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Understanding the Section 45X tax credit for manufacturers

September 18, 2023 / 10 min read

Section 45X, established with the Inflation Reduction Act, is a tax credit for businesses that manufacture and sell energy components. Wondering how to qualify, what qualifying energy components are, or how to calculate and claim the tax incentive? Read more.

The Inflation Reduction Act of 2022 (IRA) established a collection of interrelated tax credits and incentives supporting domestic clean and renewable energy production. A crucial aspect of that legislation — the Advanced Manufacturing Production Credit under Section 45X — supports the domestic production of equipment and components (solar, wind, batteries, and inverters) and critical minerals. Importantly, this credit incentivizes the manufacturing of equipment required by those seeking to take advantage of many other credits included in the IRA. Thus, the Section 45X credit is the linchpin for the achievement of numerous goals of that legislation. Our tax professionals evaluate the technical details of this credit and describe the paths available for businesses to benefit.

Keep reading for the full discussion. To navigate to individual topics, click one of the links below:

Section 45X as the catalyst for other IRA credits

The IRA created or modified more than 20 tax credits and incentives with a combination of current and future effective dates. The Section 45X credit directly supports the supply chain for property qualifying for other credits, including:

The IRA created or modified more than 20 tax credits and incentives with a combination of current and future effective dates.

How to qualify for Section 45X: Components, production, and sales

The following elements are the keys to qualification under Section 45X:

The credit will begin to phase out by 25% per year for components sold after Dec. 31, 2029.

What are qualifying energy components under Section 45X?

Detailed definitions are included in this document, but below are the initial categories of qualifying components and subcomponents:

This list of eligible components is both long and specific, so the details really do matter.

How do I calculate and claim the Section 45X tax credit?

Section 45X is a production credit, so it’s ultimately calculated based on the amount of eligible components produced during the tax year. Several different types of calculations are provided given the variety of components and production methods. Specific details for each component and subcomponent are included in this table. However, in summary form, there are three core methods of calculation:

Section 45X is a production credit, so it’s ultimately calculated based on the amount of eligible components produced during the tax year.

Businesses generating the Section 45X credit will report such amounts with their federal income tax return. However, there are three distinct paths for such businesses to realize the cash benefit of this credit:

Initial guidance related to credit sales and direct pay options has been released, but further guidance and forms will be forthcoming.

What’s the catch with Section 45X? Overlap, open questions, and documentation

The Section 45X credit provides a great tax opportunity for qualifying businesses. However, there are several points to keep in mind related to qualification and planning.

The IRA includes many attractive tax opportunities for businesses and organizations. That upside benefit comes with the cost of increased scrutiny in the future.

Have additional questions on how IRA tax credits, incentives, and monetization options could impact your organization? Explore more from our tax leaders as they track the latest developments.

Access the eligible components detailed document

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