C credit) after August 16,
2022.
Proposed Sec. 1.45X-1(g)(2)(i) would have provided that a section
45X facility includes all tangible property that comprises an
independently functioning production unit that produces one or more
eligible components. Proposed Sec. 1.45X-1(g)(2)(ii) would have
provided that a production unit is comprised of the tangible property
that substantially transforms material inputs to complete the
production process of an eligible component.
Proposed Sec. 1.45X-1(g)(3)(i) would have provided that a section
48C facility includes all eligible property included in a qualifying
advanced energy project for which a taxpayer receives an allocation of
section 48C credits and claims such credits after August 16, 2022.
Proposed Sec. 1.45X-1(g)(3)(ii) would have defined eligible property
that is included in a section 48C facility.
With respect to the proposed rules on the interaction between
sections 45X and 48C various comments were received. A commenter
requested that the final rules not apply section 45X(c)(1)(B) to
disallow the section 45X credit in the event that the taxpayer claiming
the section 45X credit incorporates into its eligible component a
subcomponent that was produced by a section 48C facility, as long as
that same taxpayer was not eligible for the section 48C credit with
respect to the section 48C facility that produced the subcomponent.
Revisions were made to these final regulations to clarify that the only
equipment, or other tangible property, that must be included in the
section 45X facility is the equipment used by the taxpayer that is
necessary to be considered the producer of the potential eligible
component. As further explained later, if production of a subcomponent
(or like property) is not a requirement to be considered the producer
under section 45X, then the equipment that is part of that section 48C
facility used to produce the subcomponent is not part of the section
45X facility. As a result, it is possible that the same taxpayer could
receive a section 48C credit on equipment used to produce a
subcomponent (or like property), and a section 45X credit on the
production of an eligible component.
One commenter requested an example to help determine whether an
eligible component produced at a facility located ``adjacent'' to a
section 48C facility that received a section 48C credit impacts
eligibility for the section 45X credit. The physical proximity of a
section 45X facility to a section 48C facility does not determine
whether a product may be an eligible component and revisions to these
final regulations were made to clarify that point.
Another commenter requested more clarity to determine whether a
facility that shares upstream raw materials and processes as a section
48C facility is still eligible for a section 45X credit and requested
examples of upstream supply chains and processes that are eligible and
ineligible for both sections 48C and 45X. Several commenters requested
additional clarity regarding the meaning and extent of the term
``production unit.''
Based on the comments and further consideration of the Proposed
Regulations, revisions were made in these final regulations to simplify
the rules and examples in proposed Sec. 1.45X-1(g)(1) through (4).
Specifically, these final regulations make clear that the general rule
is that property that would otherwise qualify as an eligible component
(otherwise qualified property) is only an eligible component if the
property is produced at a section 45X facility and no part of that
section 45X facility is also a section 48C facility. These final
regulations also revise the definition of section 45X facility,
clarifying that a section 45X facility is the independently functioning
tangible property used by the taxpayer that is necessary to be
considered the producer of the otherwise qualified property within the
meaning of Sec. 1.45X-1(c)(1) or (2), as applicable. The Proposed
Regulations would have relied on the concept of a ``production unit''
to define the scope of a section 45X facility, but there was overlap
between the term production unit as proposed and the definition of a
section 45X facility. After careful consideration, the Treasury
Department and the IRS determined that the proposed term ``production
unit'' introduced unnecessary complexity, particularly in light of the
revisions to the definition of section 45X facility in these final
regulations. Accordingly, these final regulations do not use the term
production unit.
The definition of section 45X facility in these final regulations
includes independently functioning tangible property that is used and
that is necessary for the otherwise qualified property to be considered
produced by the taxpayer within the meaning of Sec. 1.45X-1(c)(1) or
(2), as applicable. Accordingly, tangible property used to produce a
subcomponent or other property which is later integrated, incorporated,
or assembled into a distinct and final eligible component is not part
of the section 45X facility. This rule, however, does not apply if the
other property is of a type that the taxpayer must produce for the
resulting eligible component to be considered produced by the taxpayer.
This analysis can depend on the definition of the eligible component
being ultimately produced. For example, section 45X(c)(3)(B)(ii)(I)(bb)
requires a single manufacturer to produce a photovoltaic wafer through
formation of an ingot from polysilicon and subsequent slicing. Thus,
the section 45X facility with respect to the photovoltaic wafers would
include any equipment that is tangible property that is used to produce
the ingot and any equipment that is tangible property that is used to
perform the subsequent slicing. In contrast, equipment used to produce
front glass of a solar module under section 45X(c)(3)(B)(v) could be
excluded from a section 45X facility because it is not necessary to use
the front glass equipment to be considered the producer of the solar
module for section 45X. This rule may benefit a taxpayer that produces
a subcomponent or other property of an eligible component using
equipment that is also eligible property for purposes of the section
48C credit, but uses other equipment not related to the section 48C
credit to produce the eligible component.
Lastly, these final regulations add a specific rule for contract
manufacturing arrangements in Sec. 1.45X-1(g)(2)(ii) to address any
uncertainty with respect to how to determine a section 45X facility in
that situation. This rule clarifies that the tangible property used to
produce the otherwise qualified property (regardless of who claims the
credit) must be considered.
4. Examples of Sections 45X and 48C Interaction
Proposed Sec. 1.45X-1(g)(4)(i) through (v) would have provided
examples to illustrate the application of these rules. A few commenters
requested that, contrary to proposed Sec. 1.45X-1(g)(4)(ii) (Example
2), ingot and wafer production
[[Page 85806]]
should be treated as two separate manufacturing activities so that an
ingot facility is eligible for the section 48C credit while a wafer
facility is eligible for the section 45X credit. As required by section
45X(c)(3)(B)(ii)(I)(bb), however, a photovoltaic wafer must be produced
by a single manufacturer either by forming an ingot from molten
polysilicon (for example, Czochralski method) and then subsequently
slicing it into wafers, or by forming molten or evaporated solar grade
polysilicon or deposition into a sheet or layer (that is, thin-film
deposition). As the statute requires production of a photovoltaic wafer
by a single manufacturer that both forms an ingot and slices it into
wafers, it is not appropriate to treat ingot and wafer production as
two separate manufacturing activities. Rather, as both activities are
necessary, it follows that the tangible property used to complete each
activity must be within a single section 45X facility with respect to
the eligible component produced. No comments were received on the other
examples in proposed Sec. 1.45X-1(g)(4)(i) through (v). However, all
of the examples in proposed Sec. 1.45X-1(g)(4)(i) through (v) were
modified consistent with the revisions in Sec. 1.45X-1(g)(1) through
(3).
A few commenters suggested that parties in a contract manufacturing
arrangement under proposed Sec. 1.45X-1(c)(3)(iii) could circumvent
the prohibition under section 45X(c)(1)(B) that disallows a section 45X
credit for items produced at a section 48C facility. More specifically,
commenters suggested that a taxpayer could enter into a contract
manufacturing arrangement under proposed Sec. 1.45X-1(c)(3)(iii) to
produce photovoltaic wafers that are then used to manufacture
photovoltaic cells. If the taxpayer itself integrated, incorporated, or
assembled the photovoltaic cells into solar modules, the taxpayer might
claim a section 45X credit for all three products upon their sale, even
though the photovoltaic wafers were manufactured by the contract
manufacturer at a section 48C facility while the photovoltaic cells
were manufactured at a section 45X facility, if the taxpayer was
unaware that the contract manufacturer manufactured the photovoltaic
wafers at a section 48C facility. The Proposed Regulations did not
allow this, and the final regulations would continue to disallow a
section 45X credit for the photovoltaic wafers in this scenario. To the
extent that the photovoltaic wafers were produced at a section 48C
facility, the photovoltaic wafers would not qualify as an eligible
component to any party to the contract manufacturing arrangement. As
described earlier, these final regulations add a rule in Sec. 1.45X-
1(g)(2)(ii) to clarify the rules in a contract manufacturing
arrangement situation, and the examples in Sec. 1.45X-1(g)(4) have
also been modified.
G. Anti-Abuse Rule
As explained in the preamble to the Proposed Regulations, proposed
Sec. 1.45X-1(i)(1) would have provided a general anti-abuse rule that
would make the section 45X credit unavailable in extraordinary
circumstances in which, based on a consideration of all the facts and
circumstances, the primary purpose of the production and sale of an
eligible component is to obtain the benefit of the section 45X credit
in a manner that is wasteful, such as discarding, disposing of, or
destroying the eligible component without putting it to a productive
use. Proposed Sec. 1.45X-1(i)(1) would have provided that the rules of
section 45X and the section 45X regulations must be applied in a manner
consistent with the purposes of section 45X and the section 45X
regulations (and the regulations in this chapter under sections 6417
and 6418 related to the section 45X credit). A purpose of section 45X
and the section 45X regulations (and the regulations in this chapter
under sections 6417 and 6418 related to the section 45X credit) is to
provide taxpayers an incentive to produce eligible components in a
manner that contributes to the development of secure and resilient
supply chains. Accordingly, the section 45X credit is not allowable if
the primary purpose of the production and sale of an eligible component
is to obtain the benefit of the section 45X credit in a manner that is
wasteful, such as discarding, disposing of, or destroying the eligible
component without putting it to a productive use. A determination of
whether the production and sale of an eligible component is
inconsistent with the purposes of section 45X and the section 45X
regulations (and the regulations in this chapter under sections 6417
and 6418 related to the section 45X credit) is based on all facts and
circumstances. Proposed Sec. 1.45X-1(i)(2) would have provided an
example illustrating this anti-abuse rule.
One commenter suggested that, in applying the anti-abuse rule, the
taxpayer claiming a section 45X credit should not be held responsible
for the activities of the customer after a sale has occurred (unless
the customer is a related entity); the determination of whether a
component is defective should be made at the factory gate; and
``productive use'' should include the sale of an eligible component to
an entity engaged in the business of directly (such as a utility) or
indirectly (such as a project developer) deploying the batteries.
Proposed Sec. 1.45X-1(i)(1) provides that a determination of whether
the production and sale of an eligible component is inconsistent with
the purposes of section 45X and the section 45X regulations (and the
regulations under sections 6417 and 6418 related to the section 45X
credit) is based on all the facts and circumstances. Under a facts and
circumstances analysis, no single factor is determinative, and the
considerations listed by the commenter would have to be evaluated in
the context of all other facts and circumstances. The Treasury
Department and the IRS thus decline to list specific parameters that
automatically result in a finding of a favorable or unfavorable primary
purpose.
Another commenter suggested adding additional examples to proposed
Sec. 1.45X-1(i) to make clear that the section 45X credit is never
allowable with respect to any cost the primary purpose of which is to
increase the amount of the section 45X credit. While both examples
offered by the commenter involve possible abuses, the anti-abuse rule
is intended to cover a broad range of abuses. Proposed Sec. 1.45X-1(i)
would have provided that a determination of whether the production and
sale of an eligible component is inconsistent with the purposes of
section 45X and the section 45X regulations is based on all facts and
circumstances, and no single factor is determinative. Accordingly, the
Treasury Department and the IRS decline to adopt the commenter's
suggestion.
III. Sale to Unrelated Person
A. In General
Proposed Sec. 1.45X-2(a) would have stated that the amount of the
section 45X credit for any taxable year is equal to the sum of the
credit amounts determined under section 45X(b) (and described in
proposed Sec. Sec. 1.45X-3 and 1.45X-4) with respect to each eligible
component that is produced by the taxpayer and, during the taxable
year, sold by the taxpayer to an unrelated person. Applicable Federal
income tax principles apply to determine whether a transaction is in
substance a sale (or the provision of a service, or some other
disposition). Proposed Sec. 1.45X-2(a) also would have cross-
referenced proposed Sec. 1.45X-1(d) and (e) for additional
requirements relating to sales. Section
[[Page 85807]]
45X(d)(1) provides that persons are treated as related to each other if
such persons would be treated as a single employer under the
regulations prescribed under section 52(b). Proposed Sec. 1.45X-2(b)
would have provided definitions of the terms ``person,'' ``related
person,'' and ``unrelated person'' for purposes of the section 45X
credit.
A few commenters requested additional clarity in the final rules on
how a sale is defined and when a sale is determined for the purpose of
section 45X. One commenter recommended that a sale be defined for 45X
as the point when a taxpayer signs a binding contractual agreement with
a buyer in the taxpayer's trade or business for the purchase of an
eligible component. Section 45X provides special rules addressing sales
of eligible components to related persons that may be treated as sales
to unrelated persons, and a general rule that an eligible component
produced and sold by the taxpayer is only taken into account if such
production and sale is in a trade or business of the taxpayer, but
otherwise does not provide any specific rules regarding whether and
when a sale have occurred. Proposed Sec. 1.45X-2(a) would have
provided that applicable Federal income tax principles apply to
determine whether a transaction is in substance a sale (or the
provision of a service, or some other disposition), and those same
principles apply in determining when a transaction is a sale. More
specific rules on the determination of whether and when a sale occurs
is beyond the scope of these final regulations. Accordingly, the
Treasury Department and the IRS maintain the standard in proposed Sec.
1.45X-2(a) and finalize the proposed rule without modification.
Another commenter requested further clarification on the sale of
eligible components in two scenarios. In the first scenario, Company A
is a U.S. based company producing eligible components that it sells to
Company B, which is not directly using the eligible components but
resells to Company C to use in a manufacturing process or otherwise in
its trade or business. For this first scenario, the commenter requested
clarification on whether Company A is eligible to claim the section 45X
credit for the domestic production and sale of the eligible components.
In the second scenario, the commenter assumed the same facts as in the
first scenario, but Company B or Company C is using Company A's
eligible component outside the United Sates. In this second scenario,
the commenter requested clarification on whether Company A remains
eligible to claim the section 45X credit for the domestic production
and sale of the eligible components.
In both scenarios under the Proposed Regulations, Company A is
eligible to claim the section 45X credit for the domestic production
and sale of the eligible components if the production and sale is in a
trade or business of Company A, regardless of whether the first
purchaser is using the eligible component in its trade or business or
sells to a subsequent purchaser for use in the subsequent purchaser's
trade or business, and regardless of whether the purchaser or
subsequent purchaser uses the eligible component in the United States.
Because the Proposed Regulations clearly provide this result, no
further revision is necessary in these final regulations.
B. Special Rules for Sales to a Related Person
Consistent with section 45X(a)(3)(A), proposed Sec. 1.45X-2(c)(1)
would have provided a special rule that, for purposes of section
45X(a), a taxpayer is treated as selling an eligible component to an
unrelated person if such component is sold to such person by a person
who is related to the taxpayer. Proposed Sec. 1.45X-2(c)(2) would have
provided an example to illustrate this special rule.
Given the importance of whether parties are related persons or
unrelated persons, a commenter proposed a particular fact pattern and
requested clarification on who the purchaser is and whether they were
related or unrelated to the producer and seller. In general, section
45X(d)(1) and proposed Sec. 1.45X-2(b)(2) provides that persons are
treated as related to each other if such persons would be treated as a
single employer under the regulations prescribed under section 52(b). A
request for application of the section 52(b) regulations by the
Treasury Department and the IRS to a particular fact pattern requiring
a facts and circumstances analysis is outside the scope of these final
regulations.
Another commenter requested that the final rules clarify whether a
Related Person Election is necessary when eligible components are sold
by the producer to an unrelated person, who subsequently sells them to
a person related to the producer of such eligible components. The
commenter proposes amending proposed Sec. 1.45X-2(c) to clarify that
direct or indirect sales to a related person qualify if the producer
knows or has reason to know the unrelated person is intending to sell
the same eligible components to a person related to the producer. To
provide assurance to commenter, a Related Person Election is not
necessary in this situation because the first sale was to an unrelated
party, but the Treasury Department and the IRS have determined that the
rules as set out by proposed Sec. 1.45X-2(c) do not require further
clarification on this point. In addition, if there are circumstances in
which purported sales are made to unrelated persons to circumvent the
requirements of section 45X, proposed Sec. 1.45X-2(a) provides that
applicable Federal income tax principles apply to determine whether a
transaction will be respected as a sale.
C. Related Person Election
1. Availability of Election--In General
Proposed Sec. 1.45X-2(d)(1)(i) would have provided that a taxpayer
may make a Related Person Election under section 45X(a)(3)(B) to treat
a sale of eligible components by such taxpayer to a related person as
if made to an unrelated person. As a condition of, and prior to, a
taxpayer making a Related Person Election, the Secretary may require
such information or registration as the Secretary deems necessary for
purposes of preventing duplication, fraud, or any improper or excessive
credit amount determined under section 45X(a)(1). Proposed Sec. 1.45X-
2(d)(1)(ii) would have provided the rules regarding the Related Person
Election for members of a consolidated group (as defined in Sec.
1.1502-1(h)).
One commenter requested that taxpayers be allowed to exercise the
Related Person Election in situations where it is difficult for the
taxpayer to determine whether two entities are related under the
section 52(b) regulations. Allowing the exercise of the Related Person
Election as commenter requested would conflict with the language in
section 45X(d)(1), which requires the parties be treated as a single
employer under the section 52(b) regulations, not just that it be
difficult to determine the status. Therefore, these final regulations
do not adopt the commenter's request.
2. Anti-Abuse Rule
Proposed Sec. 1.45X-2(d)(4) would have provided an anti-abuse rule
for the Related Person Election consistent with section
45X(a)(3)(B)(ii) for preventing duplication, fraud, or any improper or
excessive amount of the section 45X credit. Proposed Sec. 1.45X-
2(d)(4)(i) would have provided that a Related Person Election may not
be made if the taxpayer fails to provide the information required by
proposed Sec. 1.45X-2(d)(2)
[[Page 85808]]
with respect to the relevant eligible components, the taxpayer provides
information that shows such components were put to an improper use as
defined in proposed Sec. 1.45X-2(d)(4)(ii) or were defective as
defined in proposed Sec. 1.45X-2(d)(4)(iii), or such components were
actually put to an improper use or were defective.
Proposed Sec. 1.45X-2(d)(4)(ii) would have provided that an
eligible component is put to an improper use if it is so used by the
related person to which the eligible component is sold. The term
improper use would mean a use that is wasteful, such as discarding,
disposing of, or destroying the eligible component without putting it
to a productive use. The Treasury Department and the IRS requested
comments in the preamble to the Proposed Regulations on the definition
of the term improper use and whether any clarifications to its scope
are necessary.
Proposed Sec. 1.45X-2(d)(4)(iii) would have provided that a
defective component means a component that does not meet the
requirements of section 45X and the section 45X regulations. The
Treasury Department and the IRS requested comments in the preamble to
the Proposed Regulations on the definition of defective components and
whether clarifications to its scope are necessary.
In response to the Treasury Department and the IRS's request for
comments, one commenter requested additional guidance regarding when an
eligible component can be deemed defective under section 45X. The
commenter recommended clarification that an eligible component can be
deemed defective and therefore ineligible for a tax credit under
section 45X ``up until the point of sale of the eligible component to
an unrelated party.'' However, in circumstances where a taxpayer has
made a valid Related Person Election, a sale of eligible components to
a related person is treated as if made to an unrelated person, thus
making a sale to an unrelated person not relevant for section 45X
credit determination purposes. The preamble to the Proposed Regulations
stated that the Treasury Department and the IRS are concerned that the
Related Person Election may be used by taxpayers to claim a credit for
eligible components that are defective, not capable of being used for
its intended purpose, do not meet the requirements for the section 45X
credit, and therefore are not eligible for the section 45X credit. The
Treasury Department and the IRS agree that if an eligible component is
not defective at the time of sale, defects arising after the point of
sale may occur in the ordinary course of a business and do not
generally raise the improper claim concerns regarding defective
components described in the Preamble to the Proposed Regulations.
Accordingly, the final rules modify proposed Sec. 1.45X-2(d)(4)(iii)
to clarify that components with respect to which defects arise after
the deemed sale are not considered defective components for purposes of
the anti-abuse rule.
Another commenter suggested that the definitions of improper use
and defective components should provide an exception for a defective
component that can be sold or given to a related or unrelated person
conducting legitimate recycling operations and allowing defective
components to earn a section 45X credit provided they are properly
recycled in the United States. The Treasury Department and the IRS
decline to adopt this request because section 45X does not authorize
allowing a section 45X credit for a defective component that does not
meet the definition of an eligible component and is not capable of
being used for its intended purpose without further substantial
modification.
D. Sales of Integrated Components to a Related Person
1. In General
Section 45X(d)(4) provides that for purposes of section 45X, a
person is treated as having sold an eligible component to an unrelated
person if such component is integrated, incorporated, or assembled into
another eligible component that is sold to an unrelated person. See
Part II.E. of this Summary of Comments and Explanation of Revisions for
rules applicable to eligible components that are integrated,
incorporated, or assembled into other eligible components and sold to
an unrelated person.
Proposed Sec. 1.45X-2(e)(1) would have provided that, for purposes
of section 45X and the section 45X regulations (and the regulations in
this chapter under sections 6417 and 6418 related to the section 45X
credit), a taxpayer that produces and sells an eligible component to a
related person who then integrates, incorporates, or assembles the
taxpayer's eligible component into another complete and distinct
eligible component that is subsequently sold to an unrelated person may
claim a section 45X credit in the taxable year of the sale to the
unrelated person.
Proposed Sec. 1.45X-2(e)(2) would have provided examples to
illustrate the treatment of sales of multiple incorporated eligible
components to related and unrelated persons. One commenter questioned
the practical application of the requirements in proposed Sec. 1.45X-
2(e)(2)(i) (Example 1) and expressed concern that although Company X
and Y are related, the proposed rule would require a significant amount
of coordination of information. This coordination would be necessary
for the credit to be claimed in the proper tax year in which the
ultimate product (photovoltaic cells produced by Y using photovoltaic
wafers produced by X and purchased by Y) was sold to Company Z.
Proposed Sec. 1.45X-2(e)(2)(i) (Example 1) illustrates the rule in
section 45X(d)(4) requiring an ultimate actual sale to an unrelated
person of an eligible component. Because section 45X(d)(4) expressly
conditions the deemed sale on an actual subsequent sale to an unrelated
person by the related person, the Treasury Department and the IRS do
not have the authority to change this statutorily imposed conditional
timing requirement despite any practical difficulties taxpayers may
experience in obtaining such information. Taxpayers may, however, make
a Related Person Election as illustrated in the example in Sec. 1.45X-
2(e)(3)(ii) and claim the section 45X credit upon the sale to the
related person. This would obviate the need for such taxpayer to know
when the related person actually makes the subsequent sale to an
unrelated person. For these reasons, the final regulations adopt
proposed Sec. 1.45X-2(e)(2)(i) (Example 1) without modification.
2. Special Rules Applicable to Related Person Election
Proposed Sec. 1.45X-2(e)(3) would have provided that if a taxpayer
makes a valid Related Person Election under section 45X(a)(3)(B)(i) and
proposed Sec. 1.45X-2(d)(1), and the taxpayer produces and then sells
an eligible component to a related person, who then integrates,
incorporates, or assembles the taxpayer's eligible component into
another complete and distinct eligible component that is subsequently
sold to an unrelated person, the taxpayer's sale of the eligible
component to the related person is treated (solely for purposes of the
section 45X credit and the section 45X regulations, and the regulations
in this chapter under sections 6417 and 6418 related to the section 45X
credit) as if made to an unrelated person in the taxable year in which
the sale to the related person occurs. One commenter expressed support
for this proposed rule, as it applies thoughtfully to vertically
integrated electric vehicle manufacturers engaging in sales of
[[Page 85809]]
multiple integrated eligible components to related and unrelated
persons (with a Related Person Election). No other comments were
received on this special rule, so it is adopted in these final
regulations without revision.
IV. Eligible Components
A. In General
Proposed Sec. 1.45X-3(a) would have defined the term ``eligible
component'' as any solar energy component, any wind energy component,
any inverter, any qualifying battery component, and any applicable
critical mineral, as each is respectively defined in the Proposed
Regulations. For solar energy components, wind energy components,
inverters, and qualifying battery components, proposed Sec. 1.45X-3(b)
through (e) would have provided definitions, rules for determining the
credit amount, and documentation requirements. Proposed Sec. 1.45X-
3(f) would also have provided rules for applying the phase out of the
section 45X credit. Proposed Sec. 1.45X-4 would have provided such
information for applicable critical minerals (other than rules for
applying the phase out, which does not apply to applicable critical
minerals).
Commenters addressed certain aspects of these proposed rules, as
described in this Part IV. of the Summary of Comments and Explanation
of Revisions. These final regulations generally adopt the rules as
proposed in Sec. 1.45X-3, with the modifications described in this
Part IV. of the Summary of Comments and Explanation of Revisions.
B. Solar Energy Components--in General
Consistent with section 45X(c)(3), proposed Sec. 1.45X-3(b) would
have provided that solar energy component means a solar module,
photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque
tube, structural fastener, or polymeric backsheet. Several commenters
requested that the final regulations add other non-listed solar energy
components (or alternatively, to provide a safe harbor) to allow for
section 45X credit eligibility. Examples of other non-listed solar
energy components commenters raised include the encapsulant used to
protect the photovoltaic cells and hold the entire system together;
charge transport materials used in photovoltaic cells; photovoltaic
wire; solar mirror facets; and solar thermal receivers. A commenter
also suggested adopting a functionally interdependent and integral part
test analogous to section 48 of the Code to include additional solar
energy components.
Section 45X(c)(3) expressly identifies the qualifying solar energy
components that are eligible for the section 45X credit. The Treasury
Department and the IRS do not have the authority to add to the set of
solar energy components that are identified by statute, for example, by
applying a functional interdependence or integral part test. For this
reason, the Treasury Department and the IRS decline to adopt the
commenters' requests in these final regulations.
1. Photovoltaic Cell
Proposed Sec. 1.45X-3(b)(1)(ii) would have provided that the
credit amount for a photovoltaic cell is equal to the product of 4
cents multiplied by the capacity of such photovoltaic cell. The
proposed rule provided that the capacity of each photovoltaic cell is
expressed on a direct current watt basis and capacity is the nameplate
capacity in direct current watts using Standard Test Conditions (STC),
as defined by the International Electrotechnical Commission (IEC). The
proposed rule further provided that in the case of a tandem technology
produced in serial fashion, such as a monolithic multijunction cell
composed of two or more sub-cells, capacity must be measured at the
point of sale at the end of the single cell production unit; and, in
the case of a four-terminal tandem technology produced by mechanically
stacking two distinct cells or interconnected layers, capacity must be
measured for each cell at each point of sale.
A few commenters expressed concern that the proposed rule treats
two-terminal and four-terminal tandem technologies differently, and
that by labeling a monolithic two-terminal configuration as composed of
sub-cells, the proposed rule would require this technology to be
measured as a single cell rather than two distinct tandem cells. In
contrast, proposed Sec. 1.45X-3(b)(1)(ii) provides that mechanically
stacked four-terminal tandem technology consists of ``two distinct
cells.'' In the commenters' view, the proposed rule would allow four-
terminal cells to be measured before they are combined, while two-
terminal cells would be measured after they are combined, resulting in
higher capacity for four-terminal cells and increased credit amounts
for four-terminal cells. A commenter also suggested that proposed Sec.
1.45X-3(b)(1)(ii) is currently problematic for future tandem technology
cell production and, perhaps unintentionally, directs the development
of certain tandem technologies.
The Treasury Department and the IRS agree with the commenters'
concerns regarding disparate treatment between four-terminal and two-
terminal cells and capacity and credit amounts. Accordingly, these
final regulations revise proposed Sec. 1.45X-3(b)(1)(ii) to add
additional text at the end as follows: ``Where that cell is sold to a
customer who will use it as the bottom cell in a tandem module, its
capacity should be measured with the customer's intended top cell
placed between the bottom cell and the one-sun light source.''
2. Photovoltaic Wafer
Consistent with section 45X(c)(3)(B)(ii), proposed Sec. 1.45X-
3(b)(2)(i) would have defined a photovoltaic wafer to mean a thin
slice, sheet, or layer of semiconductor material of at least 240 square
centimeters that comprises the substrate or absorber layer of one or
more photovoltaic cells. A photovoltaic wafer must be produced by a
single manufacturer by forming an ingot from molten polysilicon (for
example, Czochralski method) and then subsequently slicing it into
wafers, forming molten or evaporated polysilicon into a sheet or layer,
or depositing a thin-film semiconductor photon absorber into a sheet or
layer (that is, thin-film deposition).
Some commenters suggested revisions to the definition of a
photovoltaic wafer to include non-traditional methods of producing
wafers. For example, a commenter requested expanding the definition to
include wafers produced by any of the emerging `kerfless' or `direct'
wafer technologies, as well as the polysilicon used by these
technologies. The Treasury Department and the IRS have determined that
direct wafer technologies fall within the statutory definition of
photovoltaic wafers, if they are produced directly from evaporated
solar grade polysilicon but disagree that any further clarification is
needed in these final regulations.
A commenter requested that the final regulations clarify that
ingots must be produced within the United States for solar wafers to be
eligible for the section 45X credit. As required by section
45X(c)(3)(B)(ii)(I)(bb), to qualify for a section 45X credit, a
photovoltaic wafer must be produced by a single manufacturer either by
forming an ingot and then subsequently slicing it into wafers, or by
forming molten or evaporated solar grade polysilicon or deposition into
a sheet or layer. Thus,
[[Page 85810]]
to qualify for a section 45X credit, both the ingot and the wafer must
be produced domestically in accordance with section 45X(d)(2). Proposed
Sec. 1.45X-1(d)(2) would have clarified that constituent elements,
materials, and subcomponents used in the production of eligible
components are not subject to the domestic production requirement
provided in proposed Sec. 1.45X-1(d)(1). Because the ingot production
is part of the wafer production, ingots are not constituent elements,
materials, or subcomponents. The Treasury Department and the IRS have
determined it is unnecessary to specify that the ingot must be
domestically produced as section 45X and proposed Sec. 1.45X-
3(b)(2)(i) require the wafer to be domestically produced, which
includes production of the ingot. See also Part II.F.2. of this Summary
of Comments and Explanation of Revisions for a discussion of proposed
Sec. 1.45X-1(g)(4)(ii) (Example 2) concerning the production of ingots
and wafers.
3. Polymeric Backsheet
Consistent with section 45X(c)(3)(B)(iii), proposed Sec. 1.45X-
3(b)(3) would have defined polymeric backsheet to mean a sheet on the
back of a solar module that acts as an electric insulator and protects
the inner components of such module from the surrounding environment.
Certain commenters recommended that the term be considered to
include a product that qualifies solely based on the property's
functionality and not the property's composition, in order for
backsheets made of glass to be eligible components. One commenter
stated that its product is used in solar panels and therefore its
request is consistent with Congressional intent of expediting the
transition to clean energy, the underlying intent of section 45X to
create parity among technologies, and incentivizing the creation of a
U.S.-based supply chain for current and future solar technologies. The
commenter thought that other energy components were defined based on
their function, not their ``composition'' (for example, inverter,
photovoltaic cell, and solar module) and believes that glass performs
the same function as a backsheet made of plastic. The commenter
suggested that clarity on whether a backsheet made of glass is part of
the definition of ``polymeric backsheet'' is important because it will
help with decisions on pursuing a section 48C credit and for avoiding
penalties under section 6694 of the Code (preparer penalty) or section
6662 of the Code (substantial understatement). Another commenter
recommended adding back glass as a solar energy component because it is
better for the environment in that a domestic facility that uses
recycled glass from retired solar modules is ``cleaner'' than an
overseas facility.
In considering these comments, the Treasury Department and the IRS
determined that the best reading of the statute is that the term
``polymeric backsheet'' is limited to backsheets made of polymeric
materials that also meet the functional definition provided in section
45X(c)(3)(B)(iii). This excludes most glass backsheets because they are
typically not composed of a polymer, but of soda-lime glass. The final
regulations add the word ``polymeric'' into the definition as a
clarification. In reaching this determination, the Treasury Department
and the IRS considered that when drafting the statute, Congress
affirmatively included ``polymeric'' in the term and this inclusion
should be given effect. Thus, the final regulations clarify that the
definition is limited to a sheet on the back of solar modules composed,
at least in part, of a polymer, that acts as an electric insulator and
protects the inner components of such module from the surrounding
environment.
4. Solar Grade Polysilicon
Consistent with section 45X(c)(3)(B)(iv), proposed Sec. 1.45X-
3(b)(4) would have defined solar grade polysilicon to mean silicon that
is suitable for use in photovoltaic manufacturing and purified to a
minimum purity of 99.999999 percent silicon by mass. A commenter
requested that the final rules state that the production of the silicon
gas that is used for direct wafer production may receive the section
45X credit for polysilicon for the mass of silicon in the gas. The
Treasury Department and the IRS have determined, in close consultation
with the Department of Energy, that gas used for direct wafer
production includes molecules of silicon contained within another
substance. Accordingly, such gas is not a complete and distinct
eligible component within the meaning of proposed Sec. 1.45X-
1(c)(1)(i). For this reason, the Treasury Department and the IRS
decline to adopt this request in these final regulations.
A few commenters requested guidance on how the purity level for
solar grade polysilicon should be determined. One commenter requested
that the final rules clarify that only impurities that are ``material
to the industry'' should be counted in determining whether the minimum
purity level is met. Because these final regulations add the purity
standard in SEMI Specification PV17-1012 Category 1 to proposed Sec.
1.45X-3(b)(4), which distinguishes between material and immaterial
impurities, the Treasury Department and the IRS decline to adopt the
commenter's suggestion of clarifying that the statutory purity level
refers only to impurity levels that are ``material to the industry.''
A commenter recommended adopting the standards for polysilicon
feedstock in SEMI Specification PV17-1012. The Treasury Department and
the IRS, in close consultation with the Department of Energy, have
determined that SEMI Specification PV17-1012 Category 1 meets the
purity standard of 99.999999 percent, while Categories 2 through 5 do
not. The Treasury Department and the IRS thus agree with this request
but only for Category 1, and these final regulations accordingly revise
proposed Sec. 1.45X-3(b)(4) to add the purity standard in SEMI
Specification PV17-1012 Category 1.
5. Solar Module
Proposed Sec. 1.45X-3(b)(5)(ii) would have stated that the credit
amount for a solar module is equal to the product of 7 cents multiplied
by the capacity of such module. The proposed rule also provided that
the capacity of each solar module is expressed on a direct current watt
basis, and that capacity is the nameplate capacity in direct current
watts using STC, as defined by the IEC. A commenter requested producers
be required to use ``flash'' values to determine the value of the tax
credit for modules. The preamble to the Proposed Regulations explained
that nameplate capacity is an appropriate, accurate, and consistent
standard for the measurement of solar module capacity that can be used
to measure the capacity of other eligible components. Using an industry
standard such as nameplate capacity that is widely applicable to
various eligible components provides greater taxpayer certainty,
reduces taxpayer compliance burdens, and aids IRS administration. For
these reasons, the Treasury Department and the IRS have determined that
the best application of the statute is to require the use of nameplate
capacity to measure the capacity of a solar module. The Treasury
Department and the IRS therefore decline to adopt this suggestion to
permit the use of ``flash'' value capacity measurements in these final
regulations.
6. Solar Tracker
Consistent with section 45X(c)(3)(B)(vi), proposed Sec. 1.45X-
3(b)(6) would have provided that a solar
[[Page 85811]]
tracker means a mechanical system that moves solar modules according to
the position of the sun and to increase energy output. Section
45X(c)(3)(B)(vii) provides that torque tubes (as defined in proposed
Sec. 1.45X-3(b)(7)) or structural fasteners (as defined in proposed
Sec. 1.45X-3(b)(8)) are solar tracker components that are eligible
components for purposes of the section 45X credit.
Commenters requested that the definition of a solar tracker (not an
eligible component) in section 45X(c)(3)(B)(vi) be modified to allow
solar thermal collectors, heliostats, and fixed tilt systems
(additional items) to be solar tracker components as defined in section
45X(c)(3)(B)(vii). A solar tracker is defined in 45X(c)(3)(B)(vi) as a
``mechanical system that moves solar modules according to the position
of the sun to increase energy output.'' To be a solar tracker, a device
must be a mechanical system that moves a solar module. The Treasury
Department and the IRS do not have authority to expand the definition
of solar tracker to include additional items such as the ones suggested
that increase energy output without moving solar modules. Moreover,
modification of the definition of a solar tracker in the manner the
commenter requested would not result in such additional items
qualifying as eligible components because a solar tracker is not a
solar energy component that is an eligible component under section
45X(c)(1)(A)(i). Section 45X(c)(3)(B)(vii) provides that torque tubes
and structural fasteners are the only two solar tracker components that
may qualify as eligible components. The Treasury Department and the IRS
do not have authority to expand the categories of eligible solar
tracker components. For these reasons, the Treasury Department and the
IRS decline to adopt this request in the final regulations.
7. Torque Tube
Consistent with section 45X(c)(3)(B)(vii)(I), proposed Sec. 1.45X-
3(b)(7)(i) would have provided that torque tube means a structural
steel support element (including longitudinal purlins) that: (i) is
part of a solar tracker; (ii) is of any cross-sectional shape; (iii)
may be assembled from individually manufactured segments; (iv) spans
longitudinally between foundation posts; (v) supports solar panels and
is connected to a mounting attachment for solar panels (with or without
separate module interface rails); and (vi) is rotated by means of a
drive system.
Commenters suggested various statutory revisions to the definition
of torque tube in section 45X(c)(3)(B)(vii)(I). A commenter recommended
replacing the definition with a more generalized term such as ``Tracker
Structural Frame'' to allow for other common solar collector
morphologies. Another commenter requested removing or revising section
45X(c)(3)(B)(vii)(I)(dd) to include single foundation mounted
structures or ground-mounted carousel structures. One commenter
proposed clarifying that aluminum bearings, steel damper arms, steel
saddle brackets, and steel bottom brackets are included in the
definition of torque tubes or structural fasteners. Alternatively, the
commenter suggested providing either: (i) a non-exclusive list of items
that are included in the definition of torque tube or structural
fasteners, or (ii) a test similar to the functionally interdependent or
integral part tests under proposed Sec. 1.48-9(f)(2)(ii) and (f)(3) to
determine when a component is included in the definition of a torque
tube or structural fastener.
Because section 45X(c)(3)(B)(vii)(I) specifically defines torque
tube for purposes of section 45X, the Treasury Department and the IRS
do not have the authority to expand the definition of torque tubes and
solar tracker components in the final regulations to include additional
solar energy components. As previously discussed, the Treasury
Department and the IRS also lack authority to incorporate a functional
interdependence or integral part tests that would allow other
components not specified in the statute to qualify for the section 45X
credit. For these reasons, the Treasury Department and the IRS decline
to adopt these comments in the final regulations.
8. Structural Fastener
Consistent with section 45X(c)(3)(B)(vii)(II), proposed Sec.
1.45X-3(b)(8)(i) would have defined a structural fastener to mean a
component that is used: (i) to connect the mechanical and drive system
components of a solar tracker to the foundation of such solar tracker;
(ii) to connect torque tubes to drive assemblies; or (iii) to connect
segments of torque tubes to one another.
Several commenters requested revisions to the definition of
structural fastener in proposed Sec. 1.45X-3(b)(8)(i). For example,
commenters requested that the definition of structural fastener be
extended ``beyond steel and iron torque tubes to specifically allow for
innovations made from other materials,'' such as durable plastic; that
solar frames made from greenhouse gas reducing steel and roll-form
fabricated frames (as opposed to the current industry standard,
imported extruded aluminum frames) qualify as structural fasteners,
solar modules, or torque tubes; and that the definition of structural
fasteners be expanded to include those that secure the photovoltaic
module to the torque tube or module interface rails. The Treasury
Department and the IRS do not have the authority to expand the
definition of structural fasteners and solar tracker components in the
final regulations to include additional solar energy components.
However, the Treasury Department and the IRS note that a component that
is used for any of the functions described in section
45X(c)(3)(B)(vii)(II) would be considered a structural fastener for
purposes of section 45X. The Treasury Department and the IRS think that
proposed Sec. 1.45X-3(b)(8)(i) and the statutory definition of a
structural fastener is sufficiently clear to address the requested
clarifications. Proposed Sec. 1.45X-3(b)(8)(i) is therefore adopted in
these final regulations without revision.
Proposed Sec. 1.45X-3(b)(8)(iii) would have required that, for
substantiation purposes, a taxpayer must document that a structural
fastener is used in a manner described in proposed Sec. 1.45X-
3(b)(8)(i)(A), (B), or (C), with a bill of sale or other similar
documentation that explicitly describes such use. One commenter
specifically supported the substantiation requirement for structural
fasteners in proposed Sec. 1.45X-3(b)(8)(iii). Another commenter
requested the final rules require taxpayers to substantiate that the
structural fasteners for which they are claiming the section 45X credit
include only the manufactured component (bolt or rivet) itself. The
Treasury Department and the IRS have determined there is no need for
further clarification of the substantiation requirement for structural
fasteners in addition to the specific requirements relating to use in
proposed Sec. 1.45X-3(b)(8)(iii) and the general substantiation
requirements in section 6001 of the Code. For this reason, the Treasury
Department and the IRS decline to adopt this comment in the final
regulations.
C. Wind Energy Components
1. In General
Consistent with section 45X(c)(4), proposed Sec. 1.45X-3(c) would
have provided that a wind energy component means a blade, nacelle,
tower, offshore wind foundation, or related offshore wind vessel.
Commenters generally requested expanding proposed Sec. 1.45X-3(c) to
include other non-listed wind energy components such as structural
fasteners. Section 45X(c)(4) specifically provides a list of qualifying
wind energy
[[Page 85812]]
eligible components. The Treasury Department and the IRS do not have
the authority to expand the statutorily enumerated list of wind energy
components eligible for a section 45X credit. For this reason, the
Treasury Department and the IRS decline to adopt the commenters request
in these final regulations.
2. Nacelle
Consistent with section 45X(c)(4)(B)(iii), proposed Sec. 1.45-
3(c)(3)(i) would have defined a nacelle to mean 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.
A commenter stated that guidance should distinguish between
manufacturing of eligible wind energy components (for example, in a
manufacturing facility) from the installation of wind energy components
at the relevant project site, as the latter does not constitute
manufacturing or production of eligible components. The Treasury
Department and the IRS have determined that the definition of
``produced by the taxpayer'' provided in proposed Sec. 1.45X-1(c)(1)
is sufficient to clarify that production of an eligible component
requires substantially transforming constituent elements, materials, or
subcomponents into a complete and distinct eligible component that is
functionally different from that which would result from disqualifying
minor assembly or superficial modification of the elements, materials
or subcomponents.
Another commenter requested that the final regulations recognize
that, where a new drivetrain and associated equipment (the pitch
bearing, pitch system, main shaft, main bearing, gearbox, flex
coupling, and slip ring) are produced for use in repowering of existing
wind turbines and installed into an existing nacelle cover housing with
certain other used equipment (including yaw bearing and baseplate), the
nacelle is eligible for the section 45X credit. Under this commenter's
approach, the drivetrain of the nacelle must be new to be eligible for
the section 45X credit. Another commenter also suggests inclusion of a
``reasonable computation'' of the section 45X credit for repowered
eligible components.
The Treasury Department and the IRS note that repowering is a form
of onsite re-manufacturing that is typically accomplished through a
hybrid of primary and secondary production that utilizes a mix of
existing and new components. To produce a nacelle within the definition
of proposed Sec. 1.45X-3(c)(3)(i), the taxpayer would need to meet the
requirements of the definition of ``produced by the taxpayer'' provided
in proposed Sec. 1.45X-1(c)(1), including by substantially
transforming the combination of existing and new subcomponents into a
new nacelle that is distinct from the original nacelle. In some
circumstances, nacelle repowering may constitute production of an
eligible component. For example, a taxpayer that manufactures and
installs a new drivetrain and associated subcomponents within housing
atop a wind tower will be considered to have substantially transformed
the combination of new and existing subcomponents, so that taxpayer
will have produced an eligible nacelle. In contrast, a taxpayer that
merely replaces the controller in a nacelle with a new one will not
have substantially transformed the combination of new and existing
subcomponents, so that taxpayer will not have produced an eligible
nacelle. Routine maintenance or part replacement would fall under the
definition of disqualifying minor assembly or ``superficial
modification.''
3. Related Offshore Wind Vessel
Consistent with section 45X(c)(4)(B)(iv), proposed Sec. 1.45X-
3(c)(4)(i) would have defined related offshore wind vessel to mean any
vessel that is purpose-built or retrofitted for purposes of the
development, transport, installation, operation, or maintenance of
offshore wind energy components. Proposed Sec. 1.45X-3(c)(4)(i) would
have clarified that a vessel is purpose-built for development,
transport, installation, operation, or maintenance of offshore wind
energy components if it is built to be capable of performing such
functions and it is of a type that is commonly used in the offshore
wind industry. Proposed Sec. 1.45X-3(c)(4)(i) would have further
clarified that a vessel is retrofitted for development, transport,
installation, operation, or maintenance of offshore wind energy
components if such vessel was incapable of performing such functions
prior to being retrofitted, the retrofit causes the vessel to be
capable of performing such functions, and the retrofitted vessel is of
a type that is commonly used in the offshore wind industry.
Under proposed Sec. 1.45X-3(c)(4)(ii), consistent with section
45X(b)(1)(F)(i), the credit amount for a related offshore wind vessel
would have been equal to 10 percent of the sales price of the vessel.
Under the Proposed Regulations the sales price of the vessel does not
include the price of maintenance, services, or other similar items that
may be sold with the vessel. For a related offshore wind vessel with
respect to which a Related Person Election under section
45X(a)(3)(B)(i) has been made, the election would not cause the sale
price of such vessel to be treated as having been determined with
respect to a transaction between uncontrolled taxpayers for purposes of
section 482 of the Code and the regulations thereunder.
One commenter requested clarification on the valuation of
retrofitted offshore wind vessels and requested guidance on whether the
section 45X credit applies to the cost of the retrofit itself, the
value-add of the retrofit, the cost of the final sale of a retrofitted
vessel, or some other amount. The Treasury Department and the IRS
confirm that the credit amount specified in section 45X(b)(1)(F)(i)--
ten percent of the sales price of such vessel--specifically applies to
any related offshore wind vessel which is purpose-built or retrofitted
as provided in section 45X(c)(4)(B)(iv).
A commenter stated that the definition of an offshore wind vessel
is too narrow and that more standard vessel types (for example,
tugboats and barges) that are capable of doing offshore wind work
should also be eligible for the section 45X credit if they are being
constructed or retrofitted for the purpose of offshore wind work. The
Treasury Department and the IRS note that section 45X(c)(4)(B)(iv) and
proposed Sec. 1.45X-3(c)(4)(i) would have defined a related offshore
wind vessel to mean ``any vessel'' that is purpose-built or retrofitted
for purposes of the development, transport, installation, operation, or
maintenance of offshore wind energy components. Proposed Sec. 1.45X-
3(c)(4)(i) would have clarified that a vessel is purpose-built for
development, transport, installation, operation, or maintenance of
offshore wind energy components if it is built to be capable of
performing such functions and it is of a type that is commonly used in
the offshore wind industry. Proposed Sec. 1.45X-3(c)(4)(i) would have
further clarified that a vessel is retrofitted for development,
transport, installation, operation, or maintenance of offshore wind
energy components if such vessel was incapable of performing such
functions prior to being retrofitted, the retrofit causes the vessel to
be capable of performing such functions, and the retrofitted vessel is
of a type that is commonly used in the offshore wind industry. Thus, if
a vessel meets the definition of a related offshore wind vessel in
proposed Sec. 1.45X-3(c)(4)(i), there are no limitations as to the
type of
[[Page 85813]]
vessel that may be an eligible component.
The commenter's requested clarification would require an
application of the standard in proposed Sec. 1.45X-3(c)(4)(i) to
specific cases for which a categorical determination of eligibility for
additional vessel types would not be appropriate in these final
regulations because such a determination would depend on the specific
facts of each case.
Although no comments were received on proposed Sec. 1.45X-
3(c)(4)(i), the Treasury Department and the IRS revise proposed Sec.
1.45X-3(c)(4)(i) in these final regulations to clarify that Federal
income tax principles apply in determining the accuracy of the sales
price used to calculate the section 45X credit. This revision provides
greater certainty as to what principles apply for purposes of the
section 45X credit and is in addition to the specific exclusions from a
vessel's sales price in proposed Sec. 1.45X-3(c)(4)(i), which included
maintenance, services, or other similar items that may be sold with the
vessel.
4. Total Rated Capacity of the Completed Wind Turbine
Proposed Sec. 1.45X-3(c)(6) would have provided that, for purposes
of proposed Sec. 1.45X-3(c), the total rated capacity of the completed
wind turbine means, for the completed wind turbine for which a blade,
nacelle, offshore wind foundation, or tower was manufactured and sold,
the nameplate capacity at the time of sale as certified to the relevant
national or international standards, such as IEC 61400, or American
National Standards Institute (ANSI)/American Clean Power Association
(ACP) 101-1-2021, the Small Wind Turbine Standard (Standard). Under
proposed Sec. 1.45X-3(c)(6), certification of the turbine to such
Standards must be documented by a certificate issued by an accredited
certification body and the total rated capacity of a wind turbine must
be expressed in watts.
One commenter expressed support for the proposal requiring that
qualifying wind turbine components must be made and sold for use on
certified wind turbines. Another commenter recommended including both
American Wind Energy Association (AWEA) 9.1-2009 and ANSI/ACP 101-1-
2021 as acceptable wind turbine certification standards. The commenter
explained that ANSI/ACP 101-1-2021 is a revision of the AWEA standard
(the original small wind certification standard, and all currently
certified small wind systems are certified to this standard) that
streamlines the certification process, but there is no requirement that
turbines with the original certification must recertify to the new
ANSI/ACP standard. Thus, the commenter states that including both
standards in the final rules will allow currently certified turbines
made in the United States to earn section 45X credits as well as new
turbines currently in the certification process following the newer
standard. The Treasury Department and the IRS agree with this request
and these final regulations revise proposed Sec. 1.45X-3(c)(6) to add
both AWEA 9.1-2009 and ANSI/ACP 101-1-2021 as acceptable wind turbine
certification standards.
A commenter sought clarification as to whether a wind tower
producer may rely on a certification of the total rated capacity of the
turbine obtained from the original equipment manufacturer (OEM) that
produces the completed wind turbine in which the wind tower is
incorporated, provided the certificate was issued by an accredited
certification body. The commenter noted that requiring wind tower
producers to independently verify the capacity of the completed turbine
would cause ``undue expense and delay.'' To provide assurance to the
commenter, a wind tower producer may rely on an OEM's certification of
the total rated capacity of the completed wind turbine in which the
tower was incorporated, but the Treasury Department and the IRS have
determined that the rules as set out by proposed Sec. 1.45X-3(c)(6)
and (7) do not require further clarification on this point.
D. Inverters
1. In General
Consistent with section 45X(c)(2), proposed Sec. 1.45X-3(d) would
define an inverter as an end product that is suitable to convert direct
current (DC) electricity from one or more solar modules or certified
distributed wind energy systems into alternating current (AC)
electricity. Proposed Sec. 1.45X-3(d) would have further provided that
an end product is suitable to convert DC electricity from one or more
solar modules or certified distributed wind energy systems into AC
electricity if, in the form sold by the manufacturer, it is able to
connect with such modules or systems and convert DC electricity to AC
electricity from such connected source. For purposes of section 45X,
the term inverter includes a central inverter, commercial inverter,
distributed wind inverter, microinverter, or residential inverter.
Proposed Sec. 1.45X-3(d) would have clarified the definition of each
of these types of inverters, including the required rated outputs.
The preamble to the Proposed Regulations stated that section
45X(c)(2) requires certain types of inverters be ``suitable to'' or
``suitable for'' a statutorily required use or application to be
considered an eligible component. Proposed Sec. 1.45X-3(d) would also
have provided the calculation of the credit amount for each type of
inverter. In general, the credit amount for each type of inverter would
be equal to the product of the inverter's total rated capacity and the
amount prescribed in section 45X(b)(2)(B) for such inverter.
One commenter requested the final rules provide a credit for
utility-scale power converters and that a ``utility-scale power
converter'' be defined in a manner consistent with section 2.1.9 of
Underwriters Laboratories Standard 1741 (2002). Specifically, the
commenter requested modifying the final rules to provide a credit for
products that only convert direct current to direct current or
alternating current to direct current. Because section 45X(c)(2)(A)
specifically defines the term inverter to mean ``an end product which
is suitable to convert direct current electricity . . . into
alternating current electricity,'' the Treasury Department and the IRS
do not have the authority to expand the definition of inverter in the
final regulations to include these additional products. For this
reason, the Treasury Department and the IRS decline to adopt this
comment in the final regulations.
Another commenter requested that, for each type of inverter
provided for under section 45X(c)(2), the rated output of alternating
current power be defined as ``the maximum continuous grid-tied power
rating the inverter is capable of handling.'' The commenter asserts
that the suggested change will ``ensure consistent interpretation
across technologies despite consumer-driven decisions impacting
output.'' Section 45X(c)(2) uses the term ``rated output'' to define,
in part, a commercial inverter, distributed wind inverter,
microinverter, residential inverter, or utility inverter. The Treasury
Department and the IRS decline to adopt this comment in the final
regulations because the term rated output is in the statutory
definition for these inverters.
Several commenters requested that the final rules provide a section
45X credit for inverters that convert direct current from sources other
than solar modules or certified distributed wind energy systems as long
as these inverters meet the technical requirements of an inverter
defined under section 45X(c)(2). Section 45X(c)(2)(A)
[[Page 85814]]
specifically defines the term inverter to mean ``an end product which
is suitable to convert direct current electricity from one or more
solar modules or certified distributed wind energy systems into
alternating current electricity.'' Other types of inverters such as
bidirectional electric vehicle inverters or utility and commercial
inverters that are in practice used with battery modules can meet the
existing suitability standard within the definition without additional
clarification required. For this reason, the Treasury Department and
the IRS decline to adopt this comment in the final regulations.
2. Central Inverter
Consistent with section 45X(c)(2)(B), proposed Sec. 1.45X-
3(d)(2)(i) would have defined a central inverter as an inverter that is
suitable for large utility-scale systems and has a capacity that is
greater than 1,000 kilowatts, expressed on an alternating current watt
basis. Proposed Sec. 1.45X-3(d)(2)(i) would have further clarified
that an inverter is suitable for large utility-scale systems if, in the
form sold by the manufacturer, it is capable of serving as a component
in a large utility-scale system and meets the core engineering
specifications for such application. Proposed Sec. 1.45X-3(d)(2)(ii)
would have provided a credit equal to the product of 0.25 cents
multiplied by the total rated capacity of the central inverter where
the total rated capacity is expressed on an alternating current watt
basis.
One commenter requested the credit amount available for a central
inverter be changed to match the credit available for utility inverters
because utility inverters are eligible for a credit that is six times
higher than central inverters. Because section 45X(b)(2)(B) provides
the credit amounts available for central inverters and utility
inverters, the Treasury Department and the IRS do not have the
authority to make the requested change. For this reason, the Treasury
Department and the IRS decline to adopt this comment in the final
regulations.
3. Commercial Inverter
a. Definition
Consistent with section 45X(c)(2)(C), proposed Sec. 1.45X-
3(d)(3)(i) would have provided that a commercial inverter means an
inverter that 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 expressed on an alternating current watt basis that is
not less than 20 kilowatts and not greater than 125 kilowatts.
One commenter requested the definition of a commercial inverter be
changed to provide a credit for inverters with a rated output greater
than 800 volt three-phase power. Section 45X(c)(2)(C)(ii) defines a
commercial inverter, in part, as having ``a rated output of 208, 480,
600, or 800 volt three-phase power.'' The Treasury Department and the
IRS do not have the authority to expand the definition of a commercial
inverter in the final regulations to those with a rated output greater
than 800 volt three-phase power. For this reason, the Treasury
Department and the IRS decline to adopt this comment in the final
regulations.
A few commenters requested that the final rules modify the
definition of a commercial inverter to include a DC optimized
commercial inverter system, and that, when DC optimizers are paired
with a commercial inverter, the credit amount available for commercial
inverters should be determined in a manner similar to the credit
computation for direct current optimized inverter systems (DC optimized
inverter systems, as the term would have been defined in Proposed Sec.
1.45X-3(d)(5)(iii)(B) and discussed in Part IV.D.3.a. of this Summary
of Comments and Explanation of Revisions). Generally, these commenters
requested that, with the modified definition of commercial inverter,
the available credit be computed as a product of $0.02 multiplied by
the lesser of the sum of the alternating current capacity of each DC
optimizer when paired with the inverter in the DC optimized inverter
system or the alternating current capacity of the inverter in the DC
optimized inverter system. No language in the statutory text or
proposed rules prohibits the use of direct current optimizers with
commercial inverters. Thus, it is unnecessary to modify the final rules
to state that DC optimizers may be used with a commercial inverter.
Section 45X(b)(1)(I) provides that the amount of the section 45X
credit for an inverter is equal to the applicable amount with respect
to each type of inverter multiplied by the capacity of such inverter
(expressed on a per alternating current watt basis). The Treasury
Department and the IRS do not have the authority to change the method
for computing the credit for commercial inverters. In contrast,
language that appears only in the definition of ``microinverter'' in
section 45X(c)(2)(E) (`suitable to connect to one solar module') does
require clarification about how to apply the definition to DC optimized
systems and multi-module microinverters. Because this language does not
appear in the definition of ``commercial inverter'' in section
45X(c)(2)(C), there is no analogous need to clarify the application of
the definition or credit calculation. For this reason, the Treasury
Department and the IRS decline to adopt these requests pertaining to
commercial inverters in the final regulations.
b. Credit Amount
Proposed Sec. 1.45X-3(d)(3)(iii) would have provided a credit
equal to the product of 2 cents multiplied by the total rated capacity
of the commercial inverter where the total rated capacity is expressed
on an alternating current watt basis.
Commenters requested that DC optimizers be allowed to be paired
with commercial or utility scale system configurations, like
microinverters. This comment is not adopted for the reasons provided in
Part IV.D.3.a. of this Summary of Comments and Explanation of
Revisions.
4. Microinverters
a. Definition
Consistent with section 45X(c)(2)(E), proposed Sec. 1.45X-
3(d)(5)(i) would have defined a microinverter as an inverter that 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, expressed on an AC watt basis, that is not greater than
650 watts. One commenter requested the final rules change the maximum
capacity limit for the microinverter from 650 watts to 700 watts to
accommodate future technological advancements. Because section
45X(c)(2)(E)(iii) provides the maximum capacity of a microinverter, the
Treasury Department and the IRS do not have the authority to make the
requested change. For this reason, the Treasury Department and the IRS
decline to adopt this comment in the final regulations.
b. Suitable To Connect to One Solar Module--in General
Proposed Sec. 1.45X-3(d)(5)(iii)(A) would have clarified that an
inverter is suitable to connect to one solar module if, in the form
sold by the manufacturer, it is capable of connecting to one or more
solar modules and regulating the DC electricity from each module
independently before that electricity is converted into alternating
current electricity.
Proposed Sec. 1.45X-3(d)(5)(iii)(B) would have clarified that a DC
optimized inverter system may qualify as a microinverter. Proposed
Sec. 1.45X-
[[Page 85815]]
3(d)(5)(iii)(B) would have defined a DC optimized inverter system to
mean an inverter that is comprised of an inverter connected to multiple
DC optimizers that are each designed to connect to one solar module.
Proposed Sec. 1.45X-3(d)(5)(iii)(B) would have provided that a DC
optimized inverter system is suitable to connect with one solar module
if, in the form sold by the manufacturer, it is capable of connecting
to one or more solar modules and regulating the DC electricity from
each module independently before that electricity is converted into
alternating current electricity. Proposed Sec. 1.45X-3(d)(5)(iv)(B)
would have provided that a DC optimized inverter system qualifies as a
microinverter if each DC optimizer paired with the inverter in a DC
optimized inverter system meets the requirements of section
45X(c)(2)(E) and a taxpayer must produce and sell the inverter and the
DC optimizers in the DC optimized inverter system together as a
combined end product.
Several commenters agreed with the proposed rule permitting DC
optimizers paired with an inverter to qualify as microinverters and
receive the corresponding credit amount. One commenter suggested
revising the definition of a DC optimized inverter systems to more
clearly define the qualifying system components of a DC optimized
inverter system. This commenter proposed that qualifying system
components include items that control the DC output of one or more
solar modules and are integral to the function of the inverter and
modules. The Treasury Department and the IRS, in consultation with the
Department of Energy, conclude that the additional confirmation the
commenter is requesting is not necessary as it would not provide
additional clarity. For this reason, the Treasury Department and the
IRS decline to adopt this suggestion in the final regulations.
Several commenters requested that the final rules remove the
requirement that a taxpayer produce and sell both the inverter and the
DC optimizers in the DC optimized inverter system as a combined end
product. One commenter expressed the view that the requirement distorts
the market, provides an unfair advantage to companies that already
manufacture both items, and requires companies to seek out partnerships
solely for the purpose of obtaining the section 45X credit. Other
commenters that manufacture both products state that the proposed
requirement is inconsistent with standard industry practices where a
manufacturer sells the items separately. In contrast, one commenter
supported the ``combined end product'' requirement and suggested it
also be applied to multi-module inverters to prevent multiple entities
from claiming section 45X credits for the same system. Section
45X(c)(2)(A) defines an inverter as an end product that is suitable to
convert DC electricity from one or more solar modules or certified
distributed wind energy systems into AC electricity. For each type of
inverter listed under section 45X(c)(2), section 45X(b)(1)(I) provides
the applicable credit is determined as an amount equal to the product
of each inverter's applicable amount multiplied by the capacity of such
inverter. The section 45X credit is separately computed for each
inverter. The Treasury Department and the IRS do not have the authority
to allow a credit solely for a DC optimizer, because it does not
convert DC electricity into AC electricity as the definition of
inverter in section 45X(c)(2) requires. The Treasury Department and the
IRS also do not have the authority to change the number of inverter
units used to compute the available credit amount. For these reasons,
the Treasury Department and the IRS decline to adopt these comments in
these final regulations. However, while proposed Sec. 1.45X-
3(d)(5)(iv)(B) requires that the inverter and DC optimizer in the DC
optimized inverter system must be produced and sold as a combined end
product, the Treasury Department and the IRS clarify that the inverter
and the DC optimizer do not need to be physically packaged together at
sale, and the inverter and DC optimizer do not need to be fully
interconnected and assembled at the time of sale.
Proposed Sec. 1.45X-3(d)(5) would have clarified that a multi-
module inverter may also qualify as a microinverter. Proposed Sec.
1.45X-3(d)(5)(iii)(C) would have defined a multi-module inverter to
mean an inverter that is comprised of an inverter with independent
connections and DC optimizing components for two or more modules.
Proposed Sec. 1.45X-3(d)(5)(iii)(C) would have further provided that a
multi-module microinverter is suitable to connect with one solar module
if it is capable of connecting to one or more solar modules and
regulating the DC electricity from each module independently before
that electricity is converted into alternating current electricity.
Proposed Sec. 1.45X-3(d)(5)(iv)(C) would have provided that
multimodule inverter qualifies as a microinverter if it meets the
requirements of section 45X(c)(2)(E).
One commenter suggested revising the definition of a multi-module
inverter to more clearly define the qualifying system components of a
multi-module inverter. The commenter suggested that qualifying system
components should be those items that control the DC output of one or
more solar modules and are integral to the function of the inverter and
modules. The same commenter also suggested revising the definition of a
multi-module inverter to clarify that for a multi-module inverter to
qualify as a microinverter, a taxpayer must produce and sell the
inverter and the DC optimizers together as a combined end product. A
different commenter agreed with this suggestion.
A few commenters suggested revising the definition of a multi-
module inverter to provide that a multi-module inverter includes a DC
optimized inverter system such that each DC optimizer may connect with
more than one solar module and the credit amount in such a system is
computed similarly to a DC optimized inverter system, except that the
DC optimizers are not required to be sold with the inverter as a
``combined end product.'' Other commenters disagreed with this
suggestion and support the proposed rule that would not have allowed
solar modules to share a connection to a multi-module inverter.
The reasons provided for retaining the rule for DC optimized
inverter systems also apply to adopting the requirement for multi-
module inverters. The Treasury Department and the IRS think that
requiring taxpayers to produce and sell the inverter and the DC
optimizers together as a combined end product will create parity with
DC optimized inverter systems and avoid potential abuse. For these
reasons, the Treasury Department and the IRS adopt these comments in
the final regulations.
c. Credit Amount
Proposed Sec. 1.45X-3(d)(5)(iv)(A) would have provided that
generally, the credit amount for a microinverter is equal to the
product of 11 cents multiplied by the total rated capacity of the
microinverter where the total rated capacity is expressed on an
alternating current watt basis.
Proposed Sec. 1.45X-3(d)(5)(iv)(B) would have clarified how to
determine the credit amount for a DC optimized inverter system that
qualifies as a microinverter. Proposed Sec. 1.45X-3(d)(5)(iv)(B) would
have provided that the credit amount for a DC optimized inverter system
that qualifies as a microinverter is equal to the product of 11 cents
multiplied by the lesser of the sum of the alternating current capacity
of each DC optimizer when paired with
[[Page 85816]]
the inverter in the DC optimized inverter system or the alternating
current capacity of the inverter in the DC optimized inverter system
where capacity is measured in watts of alternating current converted
from DC electricity by the inverter in a DC optimized inverter system.
One commenter requested that the alternating current capacity of
each DC optimizer when paired with the inverter in the DC optimized
inverter system be calculated as the product of the optimizer's rated
input power capacity, the optimizer's DC-to-DC conversion efficiency
percentage, and the inverter's DC-to-AC conversion efficiency
percentage. Section 45X(b)(1)(I) provides the applicable credit is
determined as an amount equal to the product of each inverter's
applicable amount multiplied by the capacity of such inverter
(expressed on a per alternating current watt basis). The requirement
that capacity is ``expressed on an alternating current watt basis''
already factors in any DC-to-DC conversion efficiency upstream of the
DC-to-AC conversion, and the inverter's DC-to-AC conversion efficiency
percentage is accounted for by the use of ``capacity of such inverter''
(expressed on a per alternating current watt basis). Therefore, these
requirements are duplicative of rules contained in the statutory text.
For this reason, the Treasury Department and the IRS decline to adopt
this suggestion in the final regulations.
5. Utility Inverter
Consistent with section 45X(c)(2)(G), proposed Sec. 1.45X-
3(d)(7)(i) would have defined a utility inverter as an inverter that 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 expressed
on an alternating current watt basis that is greater than 125 kilowatts
and not greater than 1000 kilowatts.
One commenter requested reducing the required rated output from
``not less than 600 volt three-phase power'' to ``not less than 480
volt three-phase power.'' Section 45X(c)(2)(G)(ii) defines a utility
inverter, in part, as having ``a rated output of not less than 600 volt
three-phase power.'' The Treasury Department and the IRS decline to
adopt the commenter's request because defining a utility inverter to
include those with a rated output of not less than 480 volt three-phase
power would be inconsistent with the statute.
E. Qualifying Battery Components
Proposed Sec. 1.45X-3(e)(1) would define a qualifying battery
component as electrode active materials, battery cells, or battery
modules.
1. Electrode Active Materials
a. In General
Proposed Sec. 1.45X-3(e)(2)(i)(A) would have defined electrode
active materials to include cathode electrode materials, anode
electrode materials, and electrochemically active materials that
contribute to the electrochemical processes necessary for energy
storage. In general, electrode active materials are materials that are
capable of being used within a battery for energy storage. Proposed
Sec. 1.45X-3(e)(2)(i)(A) would also have provided that the following
materials in a battery or vehicle would not qualify for the section 45X
credit as an electrode active material: 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.
Proposed Sec. 1.45X-3(e)(2)(v) would have clarified that a taxpayer
may claim only one section 45X credit with respect to a material that
qualifies as both an electrode active material and an applicable
critical mineral.
Some commenters recommended altering the definition of electrode
active materials as defined in section 45X(c)(5)(B)(i) and in proposed
Sec. 1.45X-3(e)(2)(i)(A). The Treasury Department and the IRS do not
have the authority to alter the definition of electrode active
materials as provided by the statute. For this reason, the Treasury
Department and the IRS decline to adopt these recommendations in the
final regulations.
One commenter raised a concern that certain definitions in the
Proposed Regulations applicable to electrode active materials would
inadvertently exclude separators from being treated as an eligible
component because those definitions do not include language specific to
the separator production process. As proposed Sec. 1.45X-3(e)(2)(i)(D)
specifically included separators in the definition of electrochemically
active materials, such changes to definitions are unnecessary, and the
Treasury Department and the IRS decline to adopt the commenter's
recommendation.
b. Cathode Electrode Materials and Anode Electrode Materials
Proposed Sec. 1.45X-3(e)(2)(i)(B) would have defined ``cathode
electrode materials'' to mean the materials that comprise the cathode
of a commercial battery technology, such as binders, and current
collectors (that is, cathode foils). Proposed Sec. 1.45X-3(e)(2)(i)(C)
would have defined ``anode electrode materials'' to mean the materials
that comprise the anode of a commercial battery technology, including
anode foils.
A commenter recommended that the definition of cathode electrode
materials in proposed Sec. 1.45-3(e)(2)(i)(B) and of anode electrode
materials in proposed Sec. 1.45-3(e)(2)(i)(C) be clarified to specify
that the materials be ``battery-grade'' so the precursor materials are
eligible for the section 45X credit. Because these proposed definitions
would require that the materials comprise the cathode or anode of a
commercial battery technology, the Treasury Department and the IRS
conclude that specifying that such materials be ``battery-grade'' would
be redundant. For this reason, the Treasury Department and the IRS
decline to adopt these recommendations in the final regulations.
Another commenter recommended that the definition of cathode
electrode materials be clarified to address its concern that the
qualifier ``commercial battery technology'' excludes hydrogen fuel
cells contrary to the definition of the term in the statute, which
contains no such qualifier. The Treasury Department and the IRS do not
have the authority to alter the definition of electrode active
materials as battery components as provided by the statute. For this
reason, the Treasury Department and the IRS decline to adopt this
recommendation in the final regulations. The Treasury Department and
the IRS note, however, that although electrode active materials in
general must be capable of being used within a battery for energy
storage, such materials would still be eligible for the section 45X
credit if they are also capable of being used in other applications,
such as hydrogen fuel cells.
c. Electrochemically Active Materials
Proposed Sec. 1.45X-3(e)(2)(i)(D) would define ``electrochemically
active materials that contribute to the electrochemical processes
necessary for energy storage'' to mean the battery-grade materials that
enable the electrochemical storage within a commercial battery
technology. In addition to the list of electrochemically active
materials provided in section 45X(c)(5)(B)(i) (that is, solvents,
additives, and electrolytic salts), these may include electrolytes,
catholytes, anolytes, separators, and metal salts and oxides.
One commenter requested the definition of electrochemically active
[[Page 85817]]
materials explicitly include solid-state electrolytes. Solid-state
electrolytes are included in the definition of electrochemically active
materials because Proposed Sec. 1.45X 3(e)(2)(i)(D) includes
``electrolytes,'' with no particular form required. The Treasury
Department and the IRS conclude that specifying that such materials are
included in this definition would be redundant. For this reason, the
Treasury Department and the IRS decline to adopt these recommendations
in the final regulations.
d. Battery Grade Materials
Proposed Sec. 1.45X-3(e)(2)(i)(F) would have defined ``battery-
grade materials'' to mean the processed materials found in a final
battery cell or an analogous unit, or the direct battery-grade
precursors to those processed materials. A few commenters requested the
final rules clarify the meaning of direct battery-grade precursors.
Commenters also requested the final rules provide that silane gas,
ultra-high molecular weight polyethylene, and needle coke meet the
definition of electrochemically active materials as direct battery-
grade precursors. While the Treasury Department and the IRS understand
the desire for assurance, listing specific precursors that qualify as
electrochemically active materials would not be possible or advisable
because it could imply that unlisted materials do not qualify as
electrochemically active materials, particularly as battery
technologies may evolve over time. For this reason, the Treasury
Department and the IRS decline to adopt these recommendations in these
final regulations.
e. Production Costs Incurred
Proposed Sec. 1.45X-3(e)(2)(iv) would have provided that costs
incurred for purposes of determining the credit amount includes costs
as defined in Sec. 1.263A-1(e) that are paid or incurred within the
meaning of section 461 of the Code by the taxpayer for the production
of an electrode active material only. Thus, under the Proposed
Regulations, production costs with respect to an electrode active
material would not include any costs incurred after the production of
the electrode active material.
The Proposed Regulations would not have allowed direct material
costs as defined in Sec. 1.263A-1(e)(2)(i)(A), indirect material costs
as defined in Sec. 1.263A-1(e)(3)(ii)(E), or any costs related to the
extraction or acquisition of raw materials to be taken into account as
production costs. This limitation disallowed, for purposes of
calculating the credit: the inclusion of the cost of acquiring the raw
material used to produce the electrode active materials; the cost of
materials used for conversion, purification, or recycling of the raw
material; and other material costs related to the production of
electrode active materials. The Proposed Regulations applied section
263A and the regulations under section 263A (section 263A regulations)
solely to identify the types of costs that are includible in production
costs incurred for the purpose of computing the amount of the section
45X credit. The Proposed Regulations did not apply section 263A or the
section 263A regulations for any other purposes, such as to determine
whether a taxpayer is engaged in production activities.
The preamble to the Proposed Regulations explained that the
rationale for the proposed rule was that the credit for the production
of electrode active materials provides incentives for taxpayers to
conduct activities that add value to the production of electrode active
materials. Merely purchasing raw materials may enable a taxpayer to
produce an electrode active material but it is not by itself an
activity that adds value. In addition, excluding the costs of acquiring
electrode active materials mitigates the risk of crediting the
production costs for the same underlying material more than once as
that material is used in various stages of the production process. For
these reasons, material costs were not creditable costs under the
Proposed Regulations.
The Treasury Department and the IRS requested comments on the
proposed rule for determining the costs incurred with respect to the
production of electrode active materials. Specifically, comments were
sought as to whether and how extraction and other similar value-added
activities in the production of raw materials used in electrode active
materials should be taken into account and how extraction should be
defined, including whether the term should be defined consistent with
proposed Sec. 1.30D-3(c)(8). Comments were also requested with respect
to applicable critical minerals, which are summarized in Part V.C. of
this Summary of Comments and Explanation of Revisions. Many of these
comments had similarities, and the reasoning and revisions in these
final regulations are described in this Part IV.E.1.e. of this Summary
of Comments and Explanation of Revisions and are adopted for both
electrode active materials and applicable critical minerals.
Approximately 72 of the comments received addressed the definition
and scope of production costs generally. Many commenters recommended
that, contrary to the Proposed Regulations, all costs with respect to
the production of electrode active materials be included in production
costs for purpose of determining the credit, including direct material
costs as defined in Sec. 1.263A-1(e)(2)(i)(A), indirect material costs
as defined in Sec. 1.263A-1(e)(3)(ii)(E), and costs related to the
extraction of raw materials.
A significant number of commenters focused their recommendations on
material costs or the costs of extraction, but there was agreement
among many of them that ``costs of production'' should be interpreted
broadly to include all costs. In support of this position, commenters
asserted that section 45X(b)(1)(J) and (M) do not place limits or
otherwise qualify production costs eligible for the credit and that the
regulations should not impose limitations not explicitly present in the
Code itself. Some of these commenters also argued that, because the
costs excluded from production costs in the Proposed Regulations are
often a substantial or predominant portion of the total costs of
producing some electrode active materials, substantial limitations on
the inclusion of these costs would contradict Congress's goal of
incentivizing the production of electrode active materials. Commenters
also disputed that direct and indirect costs are not incurred in value-
adding activities.
Some commenters also disagreed that the potential for over
crediting (that is, crediting the same production costs multiple times)
justifies denying a credit for these costs. A subset of these
commenters disagreed that over crediting was a legitimate concern,
arguing instead that section 45X provides a credit for costs incurred
at different stages of production attributable to the same underlying
material. Others agreed that over crediting might not be permissible
but that the concern was insufficient to deny entirely credits for all
costs that might be impermissibly claimed more than once for the same
underlying material. In the view of these commenters, prohibiting
crediting these same production costs multiple times would be the
proper approach rather than entirely denying all credits for these
costs. Some commenters noted that, in the case of certain specifically
identified electrode active materials, there was no risk of crediting
the same production costs multiple times and thus direct and indirect
costs should be included in the costs of production for these electrode
active materials. A third
[[Page 85818]]
set of commenters argued that credits should be permissible once under
section 45X(b)(1)(M) for applicable critical minerals and again under
section 45X(b)(1)(J) for electrode active materials.
In the case of electrode active materials that are precursors for
the production of other electrode active materials, one commenter
recommended that the cost of the precursor electrode active materials
only be included in the cost of production for which a credit may be
claimed if the precursor electrode active materials are completely
consumed in the production process and are not used for any other
commercial purpose.
A number of commenters proposed solutions to the problem of
potentially crediting the same production costs multiple times. One
solution commenters proposed was to reduce the basis of property for
which a credit has been claimed by an upstream producer. Commenters
also proposed a system under which a taxpayer would only be eligible
for a credit on costs of material for which no other taxpayer had
previously claimed a credit. This arrangement could be administered
through a system of certifications in which taxpayers would be required
to verify that its suppliers had not previously claimed credits for
costs associated with the same materials for which the taxpayer is
claiming credits. A commenter also urged that producers of electrode
active materials be able to claim a credit if they can establish that
the acquired electrode active materials and applicable critical
minerals used in the production of electrode active materials were
acquired from extraction or production outside the United States and
thus were previously ineligible for a section 45X credit.
In addition to general comments regarding the inclusion of direct,
indirect, and extraction costs, commenters recommended clarification
about more specific costs, including costs associated with
transportation. Another commenter requested the final rules be modified
to include costs of the production of anodes used in the aluminum
production to convert alumina into aluminum. Other commenters asserted
that the costs of processing and purification of materials in the
production of electrode active materials add value and should, on that
basis, be included in the scope of the credit.
Several commenters recommended that the direct and indirect costs
of the production of electrode active materials from recycled feedstock
should be classified as production costs for purposes of the credit.
According to one commenter, recycling processes begin with waste
products at what is essentially a new supply chain.
A commenter supported the Proposed Regulations' exclusion of direct
material, indirect material, and extraction costs from production costs
eligible for the credit. This commenter was concerned that a contrary
rule would invite fraud, waste, and abuse and that, in the case of
extraction costs, would be difficult to administer without the creation
of a tracing system.
With respect to costs related to extraction, the Proposed
Regulations would have excluded extraction costs because extraction
could be far removed, particularly in the case of electrode active
materials, in the supply chain from the ultimate production of the
eligible component. However, commenters highlighted the critical
importance of extraction to the production of both applicable critical
minerals and electrode active materials as well as the close connection
these costs often have to the final production of these materials.
The Treasury Department and the IRS have reconsidered the treatment
of extraction costs in these final regulations for taxpayers that
extract raw materials domestically and for taxpayers that acquire
either domestically or foreign-sourced extracted raw materials. For
both electrode active materials and applicable critical minerals, the
final regulations in Sec. Sec. 1.45X-3(e)(2)(iv) and 1.45X-4(c)(3),
respectively, allow taxpayers to include extraction costs related to
the extraction of raw materials in the United States or a United States
territory, but only if those costs are paid or incurred by the taxpayer
that claims the section 45X credit with respect to the relevant
electrode active material or applicable critical mineral. The Treasury
Department and the IRS note that the section 45X credit is available
only to taxpayers that produce and sell an eligible component. Thus,
the final regulations provide that extraction costs may be included in
production costs consistent with the rules provided under section 263A
only if such costs are incurred by the taxpayer that claims the section
45X credit with respect to the relevant applicable critical mineral or
electrode active material. The Treasury Department and the IRS have
determined that this inclusion of extraction costs incurred by the
taxpayer most accurately captures the meaning ``the costs incurred by
the taxpayer with respect to the production of'' applicable critical
minerals and electrode active materials under section 45X(b)(1)(J) and
(M). If, however, a taxpayer acquires extracted raw material as a
direct (or indirect) material cost, the material costs may be included
as production costs consistent with the rules provided under section
263A regardless of whether the extracted material is domestically- or
foreign-sourced.
With respect to direct and indirect material costs, the Proposed
Regulations would have excluded direct and indirect material costs from
production costs for both applicable critical minerals and electrode
active materials. The Proposed Regulations excluded material costs from
production costs based on an interpretation of the term ``costs
incurred by the taxpayer with respect to production'' in section
45X(b)(1)(J) and (M) as being limited to value-added activities in the
production process. Electrode active materials and applicable critical
minerals differ from all other eligible components described in section
45X because their credit amounts are calculated as a percentage of
production costs rather than specifying a fixed dollar amount or rate.
The preamble to the Proposed Regulations stated that the mere purchase
of materials does not itself add value in a production process despite
being a necessary part of such process. Furthermore, it is unlikely
that Congress intended to allow production costs associated with
applicable critical minerals or electrode active materials to be
credited multiple times, due to the high risk of fraud, waste, and
abuse; the administrative burden of preventing these outcomes; and the
limited effectiveness in supporting domestic production of new eligible
components. The exclusion of direct and indirect material costs
addressed these concerns.
Numerous commenters highlighted the importance and appropriateness
of including material costs in production costs. There was, however,
disagreement as to whether and to what extent the costs of non-U.S.
produced constituent elements, materials, and subcomponents used in the
production of electrode active materials should be included in
production costs. Some commenters recommended that the costs of all
materials be included while others urged limitations to only credit
materials produced domestically. One commenter proposed that the final
regulations modify the proposed rule regarding constituent elements,
materials, and subcomponents used in the production of applicable
critical minerals to distinguish between imports of materials otherwise
available from domestic sources and imported
[[Page 85819]]
materials that are not available from domestic sources.
The Treasury Department and the IRS, after consultation with the
Department of Energy, have reconsidered the proposed exclusion of all
material costs based on these comments. The final regulations adopt a
rule allowing taxpayers that produce applicable critical minerals and
electrode active materials as specified in the statute to include
direct and indirect materials costs (as described in the referenced
section 263A regulations) in production costs if certain conditions are
met, but only if those direct or indirect material costs do not relate
to the purchase of materials that are an eligible component at the time
of acquisition (such as an electrode active material or applicable
critical mineral). In addition, two examples illustrating the revised
production costs rule are included in Sec. 1.45X-3(e)(2)(iv)(A)(2).
In finalizing this rule, the Treasury Department and the IRS
considered the provisions of section 45X and determined this final rule
appropriately implements the statute as a whole. Section 45X(a)(1) and
(2) limit the section 45X credit to the sum of the credit amounts
determined under section 45X(b) with respect to each eligible component
that is produced by the taxpayer and, during such taxable year, sold to
an unrelated person in the taxpayer's trade or business. The statute
allows a section 45X credit for the sale of an applicable critical
mineral or electrode active material produced and sold by the taxpayer
in its business. The section 45X credit for an applicable critical
mineral or electrode active material is equal to 10 percent of the
costs incurred by the taxpayer with respect to production, under
section 45X(b)(1)(M) and (J), respectively.
In calculating a taxpayer's costs incurred in the production of
applicable critical minerals and electrode active materials, it is
necessary to consider situations involving the integration of eligible
components (whether directly made by the taxpayer or purchased from
another taxpayer) in the course of producing an applicable critical
mineral or electrode active material. Generally, integrating one
eligible component into another produced eligible component results in
two credits pursuant to section 45X(d)(4) if the taxpayer produced
both, while integrating a purchased eligible component into another
produced eligible component will only result in a credit for the
eligible component produced by the taxpayer. In the case of an
applicable critical mineral or electrode active material, however, the
section 45X credit calculation differs from the other eligible
components. Thus, further examination was needed to determine how a
credit should be calculated in such a case.
The Treasury Department and the IRS considered the treatment of a
vertically integrated taxpayer. For example, assume a taxpayer produced
an applicable critical mineral or electrode active material and
incurred $50X of costs with respect thereto (EC 1) and integrated EC 1
into a separate applicable critical mineral or electrode active
material (EC 2), incurring an additional $100X of costs with respect to
the production of EC 2 (total production costs of $150X), with EC 2
ultimately being sold by the taxpayer to an unrelated person. In
calculating the section 45X credit, pursuant to section 45X(d)(4),
taxpayer is treated as having sold an eligible component to an
unrelated person if such component is integrated, incorporated, or
assembled into another eligible component which is sold to an unrelated
person. It is important to note that section 45X makes no distinction
between integrated eligible components that were purchased or produced
by the taxpayer. As section 45X(d)(4) directs the taxpayer to treat
itself as selling both EC 1 and EC 2 to the unrelated person, it is
necessary to determine a credit for each EC 1 and EC 2 when both were
produced by the taxpayer.
In this example, the $50X of production costs attributable to EC 1
were not incurred with respect to the production of EC 2, since the
production of EC 2--in other words, the substantial transformation of
EC 1 into EC 2--does not include the production of EC 1. Thus, the
taxpayer would be eligible for a total section 45X credit of $15X: $5X
(10% of $50X) for EC 1 and $10X (10% of $100X) for EC 2. If the $50X of
production costs attributable to EC 1 were included for both EC 1 and
EC 2, then the same costs would be double credited. Double crediting
would result in the taxpayer generating a $20X credit from the sale of
EC 1 and EC2, which would provide an increased credit amount as
compared to the credit amount that should result from the $150X of
actual production costs incurred (or, stated differently, a section 45X
credit that was 13.33 percent of the taxpayer's actual $150X of
production costs in the example). The correct result is taxpayer should
be viewed as having incurred $50X of production costs for EC 1 and
$100X of production costs for EC 2, resulting in a $15X credit, which
also matches 10 percent of the taxpayer's actual production costs
($150X) and does not create a double crediting of costs.
Alternatively, consider a taxpayer that, instead of producing EC 1,
purchases EC 1 for $60X. The taxpayer then spends another $100X
producing EC 2, using EC 1. Similar to the vertically integrated
taxpayer, when the taxpayer sells EC 2, pursuant to section 45X(d)(4),
the taxpayer is treated as having sold EC 1 and EC 2 to an unrelated
person. The difference is that in this case the taxpayer did not
produce EC 1, and therefore the taxpayer does not satisfy section
45X(a)(1)(A) for a section 45X credit for the sale of EC 1. If the
taxpayer were permitted to include the costs for EC 1 ($60X) in
calculating the credit for EC 2, then the taxpayer would receive a
larger credit for producing EC 2 than if the taxpayer had produced both
EC 1 and EC 2. Without a clearer indication in the statute that
Congress intended to treat these two fact patterns differently, in a
way that disadvantages vertically integrated production, the statute as
a whole is appropriately implemented when the result is the same credit
amount for EC 2 ($10X in these examples) whether the taxpayer purchases
or produces EC 1.
In comparing the two results of these examples under the final
rule, the vertically integrated taxpayer gets a larger total section
45X credit by directly engaging in more credit generating activities,
while the non-vertically integrated taxpayer receives a section 45X
credit commensurate with its activities of producing EC 2, but no
credit for integrated eligible components that it did not produce.
These results are consistent with the general rule of section 45X(a)(1)
and (2) and avoid allowing taxpayers to use the same cost in multiple
credit calculations.
Section 45X(d)(2) provides that only sales of eligible components
produced within the United States, or a United States territory, are
taken into account for purposes of section 45X and is additional
support for the rule that does not include foreign applicable critical
minerals or electrode active materials in production costs, regardless
of whether purchased or produced by the taxpayer. Allowing a foreign
produced applicable critical mineral or electrode active material to
increase the section 45X credit conflicts with section 45X(d)(2),
particularly when considered with the rule under section 45X(d)(4). The
Treasury Department and the IRS also note that section 45X(d)(2)
confirms that treatment as an ``eligible component'' is not dependent
on where production occurred, and so a foreign applicable critical
mineral or electrode active
[[Page 85820]]
material is an eligible component subject to the rule in section
45X(d)(4).
The final rule is also consistent with the overall purpose of
section 45X and addresses the concerns described in the preamble of the
Proposed Regulations. While the final rule adopts certain commenters'
position that incurring material costs is necessary and may add value
to a production process, the Treasury Department and IRS maintain that
the inclusion of material costs must be balanced against the risk of
multiple crediting of the same costs and the creation of incentives
that are contrary to the purpose of section 45X. The final rule
accomplishes this balance. Further, although applicable critical
minerals and electrode active materials, or any other eligible
component, produced outside the United States do not pose a risk of
multiple crediting, permitting the production costs of a non-U.S.
produced applicable critical mineral or electrode active material to be
included in production costs would provide an incentive for the
purchase of electrode active materials or applicable critical minerals
produced abroad, which is inconsistent with the overall statutory
scheme and purpose of section 45X (that is, to encourage domestic
production of eligible components). Thus, excluding all costs of
acquiring materials that are eligible components (for example, an
applicable critical mineral or electrode active material at the time of
acquisition) as a direct or indirect material cost with respect to the
production of another applicable critical mineral or electrode active
material appropriately implements the statute. It is also appropriate
to have the same rules for applicable critical minerals and electrode
active materials with respect to production costs, as the statutory
language regarding calculation of the credit for applicable critical
minerals and electrode active materials is the same.
These final regulations also include certain substantiation
requirements for a taxpayer that is claiming a section 45X credit with
respect to an applicable critical mineral or electrode active material.
The preamble to the Proposed Regulations supported not including all
direct and indirect material costs by referencing the possibility that
the same production costs may be credited multiple times and the
potential for increased fraud and abuse related to claiming the section
45X credit. Proposed Sec. 1.45X-4(c)(4) would have required the
taxpayer to document that their product meets the criteria for an
applicable critical mineral as described in section 45X(c)(6) with a
certificate of analysis (COA) provided by the taxpayer to the person to
which the taxpayer sold the applicable critical mineral. The Treasury
Department and the IRS requested comments on this substantiation
requirement, including whether a similar requirement should be applied
to electrode active materials.
Based on a review of the comments, including comments specifically
suggesting certification statements, and the need to balance the
expansion of costs included as production costs with respect to the
Proposed Regulations while mitigating the risk of fraud, waste and
abuse, these final regulations revise the substantiation rules in
proposed Sec. 1.45X-4(c)(4) for applicable critical minerals and added
substantiation rules for electrode active materials in Sec. 1.45X-
3(e)(2)(iv)(C). In order to include direct or indirect materials costs
as defined in Sec. 1.263A-1(e)(2)(i)(A) and (e)(3)(ii)(E) as
production costs when calculating a section 45X credit for the
production and sale of an applicable critical mineral or electrode
active material, a taxpayer must include, as at attachment to the
return on which the section 45X credit is claimed, certifications from
any supplier, including the supplier's employer identification number
and that is signed under penalties of perjury, from which the taxpayer
purchased any constituent elements, materials, or subcomponents of the
taxpayer's eligible component, stating that the supplier is not
claiming the section 45X credit with respect to any of the material
acquired by the taxpayer, nor is the supplier aware that any prior
supplier in the chain of production of that material claimed a section
45X credit for the material. A taxpayer must also prepare the following
information, and maintain that information in the taxpayer's books and
records: (1) a document that provides an analysis of any constituent
elements, materials, or subcomponents that concludes the material did
not meet the definition of an eligible component (for example, did not
meet the definition of applicable critical mineral or electrode active
material) at the time of acquisition by the taxpayer (the document may
be prepared by the taxpayer or ideally by an independent third-party);
(2) a list of all direct and indirect material costs and the amount of
such costs that were included within the taxpayer's total production
cost for each electrode active material or applicable critical mineral,
as applicable; and (3) a document related to the taxpayer's production
activities with respect to the direct and indirect material costs that
establishes the materials were used in the production of the electrode
active material or applicable critical mineral, as applicable (the
document may be prepared by the taxpayer or ideally by an independent
third-party). Finally, the taxpayer must provide any other information
related to the direct or indirect materials specified in guidance and
comply with the directions for providing such information as specified
in guidance. Failure to provide this documentation with the return
filing, or providing a ``available upon request'' statement, will
constitute a failure to substantiate the claim. The Treasury Department
and the IRS have determined, in consultation with the Department of
Energy, that these revisions to the Proposed Regulations are necessary
in order to properly substantiate credit amounts claimed under section
45X for applicable critical minerals and electrode active materials.
2. Battery Cells--Definition
a. In General
Consistent with section 45X(c)(5)(B)(ii), proposed Sec. 1.45X-
3(e)(3)(i) would have defined the term battery cell as an
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 12 watt-
hours of energy.
Commenters asked for additional guidance clarifying the volumetric
energy density calculation methodology given the variety of battery
shapes, sizes, and construction methodologies that exist in the market.
The Treasury Department and the IRS understand these comments to be
made with respect to calculating energy density under proposed Sec.
1.45X-3(e)(3)(i)(B) and agree that clarification would be helpful.
Energy density can refer to volumetric energy density but is commonly
used to refer to gravimetric (mass-based) energy density. These final
regulations clarify that energy density is referring to volumetric
energy density in Sec. 1.45X-3(e)(3)(i)(B).
One commenter asked that the final rules provide that hydrogen fuel
cells be included under the definition of battery cells by amending the
definition of a battery cell to waive the requirement that a battery
cell be capable of storing at least 12 watt-hours of energy and
permitting this requirement to be met by ``a large hydrogen storage
tank.'' The Treasury Department and the IRS do not have the authority
to amend the definition of a battery cell in the final regulations or
to waive the requirement that it be capable of storing at least 12
[[Page 85821]]
watt-hours of energy. For this reason, the Treasury Department and the
IRS decline to adopt this comment in the final regulations.
At least one commenter raised a matter involving a vertically
integrated manufacturer of electric vehicles that, together with a
related person, operates a battery cell production facility. According
to the commenter, the commenter purchases battery cells from this
production facility and assembles, integrates, and incorporates them
into battery modules at battery assembly facilities located in other
States. Modules produced at these assembly facilities are then shipped
to various electric vehicle production facilities. As described by the
commenter, the process of taking completed battery cells and
integrating, incorporating, and assembling them into completed battery
packs happens across several different facilities, all of which are
operated by the commenter and its affiliates that are separate legal
entities. Each facility is neither solely a battery module facility nor
solely a battery pack facility. The commenter requested that the final
regulations allow a vertically integrated manufacturer and related
parties to elect which facility will receive the credit in situations
where the manufacturer and related parties complete all stages of the
production process and can substantiate that the corresponding credit
will not be duplicated. The Treasury Department and the IRS appreciate
the complex operations that may be inherent in battery production.
However, the statute requires a determination of the taxpayer that
produces an eligible component and does not authorize the relief
requested by the commenter.
b. Capacity Measurement
Proposed Sec. 1.45X-3(e)(3)(ii) would have provided that taxpayers
must measure the capacity of a battery cell in accordance with a
national or international standard, such as IEC 60086-1 (Primary
Batteries), or an equivalent standard. Taxpayers can reference the
United States Advanced Battery Consortium (USABC) Battery Test Manual
for additional guidance.
Several commenters agreed with the proposed definition because it
provided taxpayers the ability and needed flexibility to determine the
appropriate standard, but others recommended additional guidance or
information be included in these final regulations. A commenter
requested that the final regulations ``retain the criteria that the
standard used by the taxpayer must be one issued by a recognized
standards setting body.'' While not specifically using that language,
these final regulations do maintain that concept by continuing to
require measurement in accordance with a national or international
standard.
Another commenter requested that the final regulations eliminate
the reference to ``an equivalent standard'' to IEC 60068-1 because
``IEC 60086-1 is not applicable to rechargeable battery chemistries,
and it is unknown therefore what an equivalent standard would be.'' The
Treasury Department and the IRS have determined that this clarification
is unnecessary because the reference to IEC 60068-1 or ``an equivalent
standard'' merely provides a non-exclusive example of an acceptable
national or international standard for capacity measurement. These
final regulations therefore do not adopt the commenter's suggestion.
Other commenters suggested the addition of various specific
national or international standards to the language provided in
proposed Sec. 1.45X-3(e)(3)(ii) regarding the standards to be used for
battery cell capacity measurement. The Treasury Department and the IRS
understand the desire for assurance but have determined that these
proposed additions, if included as examples, will not add further
clarity to the final regulations. The Treasury Department and the IRS
further do not think that there is a basis to include any of these
proposed additions as the exclusive standard or standards for capacity
measurement. The final regulations therefore do not adopt these
commenters' suggestions regarding particular national or international
standards to be used for capacity measurement in Sec. 1.45X-
3(e)(3)(ii).
Another commenter recommended that the final regulations require
that battery cell ``capacity'' must be mathematically normalized to a
100-hour discharge time, regardless of the time otherwise dictated by
the appropriate national or international standard. The Treasury
Department and the IRS do not think there is a basis to adopt this
requirement, as this would displace other national or international
standards with a new requirement that is not in the statute. Therefore,
the Treasury Department and the IRS decline to adopt additional
specific standards in these final regulations beyond those provided in
the Proposed Regulations.
Some commenters noted that the USABC Battery Test Manual, which
proposed Sec. 1.45X-3(e)(3)(ii) states may be used for additional
guidance regarding measurement of the capacity of a battery cell, is
not applicable to all battery cell applications and technologies that
may be eligible for the section 45X credit. One commenter suggested
removing the reference to the USABC Battery Test Manual for this
reason. Because the inclusion of this reference is intended to inform
taxpayers of a resource that may be helpful in some cases, even if it
may not be applicable in all cases, the Treasury Department and the IRS
decline to adopt this suggestion.
Another commenter suggested an additional requirement to conduct a
performance test in a certified laboratory once every three years to
verify the capacity of the battery cell. It was unclear from the
comment when this performance testing would be required. Section 45X
requires the production and sale of eligible components. Because an
eligible component must meet the requirements under section 45X at the
time of sale, it would be inappropriate to verify capacity once every
three years. Thus, the Treasury Department and the IRS decline to adopt
this additional capacity measurement requirement in the final
regulations.
3. Battery Modules--Definition
Under section 45X(c)(5)(B)(iii), the term battery module, in the
case of a module using battery cells, is 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,
with an aggregate capacity of not less than 7 kilowatt-hours (or, in
the case of a module for a hydrogen fuel cell vehicle, not less than 1
kilowatt-hour). Similarly, under section 45X(c)(5)(B)(iii), a battery
module with no cells means a module with an aggregate capacity of not
less than 7 kilowatt-hours (or, in the case of a module for a hydrogen
fuel cell vehicle, not less than 1 kilowatt-hour). Consistent with
section 45X(c)(5)(B)(iii), proposed Sec. 1.45X-3(e)(4)(i) would have
defined battery module to mean a module described in proposed Sec.
1.45X-3(e)(4)(i)(A) (with cells) or (B) (without cells) with an
aggregate capacity of not less than 7 kilowatt-hours (or, in the case
of a module for a hydrogen fuel cell vehicle, not less than 1 kilowatt-
hour).
Some commenters suggested lowering the aggregate capacity
limitation to incentivize domestic production of all battery types used
in various industrial applications. One commenter recommended
eliminating the capacity thresholds entirely for battery modules when
used in medical or military applications. While the Treasury Department
and the IRS appreciate commenters' desire to incentivize domestic
battery manufacturing, section 45X(c)(5)(B)(iii)(II) provides the
[[Page 85822]]
aggregate capacity thresholds that battery modules must meet in order
to be eligible components. The Treasury Department and the IRS decline
to adopt the commenters' request to alter or eliminate the aggregate
capacity requirements for battery modules as such revisions would be
inconsistent with the statute. Thus, these final regulations adopt
proposed Sec. 1.45X-3(e)(4)(i) without change.
a. Modules Using Battery Cells
Proposed Sec. 1.45X-3(e)(4)(i)(A) would have defined a module
using battery cells as a module with two or more battery cells that are
configured electrically, in series or parallel, to create voltage or
current (as appropriate), to a specified end use, meaning an end-use
configuration of battery technologies. Under the proposed rule, an end-
use configuration is the product that ultimately serves a specified end
use. It is the collection of interconnected cells, configured to that
specific end-use and interconnected with the necessary hardware and
software required to deliver the required energy and power (voltage and
current) for that use. The preamble to the Proposed Regulations
explained that, as applied to batteries commonly used in electric
vehicles, proposed Sec. 1.45X-3(e)(4)(i)(A) would have permitted a
credit for the production and sale of the battery pack in an electric
vehicle, but it would not have permitted a credit for the production of
a module that is not the end-use configuration. The Treasury Department
and the IRS requested comments on this proposed interpretation of the
phrase ``to a specified end use'' in section 45X(c)(5)(B)(iii)(I)(aa).
Many commenters raised concerns with the interpretation of the
phrase ``to a specified end use'' in proposed Sec. 1.45X-
3(e)(4)(i)(A). Some commenters asserted that requiring that modules be
in an end-use configuration would be overly restrictive for certain
product categories. For example, certain types of modules may be
transported to the end-use site only partially assembled due to safety
considerations, with final assembly performed by the battery
manufacturer, the customer, or a third-party contractor.
Similarly, a few commenters expressed concern that no taxpayer may
be eligible for the battery module credit in certain cases. One
commenter suggested that this result might occur if module
manufacturers do not manufacture a pack in its end-use configuration.
Further, those who purchase such items and convert them to their end-
use configuration may struggle to demonstrate their activities amount
to substantial transformation. One commenter suggested changing
proposed Sec. 1.45X-3(e)(4)(i)(A) to provide that ``an end-use
configuration is the product that ultimately serves a specified end
use--whether delivered pre-assembled or assembled on-site.'' Further,
the commenter recommended an additional sentence at the end of proposed
Sec. 1.45X-3(e)(4)(i)(A) to identify the section 45X claimant in cases
where assembly occurs by someone other than the taxpayer.
Several commenters stated that proposed Sec. 1.45X-3(e)(4)(i)(A)
created confusion because the definition of battery module could, in
some circumstances, include the items that are referred to in industry
as ``battery packs.'' One commenter noted that while battery cells and
modules predominantly originate from battery manufacturers, battery
packs are assembled by electric vehicle manufacturers before being
installed in electric vehicles.
Some commenters requested that, if the definition of battery
modules includes battery packs in the case of electric vehicle battery
modules, the process to transform what is colloquially referred to in
industry as a battery module into what is known as a ``battery pack''
be clarified in the final regulations to constitute disqualifying minor
assembly or ``partial transformation.'' Another commenter requested
that the final regulations state that the rules are agnostic as to the
form or manner in which a battery module with cells is incorporated
into the electric vehicle.
Other commenters supported the proposed definition of battery
module with cells, stating that this definition appropriately captures
the intention of the section 45X credit. One commenter asserted that
the battery pack production covered by the proposed definition is a
more valuable activity than the production of a single battery module
and is the activity closer to the downstream consumer.
The Treasury Department and the IRS appreciate the comments
received regarding battery modules and have determined, in close
consultation with the Department of Energy, that additional
clarification is needed. Section 45X(c)(5)(B)(iii)(I)(aa) defines
battery module using battery cells as ``a module using battery cells,
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[. . .].'' Section 45X(c)(5)(B)(iii)(II) provides a
capacity threshold limitation of ``[an] aggregate capacity of not less
than 7 kilowatt-hours (or, in the case of a module for a hydrogen fuel
cell vehicle, not less than 1 kilowatt-hour)'' that such battery module
using battery cells (as defined in section 45X(c)(5)(B)(iii)(I)(aa))
must meet.
In reviewing comments, the Treasury Department and the IRS
understand that the explanation in the preamble of the Proposed
Regulations regarding application to electric vehicles may not have
aligned with industry understanding and the statutory text. Upon review
of the comments received, the Treasury Department and the IRS wish to
restate that the requirement found in section 45X(c)(5)(B)(iii)(I)(aa),
that battery modules using battery cells that contain battery cells
configured to a specified end use, applies regardless whether the items
are typically called ``battery modules'' or ``battery packs'' in
industry practice. These final regulations are therefore clarified to
provide that a battery module using battery cells becomes an eligible
component upon first meeting the requirements of section
45X(c)(5)(B)(iii)(I)(aa) and (c)(5)(B)(iii)(II), notwithstanding when
this transformation may occur in a manufacturing production chain.
At least one commenter requested a rule allowing the entity that
assembles the pack to assign tax credits to the joint venture that
manufactured the module. Alternatively, if the definition of specified
end use is not adopted with respect to joint ventures, the regulations
should instead allow for joint venture partners to assign battery-
related section 45X credits to the joint venture as the parties see
fit, or in cases where the parties do not choose to assign the credits
to one of the parents, the joint venture itself. This comment is not
adopted as issues specific to joint ventures are outside the scope of
these final regulations. For discussion of ``produced by the taxpayer''
and the associated rules for who may claim the section 45X credit, see
Part II.B. of this Summary of Comments and Explanation of Revisions.
b. Modules With No Battery Cells
Proposed Sec. 1.45X-3(e)(4)(i)(B) would have defined the term
``module with no battery cells'' as a product with 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. This proposed definition would allow battery
[[Page 85823]]
technologies, such as flow batteries and thermal batteries, to be
eligible for the section 45X credit, but would not permit technologies
that do not meet this definition, such as standalone fuel storage tanks
or fuel tanks connected to engines or generation systems, to qualify as
a module with no battery cells.
Several commenters supported the proposed definition of a battery
module, and specifically the inclusion of thermal batteries. Commenters
also asked for clarification regarding a technology-neutral application
of the proposed definition of a battery module. Other commenters
suggested specific clarifications to the final regulations regarding
certain types of thermal battery systems, such as thermal ice storage
or thermal bricks. Some commenters requested that the final regulations
incorporate similar language used in the section 48 proposed
regulations to facilitate this technology-neutral treatment. For
example, these commenters suggested that the final regulations should
adopt the language in proposed Sec. 1.48-9(e)(10)(ii) by specifically
stating that ``batteries of all types (such as lithium ion, vanadium
flow, sodium sulfur, and lead-acid)'' are eligible components.
Commenters asserted that there is symmetry between the investment tax
credits for energy storage property and advanced manufacturing credits
for energy storage products. Additionally, commenters raised that
technology-neutral treatment aligns with Congressional intent to
establish eligibility criteria based on performance thresholds, not
technology.
The Treasury Department and the IRS, in close consultation with the
Department of Energy, agree with commenters that a battery module with
no battery cells does not require a specific storage medium nor are
there chemistry-based requirements for qualifying battery modules.
However, the Treasury Department and the IRS decline to include
specific language as a non-exhaustive list of possible storage mediums.
Including a non-exhaustive list of current storage mediums on an
industry-by-industry basis is not practical and may inadvertently
create confusion for other emerging technologies on whether those
mediums would qualify for the section 45X credit.
Some commenters disagreed with the requirement in proposed Sec.
1.45X-3(e)(4)(i)(B) that the storage medium remain in the module,
asserting that the requirement ``may inadvertently exclude
technologies'' such as compressed air ``that can deliver on the intent
of the regulations.'' The Treasury Department and the IRS decline to
amend proposed Sec. 1.45X-3(e)(4)(i)(B) in response to this comment.
The Treasury Department and the IRS, in consultation with the
Department of Energy, have determined that the proposed rule
appropriately implements the statute. The requirement that the storage
medium remain in the module gives meaning to both ``battery'' and to
``module.'' For batteries, this requirement describes a feature common
to electrochemical and more nascent types of batteries and
distinguishes batteries from technologies that rely on fuel. For
modules, this requirement helps segregate qualifying technologies from
those that are self-contained and not merely one component of a larger
system.
Manufacturing the constituent components of battery modules without
manufacturing the entire energy storage system does not result in the
production of a module with no battery cells under the final
regulations. For example, in thermal energy storage applications, the
taxpayer must produce and sell the entire system and not just the
storage medium. A manufacturer that only produces a thermal storage
medium (for example, molten salt) in a thermal energy storage system
would not be eligible for the credit. Requiring the production of the
entire energy storage system from ``energy in'' through ``energy out''
provides similar treatment for purposes of the section 45X credit to
the production of a battery module using battery cells.
Numerous comments requested additional clarification of ``custom-
built electricity . . . storage facility.'' Commenters noted that the
definition in proposed Sec. 1.45X-3(e)(4)(i)(B) creates ambiguity as
to which modifications made in order to meet site or use specifications
would trigger the ``custom-built'' disqualifier. Several commenters
asserted that the Proposed Regulations create additional limitations on
battery modules without cells that do not apply to the other eligible
components. Commenters contended that the terms in the Proposed
Regulations, such as ``manufacturing,'' ``standardized,'' and ``not
custom-built,'' do not appear in the statutory text and diverge from
the general approach taken by the Proposed Regulations with respect to
other eligible components. Some commenters asserted that nearly all
thermal battery implementations are associated with custom-built
generation and storage facilities.
These commenters requested that the final regulations clarify that
the eligible components may be assembled with other property to
comprise a functioning energy generation or storage facility.
Commenters also suggested additional clarity regarding the physical
boundaries of a battery module and thought that using the proposed
definition of ``produced by the taxpayer'' would allow for an eligible
component to be assembled on-site, such as battery modules with no
battery cells that are too heavy and large to transport fully
assembled. Commenters asserted that most or all batteries will require
some amount of on-site installation. Commenters generally requested
that the final regulations provide a clear and principled definition of
``custom-built'' that continues to support a technology-neutral and
inclusive implementation of section 45X.
Commenters provided various alternatives to further clarify the
definition of ``custom-built'' in the Proposed Regulations. One
commenter recommended clarifying the definition of ``a custom-built
electricity storage facility'' as ``a facility (1) that contains an
energy storage medium and (2) of which all, or substantially all, of
the integral components are designed specifically for the facility and
are not interchangeable with components of other facilities that
utilize the same or similar electricity storage technology.'' Another
commenter asked that the final regulations clarify that a module with
no battery cells is not treated as custom-built if modules are produced
by the taxpayer using the same or similar components or property
generally used by the taxpayer to produce such modules but in different
configurations or amounts to accommodate the storage needs or the site
layout applicable to the storage asset. A commenter recommended
clarifying the definition that a module with modular components
manufactured offsite may undergo final assembly at its installation
site without being considered a custom-built facility and include an
example regarding final assembly on site. Another suggestion included
clarifying that modules with no cells are items of property that must
be combined with other tangible personal property to store energy.
Separately, a commenter noted that for contract manufacturing
arrangements, ``a routine order for off-the-shelf-property'' is not
eligible for the section 45X credit. The commenter suggested the final
regulations provide that an agreement will be treated as a routine
purchase order for off-the-shelf property if the contractor is required
to make no more than de minimis modifications to the property to tailor
it to the customer's specific needs. However, if the manufacturer does
make more than de minimis modifications,
[[Page 85824]]
the module may be custom-built. The commenter asserted that the
proposed rule sets up a complicated dichotomy under which manufacturers
of modules with no battery cells who enter into contract manufacturing
arrangements will have to establish an undefined standard that are
neither off the shelf nor custom-built.
Commenters also provided specific examples regarding whether
certain technologies or configurations would be considered custom-
built. For example, physical site conditions at a customer's site may
require that the same components used for one pumped heat energy
storage (PHES) are differently arranged for another PHES. The use of
the PHES by a customer may require modified storage durations (for
example, 20 hours versus 10 hours), which would require additional
storage media and vessels. The commenter asserted that this should not
be considered custom-built. Commenters also noted that, for closed-loop
pumped storage hydropower systems, pipes and other related components
are otherwise produced in a standardized process, and neither resemble
nor are functionally equivalent to standalone fuel storage tanks or
fuel tanks connected to engines or generation systems custom-built
electricity generation or storage facility. Commenters also raised that
these differences are based on the topography of the site where the
system is located and not on the intended function of these components
or the system as a whole.
One commenter requested that the Treasury Department and the IRS
include hydrogen fuel cell systems under the definition of a battery
module using battery cells. Proposed Sec. 1.45X-3(e)(4)(i)(B) would
define the term ``module with no battery cells'' as a product with 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.
In general, the Treasury Department and the IRS appreciate the
complexity of the issues raised by commenters. Given the myriad o
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