Breaking Down Cleantech Tax Credits: IRC Sections 45X & 48C

The Inflation Reduction Act (IRA) includes several tax provisions that are expected to accelerate the deployment of clean energy, clean vehicles, clean buildings, clean manufacturing, and many other aspects of transitioning to a lower-carbon economy. Whitehouse.gov also provides a comprehensive look at all the incentives behind the IRA. In this article, given the potential benefits to manufacturing and technology companies, we’ll focus exclusively on a few major changes to the Internal Revenue Code (IRC):

• Advanced Manufacturing Production Credit (IRC 45X)
• Advanced Energy Project Credit (IRC 48C)
• Credit for Carbon Oxide Sequestration (IRC 45Q)

These credits are monetizable, may be exchanged for cash, and are transferable. Below, we detail what you should know to understand whether these apply to your company and how lucrative they might be.

IRC 45X, Advanced Manufacturing Production Credit

Section 45X provides a production tax credit for domestic manufacturing of components for solar and wind energy, inverters, battery components, and critical minerals. This is a new tax provision and will be available between 2023-2029, and generally phases out between 2030-2032.

Those eligible for benefits under 45X will (for the first time) be able to receive payments to the full value of tax credits as refunds (direct pay), even if they don’t have tax liability. For most for-profit entities, the direct pay amount would be paid within a five-year period. This is a beneficial alternative for organizations, as opposed to transferring the credit to a third-party and, in essence, selling it for an amount that is less than the full credit to get earlier access to liquidity.

This also clarifies that, yes, the 45X credit is transferable. Transferability allows entities that qualify for a tax credit but are not eligible to use elective pay to transfer all, or a portion of the credit to a third-party buyer in exchange for cash. The buyer and seller of the tax credit would negotiate and agree to the terms and pricing.

IRC 48C, Advanced Energy Project Credit

Section 48C is an investment tax credit treated as a general business credit equal to 6% of a qualified investment for a taxable year, applicable to any qualifying advanced energy project placed in service by a taxpayer. This credit can increase to 30% of the investment if certain labor requirements are achieved. Eligible projects include those that:

1. Re-equips, expands, or establishes an industrial or manufacturing facility for the production or recycling of a range of clean energy equipment and vehicles.
2. Re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20 percent, or
3. Re-equips, expands, or establishes an industrial facility for the processing, refining, or recycling of critical materials.

This is not a new tax benefit, but rather one significantly modified and extended under the IRA. 48C had been enacted in 2009, but was fully allocated after the second allocation round in 2013. The Inflation Reduction Act provided to 48C another $10 billion of allocations, directs a minimum share to energy communities, and expands eligibility to new types of projects. The 48C is transferable, however, the direct pay elections are more limited.

IRC 45Q, Credit for Carbon Oxide Sequestration

Section 45Q, in general, is designed to incentivize and promote investments in carbon capture, utilization, and storage projects to reduce greenhouse gas emissions. It also aims to mitigate climate change by capturing and storing CO2 from industrial processes, such as power plants or manufacturing facilities.

45Q is another tax credit that previously existed, however, was extended and modified under the IRA to tie the credit amounts to wage data, provide an enhanced credit for direct air capture (DAC), and lowering the carbon capture threshold requirements.

Eligible projects are U.S. facilities within certain defined minimum volumes:

• 1,000 metric tons of CO2 per year for DAC facilities.
• 18,750 metric tons for electricity generating facilities (with carbon capture capacity of 75% of baseline CO2 production).
• 12,500 metric tons for any other facility.

45Q can be claimed for 12 years after a facility is placed in service and facilities must be placed in service before January 1, 2033. The provisions of 45Q include direct pay provisions similar to 45X, so the credit would be more quickly convertible into cash.

Noteworthy Caveats

• You cannot claim 45X credits for any facilities that have already received the 48C credit.
• Availability of the 48C tax credit ends when credits are fully allocated. The deadline for submitting concept papers for the first round of 48C funding has passed, however, a second round of funding is expected to open in early 2024.
• 45X credit is a statutory credit that carries no application deadline; however, the credit begins to phase out in 2030.
• 45Q incentivizes the permanent sequestration of captured carbon into secure geological storage more than carbon captured and stored or utilized through other means.
• Look to the Department of Energy’s (DOE) definitions to confirm whether your facility or production activities will qualify.

Illustrative Examples

So, could these credits be worthwhile for you to pursue? Below, are a few illustrative examples of the potential credits that could be earned. However, it is important to note that these examples are illustrative only and actual claims that your company is eligible for should be thoroughly vetted by your tax advisor.

Conclusion

The IRA presents significant opportunities for manufacturers and technology companies to monetize clean energy activities. Maximizing that monetization under 45X and 48C will require an analysis to determine which tax incentive would be most advantageous for your organization.

If you are an organization seeking more background into these tax credits, please reach out to a member of our team today!