Domestic clean energy manufacturing capacity is booming due to the enactment of a new tax incentive for the manufacture of solar, wind, or battery components, inverters, and critical minerals. Manufacturers of these products are entitled to receive advanced manufacturing production tax credits (AMPTC), 45X tax credits, which can be sold for cash through a provision in the tax code known as transferability.
The market for transferable tax credits is growing and maturing rapidly, and 45X tax credits are among the most popular and transactable credits in the market. Understanding the nature of 45X tax credits, how they are calculated, claimed and sold, can help US manufacturers efficiently realize the benefit of this impactful new tax provision.
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The Inflation Reduction Act (IRA) created a tax incentive for domestic manufacturers under Section 45X of the Internal Revenue Code (IRC). Manufacturers are entitled to receive a production tax credit for solar components, wind energy components, battery components, or the refining or recycling of critical minerals.
The value of the 45X tax credit is calculated based on either a fixed dollar amount per unit of production, per unit of electrical capacity, or as a percentage of the cost of production. 45X tax credits are transferable, and many manufacturers are finding that transferability is a valuable way to maximize the benefit of these tax credits.
Advanced manufacturing production tax credits went into effect at the beginning of 2023 and run through the end of 2032. For most manufactured goods, the credit value phases down in the later years: to 75% of its value in 2030, 50% of its value in 2031, and 25% in 2032. Critical minerals are not subject to the phase out.
45X is a powerful incentive for domestic manufacturers. Clear visibility into the value of the credit over the next decade is supporting long-term investment decisions. According to data from the Clean Investment Monitor (CIM), investment in manufacturing since the passage of the IRA is up 305%, to $89 billion in 2023-2024, from $22 billion in 2020-2022.
45X tax credits are available to any US- based manufacturer of an eligible product:
Domestic production includes facilities located in the United States or territories (including Puerto Rico, Guam, the Northern Mariana Islands, American Samoa, or the US Virgin Islands).
The IRS defines the process of manufacturing as “substantial transformation of inputs into a complete and distinct eligible component,” not simply that which would result from “minor assembly” or “superficial modification.” In the draft guidance for the AMPTC, the IRS provides a series of examples of scenarios that would not meet the definition of a manufactured good eligible for the AMPTC.
Finished goods must be produced in the US, but subcomponents or constituent elements (for instance, steel, framing, electrical components, etc.) do not need to be sourced in the US. Additionally, manufacturers are not required to meet prevailing wage and apprenticeship (PWA) requirements that are common for other clean energy tax credits.
Finally, the manufactured component must be sold to a third party in order to earn the AMPTC.
Documentation of the manufacturing process, the goods produced, and the record of sale to a third party are key components of ensuring that a manufacturer can reliably calculate their AMPTC value.
The IRS makes an allowance for contract manufacturing arrangements under the AMPTC guidance. The owner of a manufacturing facility is entitled to receive the AMPTC. However, if the owner has a contract manufacturing agreement with an unrelated entity, the AMPTCs can alternatively be claimed by the contracting party.
IRS defines a contract manufacturing arrangement as “any agreement providing for the production of an eligible component,” other than “a routine purchase order for off-the-shelf property.”
In the event that a contract manufacturing agreement is in place, the tax credit seller (whether the manufacturer or the contracting party) should ensure that there is clear documentation of which entity is entitled to claim the AMPTC. IRS regulations require all parties to the contract manufacturing arrangement to sign a certification statement acknowledging who will claim the 45X credits as well as a penalty of perjury statement.
The IRS has articulated a defined tax credit value for each eligible component included in the 45X regulation. Manufacturers must ensure that their products meet the definition of an eligible component and determine the associated production tax credit value. Finally, the component must be sold to an unrelated third party in order to generate the 45X tax credit.
There are three primary methods used to calculate the value of the 45X credit for a manufactured product. The credit can be determined based on a fixed value per component size or weight, derived per unit of electrical capacity (e.g. cents per watt), or as a percentage of the cost of production. For example:
The 45X credit is generated and claimed on an annual basis. Manufacturers must ensure that the credits claimed are tied to eligible products that were sold to a third party within a given year.
Importantly, products may have been produced in a preceding tax year, but until they are sold the manufacturer is not entitled to claim a 45X credit associated with the good. There are certain exemptions for related persons, which are discussed in the FAQ section.
US taxpayers who have determined that they are entitled to claim the 45X tax credit have several options for claiming or monetizing the credit. A company intending to claim the 45X will file IRS Form 7207 with their annual return.
A separate form must be completed for each eligible facility that is owned or controlled by the taxpayer. 45X credits are eligible for direct pay and transferability. The process for claiming the credit is similar in both cases, but the method of monetization differs.
In both cases, the taxpayer will annually register their facility through the IRS pre-filing registration portal and indicate whether they are taking direct pay or transferring the credits.
Taxpayers may take the 45X credits on their own return and may elect to receive a refund from the IRS if doing so results in overpayment of taxes. This process is often referred to as direct pay.
To file for Direct Pay, the taxpayer must complete pre-filing registration for each facility and file Form 3800 with their annual tax return. Companies electing to take direct pay for a tax year are generally presumed to take direct pay for the subsequent four tax years, unless they revoke their election and choose to transfer the credits. Once revoked, the taxpayer cannot re-elect direct pay for any remaining balance of the five-year direct pay entitlement.
45X tax credits are among the most desirable and transactable tax credits in the transferable tax credit market. There are no limitations on the time period that the company can transfer their credits — as long as the credit is generated, it can be sold in the transfer market.
Similar to direct pay, in order to transfer credits, the taxpayer must complete the pre-filing registration process, file Form 7207 for each facility and file Form 3800 with their annual returns.
To transfer the tax credits to a buyer, the taxpayer typically will estimate their annual 45X production volume and secure a buyer directly, or through an intermediary (like a financial institution, tax firm, or transparent marketplace). The seller can ensure that their credits are highly transactable by lining up due diligence items, legal memos, and documentation of sales ahead of engaging with prospective buyers.
In general, larger deals (over $50 million in annual credit volume) tend to attract the strongest pricing. It is relatively common for 45X credits to transact around 92-95% of their face value and to settle on a quarterly basis (in arrears, for credits generated during the preceding quarter). Strong credit pricing and timely settlement can make transferability the most cost effective mechanism for a company to claim its 45X credits, when accounting for the time value of money.
Pre-filing registration with the IRS is a feature of both the transfer and direct pay methods of claiming the credit. The pre-filing registration portal opened in December 2023.
Companies that generate 45X credits should anticipate supplying basic facility information in the pre-filing registration portal. The IRS publishes a detailed guide describing the application process for each tax credit-eligible entity and tax credit type.
In general, the IRS recommends that applicants allow 120 days for processing of the pre-filing registration, though the process can be faster. At the end of the process, the IRS will supply a registration number which is typically required in any tax credit transfer deal or in a direct pay filing.
Companies listing their credits on Crux are able to enter the pre-filing registration number, as well as share the status of their application if the number has not yet been received.
Transferring tax credits is a relatively straightforward way to maximize the value of 45X tax credits. The 45X incentive is new, having come into effect following the passage of the IRA in 2022, but the long-standing tax credit advisory industry has quickly come to embrace these credits as clear, well-constructed, and simple to diligence in the context of a transaction.
In particular, Crux has observed that the regulatory guidance published by the IRS in December 2023 settled most uncertainties regarding the 45X credit. Average credit pricing observed before and after that guidance was published reflects the market’s increasing comfort and familiarity with 45X.
Prior to the release of guidance, 45X credits averaged around 89 cents on the dollar in the market (an 11% discount to their face value). After the release of guidance, credits average 92.8 cents (just over a 7% discount to face value).
45X pricing before and after the release of IRS guidance
Source: Crux Mid-Year Market Intelligence Report
45X credit deals also tend to be quick to execute and simple to diligence for all parties involved. Unlike other common tax credits, such as the Investment Tax Credit (ITC), 45X credits do not incorporate the risk of future recapture of the credit. Once the manufacturer can demonstrate that their products are eligible for 45X credits and that the products have been sold, there is typically little doubt that they can claim and transfer the corresponding tax credit.
The simplicity of 45X contributes to the competitiveness of these credits among buyers and helps accelerate transaction timeline. Crux has observed that 30% of 45X credits listed on the platform receive bids within the first day, and 100% of credits receive a bid in the first 3 days after listing.
45X credits typically get multiple bids, as well, contributing to a seller’s ability to optimize the transaction across a range of terms – counterparty readiness to transact, timing of payment, insurance, and, of course, overall price.
Even so, it is important to approach the market with realistic price expectations. Deals with notional value under $50 million per year, or sellers who desire a multi-year commitment from a buyer may experience less robust demand for their credits. Buyers typically expect that the seller will cover the costs associated with due diligence (up to a negotiated cap) as well as any insurance that may be required to backstop the seller’s indemnities (or in place of indemnities).
The high water mark for pricing in the tax credit market is around 96 cents per dollar of credit. This pricing is typically realized for the largest deals, where the seller is a large company with a strong credit rating. Deals in the mid to low 90s for 45X credits remain common.
Tax credit buyers have developed a strong appetite for 45X tax credits due to their relative abundance, simplicity, and the integral role that the 45X program plays in supporting the US manufacturing industry.
The due diligence process, discussed more fully below in the section covering transaction risks, is typically a straightforward and facts-based analysis. It has become increasingly common for manufacturers to indemnify their tax credit deals in lieu of obtaining insurance.
Crux has observed that in the first half of 2024, about 40% of 45X deals included some form of insurance while 60% included a parent guarantee. Insurance is generally widely available to cover 45X transactions, as well, and some buyers prefer the comfort that insurance affords.
Prevalence of insurance on 45X transactions in 1H2024
Source: Crux Extended Mid-Year Market Intelligence Report
45X PTCs are generated on an ongoing basis and buyers have the option to contract for tax credits on a multi-year basis, also called purchasing a “strip” of tax credits. Unlike other PTCs, where it can be common to contract for tax credits on a ten-year basis, shorter-term strips, like 2-3 years, are more common for 45X deals.
This shorter-duration strip can be attractive to buyers who may not be able to take a view of their future tax liabilities a decade ahead of time.
Intermediaries play an important role in facilitating tax credit transactions. It is increasingly common for 45X credits to seek multiple bids for their credits. Sellers typically indicate that they prefer counterparties who are ready to transact and have experience dealing with 45X credits. Since the credit category is so new, buyers do not necessarily have this experience.
Engaging with experienced advisors can help buyers climb the learning curve more quickly, put together a competitive and timely bid for 45X credits, and demonstrate their preparedness for a transaction. Advisors and intermediaries should help their clients recognize the competitiveness of the marketplace, particularly for in-demand credits like 45X, and encourage them to bid competitively and respond quickly to communication from the seller.
Crux can serve as a neutral source of information and a sounding board for intermediary parties and their clients, as well. Data from more than $10 billion of transferable tax credit transactions, including over $2 billion in 45X deals, provide valuable insight into pricing and commercial terms.
Like many of the tax credit programs established in the IRA, the 45X program is new and there are some inherent uncertainties regarding how the program will be overseen and administered by the IRS in the long-term.
The most material and foreseeable risk for a given 45X transaction relate to the eligibility and calculation of the tax credit. Buyers and sellers will evaluate several important factors in the context of due diligence for a 45X deal.
Crux has prepared a proprietary due diligence checklist and workflow software specifically designed to support 45X transactions. The due diligence checklist has been tested and utilized in the context of hundreds of millions of dollars worth of 45X deals. Including one of the first 45X transactions and a recent transaction between Schneider Electric and Silfab Solar.
The 45X statutes outline values for a wide range of manufactured products and components and for 50 critical minerals. There are three primary methods for determining the value of an eligible good: the production volume of a component based upon size or weight, the volume based upon electrical capacity, or as a percentage of production cost. Each 45X eligible good has an associated tax credit value.
Tax credit value multiplied by the volume of goods produced in a given period (and sold to a third party) yields the total value of tax credits produced during that period.
The 45X tax credit is eligible for direct pay, or refundability. Manufacturers will calculate the total value of the 45X credits generated during a tax year and file that amount on their annual tax filings. The IRS has indicated that refunds will only be issued on an annual basis, following the receipt of the tax filing and will not be issued on a quarterly basis following quarterly estimated return filings.
Companies are eligible to take direct pay for up to a five year period, unless they revoke the direct pay election prior to the end of that period. Companies cannot re-elect direct pay after having revoked that election or after the end of the five years.
Manufacturing facilities that are eligible for 45X may also be eligible for an investment tax credit, 48C, for qualifying advanced energy projects. The total value of the 48C program is capped at $10 billion, and the Department of Energy oversees the allocation of these tax credits. 48C is a one time credit worth 30% to 40% of the value of an investment in a new manufacturing facility.
Facilities which received an award under the 48C program and claimed the tax credit associated with it are not eligible for 45X tax credits. Some facilities may include multiple production lines, and may earn 48C for some portion of their operations but not for the full facility operation. The portion of a facility that is not covered under the 48C program would still be entitled to claim 45X tax credits associated with their production through the end of 2032.
The 45X tax credit is eligible for direct pay, or refundability. Companies are entitled to receive annual the value of their tax credits as a cash refund from the IRS for up to five years.
Companies make an annual election when filing their tax returns. The IRS anticipates that companies electing direct pay will continue to utilize direct pay through the subsequent four tax years.
However, companies may also terminate the direct pay election and choose to transfer their tax credits instead. They are not able to re-elect direct pay after having done so, even if they elected direct pay for fewer than five years.
A key requirement of the 45X program is that the eligible products or components must be sold to an unrelated third party in order to generate the tax credit. However, the IRS has outlined certain circumstances under which a sale to a related person may be treated as a sale to an unrelated person (the “related person election”).
Prior to the sale, the related person must make the election with the IRS and may be required to supply information as a condition of the election.
Critical minerals are a set of 50 different minerals deemed essential for supporting the transition to clean energy. The list of critical minerals is articulated in the IRA statute, but the Department of Energy, working in conjunction with the Department of the Interior and the US Geological Survey maintains a list of critical minerals and materials.
The full list of critical minerals is:
A central purpose of the IRA is to drive investments in new domestic manufacturing capacity for clean energy technologies such as solar products and components, wind components, battery components, inverters, and critical minerals. To that end, Congress created section 45X of the tax code to award tax credits for the production and sale of these products.
45X tax credits are among the most valuable and popular credits in the new transferable tax credit market. These credits are supporting billions of dollars of new investment in US manufacturing capacity.
Transferability enables manufacturers to economically and efficiently monetize their tax credits. The diligence process for a tax credit transaction is relatively straightforward and a deal can create a valuable and predictable source of cash flow for the manufacturer.
Crux has successfully executed some of the first 45X transactions and continues to be a leader in the development of the burgeoning tax credit market. Get in touch with us today to learn more about maximizing the value of your 45X tax credits.
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