The Inflation Reduction Act (IRA) of 2022 introduced various new tax credits related to renewable energy. One of which is Section 45X, a tax credit for domestic manufacturers of clean energy components.
Prior to the IRA, the U.S. relied heavily on foreign manufacturers for crucial clean energy components. Section 45X aims to change this by providing a generous advanced manufacturing production credit to domestic producers of specific clean energy components. This not only strengthens America’s national energy independence but also creates numerous opportunities for further investment in a domestic supply chain and clean energy manufacturing jobs.
What Components Qualify?
The credit applies to the domestic production of a defined list of “eligible components” used in clean energy technologies. These components include:
- Solar energy technology: Solar panels, modules, trackers, and inverters
- Wind energy technology: Wind turbine towers, nacelles, blades, and generators
- Battery storage technology: Battery cells and modules
- Critical minerals: Processing, refining, and recycling of minerals essential for clean energy technologies
Calculating the Credit
The credit is calculated on the volume of eligible components produced and sold in a given tax year. There are three methods depending on the specific component: a value per component based on size or weight, electric capacity, and a percentage of the qualified production costs. The qualifying components and their respective calculation methods are extensive, which is why it is best to work with a qualified expert to ensure you are calculating the credit correctly.
Benefits for Your Business
Section 45X offers substantial tax benefits for qualified manufacturers. Here’s how it can impact your business:
- Reduced Tax Liability: The credit directly reduces the amount of federal income tax your company owes
- Increased Cash Flow: The credit translates to a significant cash flow boost, allowing you to reinvest in your business growth
- Enhanced Competitiveness: The credit makes domestic production of clean energy components more financially attractive, giving you an edge in the marketplace
- Alignment with National Priorities: By supporting clean energy production, your business contributes to national energy security and environmental goals
Important Considerations
While Section 45X offers exciting possibilities, some crucial aspects require consideration:
- Final Regulations: The IRS is still finalizing the regulations for claiming the credit. Staying informed on updates is essential.
- Eligibility Requirements: Ensure your company and the components you produce meet the specific eligibility criteria under Section 45X
- Tax Planning: Consulting a tax professional like KBKG can help you maximize the benefits of Section 45X and develop a strategic tax plan
KBKG's Expertise
Navigating Section 45X requires careful calculation and substantial documentation for each eligible component. Incorrect calculations or noncompliance can lead to penalties and potential recapture of credits. KBKG’s team of 45X experts can assist taxpayers in:
- Determining Eligibility: Ensuring that their business and components qualify for the credit
- Navigating the Complexities: Understanding the intricate rules and regulations surrounding Section 45X
- Maximizing the Credit: Optimizing calculations and documentation to claim the maximum possible credit.
- Substantiating Claims: Providing the necessary evidence to support credit claims
- Facilitating Credit Transfers: Helping taxpayers find buyers for transferable credits and providing the required third-party validation
- Identifying Additional Federal & State Tax Incentives: Numerous incentives exist for clean energy manufacturers and making sure no stone is left unturned enhances success for taxpayers
Ready to take advantage of this powerful tax credit? Contact KBKG today for a free consultation to determine your eligibility.