In 2022, Congress passed the Inflation Reduction Act (IRA) establishing new tax credits designed to support the transition to clean and renewable energy. Critically, Congress recognized the importance of the US manufacturing industry to spearhead this transition, and created or modified two significant tax credits designed to support domestic manufacturing. In the year since the IRA passed, the advanced manufacturing production tax credit (45X) and the expansion of the advanced energy project investment tax credit (48C) have emerged as game-changers, resulting in at least $80 billion in investments supporting domestic manufacturing, creating thousands of jobs, and fostering innovation and progress in the energy sector. Like most of the tax credits in the IRA, 45X and 48C are transferable, meaning they can be purchased for cash by a third party with qualifying tax liabilities.
As we approach the end of 2023, we are finding that these credits (particularly the 45X production tax credits) are also enormously popular with corporate tax credit buyers. We’re unpacking how these credits work, their unique circumstances, and why they’re so desirable.
To understand the nuances of 48C and 45X, it's crucial to distinguish between Investment Tax Credits (ITC) and Production Tax Credits (PTC). ITCs are calculated based on the upfront costs of a given project, while PTCs are generated annually and linked to the actual manufacturing production from a facility.
Under the new IRA framework, many clean energy technologies can avail themselves of either ITCs or PTCs, including advanced manufacturing facilities. However, there are some important distinctions for these credits. First, a facility cannot claim both an ITC and a PTC election. Second, existing manufacturing facilities may generate PTCs beginning in 2023 and running through 2032, but a facility would have to make a new investment to apply to claim ITC credits. Finally, a single entity may claim both the ITC and PTC for distinct parts of their manufacturing operations, but must be careful to distinguish between the ITC and PTC-claiming activities.
In an example cited by the IRS in its additional guidance for qualifying advanced energy projects, a single entity owns a manufacturing business with two production lines. One production line manufactures photovoltaic wafers and the other photovoltaic cells, and the two lines are arranged in serial fashion, but function independently — with the second line utilizing the wafers produced in the first line. In this example, the manufacturer received a 48C credit for the first production line and placed it into service in taxable year 2024, rendering the first line ineligible for 45X. However, the IRS notes in its guidance, the second line is “tangible property that comprises an independently functioning production unit that produces eligible components,” and therefore can be eligible to generate tax credits under 45X.
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In order to generate 45X tax credits, a manufacturing facility must be engaged in the production of components or systems that are considered "advanced energy property." This includes items such as:
Producing these components generates a tax credit, calculated as a dollar value of credit multiplied by capacity/unit or as a percentage of the cost of producing the products (depending upon the product). Credits can subsequently be sold to a third party, taken by the manufacturer generating the credit, or through elective pay.
Compared to ITCs, PTCs tend to sell at a premium due to their lower risk, specifically regarding recapture and basis. Unlike ITCs, which bear a risk of recapture over the five years after the project enters service (and after the credit is claimed), PTCs are only generated after a unit of an eligible good (such as electric power or a manufactured good) has been created.
A particularly notable aspect of 45X is that sellers often elect to sell credits in shorter tranches — typically several years — instead of the 10-year tranche common for power sector PTCs. The shorter tranches reduce the buyer's exposure to long-term risks associated with future tax balances, making 45X a more accessible and flexible investment.
A number of factors can drive a credit seller’s decision to sell their credits over a shorter period of time (power sector PTCs can also be sold in shorter tranches, but we find that developers often prefer to sell as much of the credits forward as possible). For one, manufacturers have more options regarding how to monetize their credits: sell them, take them against their tax balances, or, for the first five years, take them as a cash refund through elective pay (also known as direct pay).
Financing for manufacturing facilities also differs in important ways from power project financing. While power is almost always contracted under long term power purchase agreements, manufacturers often have shorter-duration contracts for goods and a greater ability to adjust selling prices per unit due to market conditions.
Many credit buyers have found value in 45X credits’ unique qualities. Manufacturers can take advantage of this demand by posting their credits on Crux, automatically accessing the largest network of buyers and buyer advisors. Get in touch with us today to learn more.
Unlike the majority of the IRA’s other tax credits, the total allocation under 48C is capped at $10 billion. For interested parties, this means that the 48C program is highly competitive, and only those projects which the Department of Energy (DOE) assesses to most strongly address the critical supply chain gaps and other policy priorities articulated in the guidance will likely be awarded a credit (as opposed to simply meeting the eligibility criteria for most other credits).
Applications for the first $4 billion of 48C credits are due December 26, with DOE and IRS expected to announce allocations by March 31, 2024. Under the IRA, 40% of the 48C allocation must go to certain qualifying energy communities (census tracts containing either a coal mine that has been closed after December 31, 1999 or a coal plant that has retired since December 31, 2009, or adjacent to one or both).
Projects seeking 48C credits must apply under one of three categories: new investment in clean energy manufacturing or recycling, reduction of greenhouse gas (GHG) emissions from existing industrial facilities, or new critical mineral production or recycling. This targeted approach encourages diverse projects that contribute to multiple components of building out a domestic clean energy supply chain.
While 45X and 48C credits are unique in their objectives, the process of transferring them follows the standard framework of any other transferable credit. This simplifies the transaction process, making these credits accessible to a broader range of investors.
For projects aligned with 48C, the credits provide more than just financial incentives. They serve as a catalyst for supporting high-paying domestic jobs and promoting investment in historic energy communities. This dual impact contributes to both economic growth and the revitalization of regions with historical ties to the fossil energy sector.
Investors eyeing PTCs, especially under the 45X framework, benefit from a high degree of visibility into credit generation. The unique characteristics of 45X credits, including contracted production and shorter tranches, create a low-risk profile for investors seeking to navigate the complex landscape of renewable energy tax credits.
Crux has helped many manufacturing companies with 45X credits list their credits for sale, solicit bids, and navigate a transaction — including securing the best price and low transaction fees. The Crux platform offers credit sellers, buyers, and their advisors a convenient and centralized location where they can exchange information and manage the due diligence process as they progress through the transaction. Additionally, multi-year 45X strips and any 48C credits claiming the PWA bonus adder require ongoing documentation (as we discussed in our coverage of the IRS’s recent Section 48 draft guidance).
If your firm is interested in exploring purchasing Section 45X or 48C tax credits, or if you have manufacturing tax credits to sell, get in touch with us.
October 11, 2024
Experts from the law firm Vinson & Elkins partner with Crux to prepare a detailed guide to the IRS's pre-filing registration portal. Learn how to access the portal to register transferable tax credits generated by eligible projects and facilities, as well as how to properly account for transfers in the context of tax filings.
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October 2, 2024
Beginning in 2025, clean energy projects have access to the new 48E clean electricity Investment Tax Credit and 45Y clean electricity Production Tax Credit. The legacy Section 48 ITC and Section 45 PTC credits will no longer be available to projects that start construction after December 31, 2024, and will instead be replaced by the tech-neutral tax credits. Going forward, developers of new projects need to understand the details of the new tax credits, and tax credit buyers should understand the different qualification parameters under the tech-neutral tax credit regulations.
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September 12, 2024
Crux is launching the Cruxtimate, projected market prices for clean energy tax credits. The Cruxtimate is derived from a model that takes into account a dozen factors that influence tax credit pricing.
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