Advanced Manufacturing Production Credit

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10010]

RIN 1545-BQ85

Advanced Manufacturing Production Credit

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final rule.

SUMMARY:

This document sets forth final regulations regarding the advanced manufacturing production credit established by the Inflation Reduction Act of 2022 to incentivize the production of eligible components within the United States. Eligible components include certain solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals. These final regulations also address specific recordkeeping and reporting requirements. These final regulations affect eligible taxpayers who produce and sell eligible components and intend to claim the benefit of an advanced manufacturing production credit, including by making elective payment or credit transfer elections.

DATES:

Effective date:

These regulations are effective December 27, 2024.

Applicability date:

For date of applicability,

see

§§ 1.45X-1(j), 1.45X-2(f), 1.45X-3(g), and 1.45X-4(d).

FOR FURTHER INFORMATION CONTACT:

Mindy Chou, John Deininger, Derek Gimbel, or Alexander Scott at (202) 317-6853 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

This document contains final regulations (final regulations) that amend the Income Tax Regulations (26 CFR part 1) to implement the statutory provisions of section 45X of the Internal Revenue Code (Code). The final regulations are issued by the Secretary of the Treasury or her delegate (Secretary) under the authority granted under sections 45X(a)(3)(B)(i) and (ii), 1502, 6001, 6417(h), 6418(h), and 7805(a) of the Code.

Section 45X(a)(3)(B)(i) of the Code provides a specific delegation of authority to the Secretary to prescribe the form and manner for a taxpayer to make an election such that “a sale of components by such taxpayer to a related person shall be deemed to have been made to an unrelated person.” Section 45X(a)(3)(B)(ii) provides a specific delegation of authority to the Secretary, “[a]s a condition of, and prior to, any election described in [section 45X(a)(3)(B)(i)],” to “require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive amount determined under [section 45X(a)(1)].”

Section 1502 of the Code requires the Secretary to “prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income-tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability.” Section 1502 of the Code also provides that the Secretary “may prescribe rules that are different from the provisions of chapter 1 that would apply if such corporations filed separate returns.”

Section 6001 of the Code provides an express delegation of authority to the Secretary, stating that, “[e]very person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, [s]he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.”

Sections 6417(h) and 6418(h) of the Code direct the Secretary to issue such regulations or other guidance as may be necessary to carry out the purposes of each section, respectively.

Finally, section 7805(a) of the Code authorizes the Secretary “to prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Background

I. Overview of Section 45X

Section 45X was added to the Code by section 13502(a) of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA). In general, for purposes of the general business credit under section 38 of the Code, section 45X provides for the advanced manufacturing production credit (section 45X credit) with respect to eligible components produced by the taxpayer and sold during the taxable year to an unrelated person. Section 45X applies to eligible components produced and sold after December 31, 2022.

Under section 45X(a)(1), the total section 45X credit amount for the taxable year equals the sum of the credit amounts determined under section 45X(b) with respect to each eligible component (as defined in section 45X(c)(1)). Under section 45X(a)(2), any eligible component produced and sold by the taxpayer is taken into account only if the production and sale is in a trade or business of the taxpayer.

Section 45X(a)(3) generally provides rules regarding the sale of eligible components to an unrelated person. However, section 45X(a)(3)(B) provides a special rule whereby if a taxpayer makes an election in the form and manner prescribed by the Secretary, a sale of eligible components by the taxpayer to a related person will be treated as if made to an unrelated person, referred to in these final regulations as the related person election (Related Person Election). As a condition of, and prior to, a taxpayer making the Related Person Election, the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount.

II. Credit Amounts for Eligible Components

Section 45X(b)(1) generally provides the credit amount determined with respect to any eligible component, including any other eligible component it incorporates, subject to the credit phase out rules provided at section 45X(b)(3). Section 45X(b)(1)(A) through (M) and section 45X(b)(2) set forth the credit amounts for each type of eligible component. The credit amounts are generally subject to phase out rules under section 45X(b)(3), but the phase out rules do not apply to any applicable critical mineral. For any eligible component (except applicable critical minerals) sold after December 31, 2029, the credit amount for such component equals the product of the amount determined under section 45X(b)(1) for such component multiplied by the applicable phase out percentage under section 45X(b)(3)(B)(i) through (iv). In the case of an eligible component sold during calendar year 2030, 2031, and

2032, the phase out percentages are 75 percent, 50 percent, and 25 percent, respectively. For any eligible component sold after December 31, 2032, the phase out percentage is zero percent, and no section 45X credit is allowed other than for applicable critical minerals.

Section 45X(b)(4) provides capacity limitations used to compute the credit amount for battery cells under section 45X(b)(1)(K)(ii) and battery modules under section 45(b)(1)(L)(ii). Section 45X(b)(4)(A) provides that the capacity determined with respect to a battery cell or battery module must not exceed a capacity-to-power-ratio of 100:1. Section 45X(b)(4)(B) defines “capacity-to-power-ratio” as the ratio of the capacity of a battery cell or battery module to the maximum discharge amount of such cell or module.

III. Eligible Components

Section 45X(c)(1)(A) defines an eligible component to mean any solar energy component, any wind energy component, any inverter described in section 45X(c)(2)(B) through (G), any qualifying battery component, and any applicable critical mineral. Section 45X(c)(1)(B) clarifies that eligible components do not include any property that is produced at a facility if the basis of any property that is part of such facility is taken into account for purposes of the qualifying advanced energy project credit allowed under section 48C after August 16, 2022 (the date of enactment of the IRA).

Section 45X(c)(2)(A) generally defines an inverter as an end product that is suitable to convert direct current (DC) electricity from one or more solar modules or certified distributed wind energy systems into alternating current (AC) electricity. Section 45X(c)(2)(B) through (G) defines the following different types of eligible inverters: central inverter, commercial inverter, distributed wind inverter, microinverter, residential inverter, and utility inverter.

Section 45X(c)(3)(A) defines a solar energy component as a solar module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque tube, structural fastener, or polymeric backsheet. Section 45X(c)(3)(B) defines these different types of eligible solar energy components as well as a solar tracker.

Section 45X(c)(4)(A) defines a wind energy component as blades, nacelles, towers, offshore wind foundations, and related offshore wind vessels. Section 45X(c)(4)(B) defines these different types of eligible wind energy components.

Section 45X(c)(5)(A) defines a qualifying battery component as electrode active materials, battery cells, and battery modules. Section 45X(c)(5)(B) defines these different types of qualifying battery components.

Section 45X(c)(6) defines applicable critical minerals. The following minerals are eligible for the section 45X credit if converted or purified to specified purities or forms: aluminum, antimony, arsenic, barite, beryllium, bismuth, cerium, cesium, chromium, cobalt, dysprosium, erbium, europium, fluorspar, gadolinium, gallium, germanium, graphite, hafnium, holmium, indium, iridium, lanthanum, lithium, lutetium, magnesium, manganese, neodymium, nickel, niobium, palladium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, tellurium, terbium, thulium, tin, titanium, tungsten, vanadium, ytterbium, yttrium, zinc, and zirconium.

IV. Special Rules

Section 45X(d)(1) provides that persons are related to each other for purposes of the section 45X credit if they would be treated as a single employer under section 52(b) of the Code and § 1.52-1(b). Section 52(b) and § 1.52-1(b) generally provide that trades or businesses that are partnerships, trusts, estates, corporations, or sole proprietorships under common control are members of a controlled group and are treated as a single employer. Section 52(b) requires the regulations under section 52(b) to be based on principles similar to the principles that apply under section 52(a), which generally provide that corporations that are members of a controlled group of corporations are treated as a single employer. Section 52(a) provides that a controlled group of corporations is defined with reference to section 1563(a) of the Code. Section 52(b) and § 1.52-1 provide rules based on principles similar to those under section 52(a), but with certain modifications to account for different types of ownership interests.

Section 45X(d)(2) provides that sales of eligible components are taken into account under section 45X only for eligible components that are produced within the United States (including continental shelf areas described in section 638(1) of the Code), or a U.S. territory (including continental shelf areas described in section 638(2)).

1

1

The preamble to these section 45X final regulations refers to U.S. territory to mean a possession as defined in section 638(2).

Section 45X(d)(3) directs the Secretary to promulgate regulations adopting rules similar to the rules of section 52(d) to apportion credit amounts between estates or trusts and their beneficiaries on the basis of the income of the estates or trusts allocable to each, and to pass-thru any apportioned credit amounts to the beneficiaries.

Section 45X(d)(4) provides that a person is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is sold to an unrelated person.

V. Prior Guidance

On October 24, 2022, the Department of the Treasury (Treasury Department) and the IRS published Notice 2022-47, 2022-43 IRB 312, requesting comments on issues arising under section 45X that may require guidance. On December 15, 2023, after full consideration of all the stakeholder input received in response to Notice 2022-47, the Treasury Department and the IRS published a notice of proposed rulemaking and a notice of public hearing (REG-107423-23) in the

Federal Register

(88 FR 86844) to provide guidance on the advanced manufacturing production credit under section 45X (Proposed Regulations). While the Proposed Regulations are summarized in the Summary of Contents and Explanation of Revisions portion of this preamble, the provisions of the Proposed Regulations are explained in greater detail in the preamble to the Proposed Regulations.

On March 6, 2023, the Treasury Department and the IRS published Notice 2023-18, 2023-10 IRB 508, establishing the qualifying advanced energy project allocation program (section 48C(e) program). On June 20, 2023, the Treasury Department and the IRS published Notice 2023-44, 2023-25 IRB 924, providing additional guidance on the section 48C(e) program, including rules for the interaction between sections 45X and 48C. The rules regarding the interaction between sections 45X and 48C provided in Notices 2023-18 and 2023-44 were addressed in the Proposed Regulations and have been incorporated into these final regulations. Section 5.05(2) of Notice 2023-18 and section 3 of Notice 2023-44 are superseded by these final regulations.

Summary of Comments and Explanation of Revisions

I. Overview

This Summary of Comments and Explanation of Revisions summarizes the Proposed Regulations, all substantive comments submitted in response to the Proposed Regulations, and revisions adopted by these final regulations. The Treasury Department and the IRS received 193 written comments in response to the Proposed Regulations. The comments are available for public inspection at

https://www.regulations.gov

or upon request. A public hearing was held in person and telephonically on February 22, 2024. After full consideration of the comments and testimony, these final regulations adopt the Proposed Regulations with modifications in response to the comments and testimony as described in this Summary of Comments and Explanation of Revisions.

Comments merely summarizing the statute or the Proposed Regulations, recommending statutory revisions to section 45X or other statutes, and addressing issues that are outside the scope of this rulemaking (such as revising other Federal regulations and recommending changes to IRS forms) are generally not addressed in this Summary of Comments and Explanation of Revisions or adopted in these final regulations. Some commenters requested additional time to submit comments. The Proposed Regulations required all comments to be received by February 13, 2024; however, comments received later but before these final regulations were substantially developed were carefully considered in drafting these final regulations. The final regulations retain the same basic structure as the Proposed Regulations with certain revisions.

II. General Rules Applicable to the Advanced Manufacturing Production Credit

A. In general

Proposed § 1.45X-1 would have provided general rules regarding the section 45X credit including generally applicable definitions, rules regarding the computation of the credit amount, the definition of “produced by the taxpayer,” the requirement to produce eligible components in the United States, the production and sale in a trade or business requirement, the sale of integrated components, the interaction between sections 45X and 48C, and an anti-abuse rule. Commenters addressed certain aspects of these proposed rules, as described in Part II. of this Summary of Comments and Explanation of Revisions. These final regulations generally adopt proposed § 1.45X-1, with the modifications described in this Part II. of the Summary of Comments and Explanations of Revisions.

B. Definition of Produced by the Taxpayer

1. In General

Section 45X(a)(1) allows a section 45X credit with respect to each eligible component which is produced by the taxpayer and sold to an unrelated person during the taxable year. Proposed § 1.45X-1(c)(1) would have defined “produced by the taxpayer” to mean a process conducted by the taxpayer that substantially transforms constituent elements, materials, or subcomponents into a complete and distinct eligible component that is functionally different from that which would result from mere assembly or superficial modification of the elements, materials, or subcomponents. Proposed § 1.45X-1(c)(1)(i) would have provided that “produced by the taxpayer” does not include partial transformation that does not result in substantial transformation of constituent elements, materials, and subcomponents into a complete and distinct eligible component as described in proposed § 1.45X-1(c)(1). Proposed § 1.45X-1(c)(1)(ii) would have provided that “produced by the taxpayer” does not include minor assembly of two or more constituent elements, materials, or subcomponents, or superficial modification of the final eligible component, if the taxpayer does not also engage in the process resulting in a substantial transformation described in proposed § 1.45X-1(c)(1). Proposed § 1.45X-1(c)(1)(iii) would have provided examples illustrating the definition of “produced by the taxpayer.”

Several commenters requested that the final regulations specifically state that taxpayers may produce eligible components using recycled materials. While the preamble to the Proposed Regulations stated that primary and secondary production are included in the definition of “produced by the taxpayer,” that issue was not addressed in the text of the Proposed Regulations. The preamble to the Proposed Regulations further stated that primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials.

The Treasury Department and the IRS agree with the request to clarify the general rule that production includes primary and secondary production, and these final regulations revise proposed § 1.45X-1(c)(1) and (2) to add secondary production to the definition of produced by the taxpayer.

A few commenters stated the definition of “produced by the taxpayer” should be defined consistently with section 263A of the Code to the extent possible and expressed concern that using different definitions will cause “increased technical uncertainty, additional compliance burden, especially for small business taxpayers, and unnecessary litigation and controversy.” Another commenter stated that the Proposed Regulations introduced new definitions, such as “substantial transformation” as production qualifiers, “raising concerns about its apparent conflict with the enacted statutes.”

The term “produced by the taxpayer” is not defined in section 45X, nor is there any indication in section 45X suggesting that Congress intended the use of any existing statutory definition, such as the standard in section 263A. Section 45X provides a credit based on the production of numerous eligible components and a variety of production processes are utilized by manufacturers in the production of these eligible components.

Given the variety of production processes and the highly technical nature of production, the Treasury Department and the IRS, in close coordination with the Department of Energy, proposed a definition that would apply broadly to eligible components. In addition, the proposed definition of “produced by the taxpayer” focused on requiring production of a complete and distinct eligible component and, accordingly, introduces a substantial transformation requirement to distinguish production from partial transformation, mere assembly, and superficial modification. The proposed definition of “produced by the taxpayer” along with the amendment clarifying that production includes secondary production is the appropriate standard to implement the section 45X credit. The definition provides the necessary flexibility to account for the highly technical nature of the production processes associated with eligible components. This standard also ensures that the section 45X credit is claimed by the taxpayer responsible for the key production activity and that such activity occurs in the United States or a United States territory. In contrast to section 45X, section 263A is designed

to ensure that taxpayers capture the direct and indirect costs associated with producing inventoriable goods for capitalization purposes. Moreover, in section 263A, the definition of production applies to a broad range of produced items, whereas the definition in section 45X applies to a limited number of statutorily enumerated eligible components. For these reasons, the Treasury Department and the IRS have concluded that the definition of “produced by the taxpayer” in the Proposed Regulations with the clarifying amendment addressing secondary production appropriately implements section 45X(a)(1)(A), and thus decline to accept the commenter's recommendation to define “produced by the taxpayer” for purposes of section 45X consistent with the similar term under section 263A.

Several commenters requested that the final regulations provide more specific guidance for certain eligible components to illustrate whether certain activities or processes result in substantial transformation versus partial transformation, mere assembly, or superficial modification. One commenter, for example, requested that the final rules confirm that the term “produced” in the phrase “produced by the taxpayer” is applied within the context of the standard production process of each eligible component, such that the standard production process for each eligible component is deemed to be “substantial transformation” that meets the requirements of proposed § 1.45X-1(c)(1). The commenter provided an example of the production of a solar module, which “involves the final assembly of the other solar components, many of which separately qualify for their own section 45X credit, into the overall module.” The Treasury Department and the IRS recognize that certain eligible components, such as solar modules and battery modules using battery cells, are produced primarily by assembling other components. In these limited cases, the substantial transformation requirement is met by the taxpayer that assembles the constituent components to produce the solar module or battery module using battery cells. Because assembly is the activity that primarily produces these eligible components, the assembly necessary to achieve production of a solar module or battery module using battery cells should not generally be viewed as disqualifying “minor assembly.” The Treasury Department and the IRS also recognize that certain eligible components, such as nacelles, that have undergone substantial transformation to be considered “produced by the taxpayer” may be produced and sold to a third party in a manner in which only minor assembly remains left to complete. In these cases, provided all other requirements of section 45X are met, the party that produces and sells the eligible components in such manner is not precluded from claiming the section 45X credit. The third party that completes the eligible component by performing minor assembly is not entitled to the section 45X credit because that third party is not considered to produce the eligible component. For these reasons, and for clarity and consistency, the final regulations replace each instance of “mere assembly” in the Proposed Regulations, with “minor assembly.”

A commenter suggested adding an additional example to proposed § 1.45X-1(c)(1)(iii) to clarify whether the integration of electrical subcomponents and software necessary to enable the functionality of an inverter is disqualifying minor assembly, and another commenter requested clarification on whether the coating of a battery separator is “superficial modification” or “substantial transformation.” A few commenters also requested that the final rules further clarify “substantial transformation” to ensure manufacturers claiming section 45X credits are actually producing an eligible component in the United States and suggested using examples to differentiate between substantial and partial transformation for specific components, such as inverters for solar energy.

As previously discussed, section 45X provides a credit based on the production of numerous eligible components and a variety of production processes are utilized by manufacturers in the production of these eligible components. Thus, listing specific production processes for each eligible component is not practicable and could also imply that other variations of production processes do not qualify as production. The Treasury Department and the IRS have determined that the inquiry into whether production activities or processes result in substantial transformation for a specific eligible component is highly fact dependent and conclude that the examples in proposed § 1.45X-1(c)(1)(iii), which are included in the final regulations, provide sufficient guidance to determine what types of activities or production steps do not qualify as substantial transformation.

2. Special Rule for Production of Certain Eligible Components

Proposed § 1.45X-1(c)(2) would have provided that for solar grade polysilicon, electrode active materials, and applicable critical minerals, produced by the taxpayer means processing, conversion, refinement, or purification of source materials, such as brines, ores, or waste streams, to derive a distinct eligible component. Several commenters requested that in addition to processing, conversion, refinement, and purification, the final regulations clarify that the production process includes extraction, while others requested maintaining the position in the Proposed Regulations to exclude costs of extraction. The Treasury Department and the IRS decline to amend the final regulations to expressly include the term “extraction,” as the action of extraction alone does not produce an eligible component. For the discussion and analysis of whether extraction costs are includible as production costs in the production of electrode active materials or applicable critical minerals, see Part IV.E.1.e. of this Summary of Comments and Explanation of Revisions.

Another commenter asked whether recycling aluminum transformer wire (cleaning, melting, and bailing it) to send to an aluminum smelter constitutes “secondary aluminum production.” The Treasury Department and the IRS note that under both proposed § 1.45X-1(c)(2) and § 1.45X-1(c)(2) of these final regulations, substantial transformation for an applicable critical mineral requires that the applicable critical mineral be “processed, converted, refined, or purified to derive a distinct eligible component.” Because a taxpayer in these circumstances would not derive a distinct eligible component, this would not be an eligible component produced by the taxpayer within the meaning of section 45X(a)(1)(A).

These final regulations make a clarifying revision to the definition of produced by the taxpayer under proposed § 1.45X-1(c)(2) so that it references substantial transformation. While no comments were received on this issue, this revision is needed to appropriately align the definition of “produced by the taxpayer” in § 1.45X-1(c)(2) with the requirements to qualify as an eligible taxpayer in § 1.45X-1(c)(3).

3. Eligible Taxpayer

a. In General

Proposed § 1.45X-1(c)(3)(i) would have provided that the taxpayer

claiming a section 45X credit with respect to an eligible component must be the person that performs the actual production activities that bring about a substantial transformation resulting in the eligible component and that sells such eligible component to an unrelated person.

b. Contract Manufacturing Arrangement

Proposed § 1.45X-1(c)(3)(ii)(A) would have provided that, if the production of an eligible component is performed in whole or in part subject to a contract that is a contract manufacturing arrangement, then the party to such contract that may claim the section 45X credit with respect to such eligible component, provided all other requirements in section 45X are met, is the taxpayer that performs the actual production activities that bring about a substantial transformation resulting in the eligible component. The preamble to the Proposed Regulations stated that this proposed rule was intended to provide an administrable rule that provides clarity and certainty in determining which taxpayer may claim the section 45X credit in a contract manufacturing arrangement.

c. Contract Manufacturing Defined

Proposed § 1.45X-1(c)(3)(ii)(B) would have defined the term “contract manufacturing arrangement” to mean any agreement providing for the production of an eligible component if the agreement is entered into before the production of the eligible component to be delivered under the contract is completed. Proposed § 1.45X-1(c)(3)(ii)(B) would have further provided that a routine purchase order for off-the-shelf property is not treated as a contract manufacturing arrangement. Proposed § 1.45X-1(c)(3)(ii)(B) also would have provided that an agreement will be treated as a routine purchase order for off-the-shelf property if the contractor is required to make no more than

de minimis

modifications to the property to tailor it to the customer's specific needs, or if at the time the agreement is entered into, the contractor knows or has reason to know that the contractor can satisfy the agreement out of existing stocks or normal production of finished goods. This definition of the term “routine purchase order” is based on the definition found in § 1.263A-2(a)(1)(ii)(B)(

2

)(

ii

). The Treasury Department and the IRS requested comments in the preamble to the Proposed Regulations on whether this definition should be further clarified or modified. Comments on the definition of manufacturing arrangements are discussed in Part II.B.3.d. of this Summary of Comments and Explanation of Revisions.

d. Special Rule for Contract Manufacturing Arrangements

Proposed § 1.45X-1(c)(3)(iii) would have explained the special rule allowing parties to a contract manufacturing arrangement to agree on which party to the contract will claim the section 45X credit for eligible components produced subject to such contract. Proposed § 1.45X-1(c)(3)(iv) would have explained the certification requirements for the special rule. Several commenters expressed support for the contract manufacturing rules, but one commenter expressed concern about the treatment of contract manufacturing arrangements in effect prior to the applicability date of the Proposed Regulations. This commenter recommended that the final regulations adopt a safe harbor rule that would function as an exception to the general rule and provide that when one party is contractually entitled to purchase all or substantially all (for example, at least 90 percent) of the output of the fabricator's production of a given component for the taxable year, the purchaser would be treated as the producer for purposes of section 45X. The Treasury Department and the IRS decline to adopt the commenter's request to add a safe harbor for contract manufacturing arrangements in place before the applicability date of the Proposed Regulations, but note that a taxpayer may still have the option of applying the special rule in § 1.45X-1(c)(3)(iii) of these final regulations for contract manufacturing arrangements entered into before the applicability date, provided all requirements of the special rule are met.

The preamble to the Proposed Regulations stated that the Treasury Department and the IRS intend for the production cost incurred rules in proposed § 1.45X-3(e)(2) to apply to a credit claimant in a contract manufacturing arrangement. The Treasury Department and the IRS requested comments on whether the proposed rules need further clarification or modification as applied to contract manufacturing arrangements. One commenter requested allowing taxpayers that extract and recycle raw materials and taxpayers that process such materials and incorporate them into applicable critical minerals to apply the contract manufacturing arrangement provisions, in the event that costs of extraction and direct and indirect material costs are not includible in the eligible production costs of producing an applicable critical mineral. The Treasury Department and the IRS think that the clarification requested by this commenter is no longer necessary because these final regulations permit the inclusion of extraction and certain material costs in the cost of producing an applicable critical mineral if certain requirements are met. See Parts IV.E.1.e. and V.C. of this Summary of Comments and Explanation of Revisions for further discussion.

Proposed § 1.45X-1(c)(3)(v) would have provided examples illustrating the application of the special rule. One commenter requested that proposed § 1.45X-1(c)(3)(v)(C) (

Example 3

) specifically state that the domestic production requirement requires that each wind tower section must be produced in the United States. Proposed § 1.45X-(1)(c)(3)(v)(C) (

Example 3

) states that a taxpayer could claim a credit for a tower for which it had three different producers each produce one section, provided that the parties all agree that the taxpayer is the sole party that can claim the credit and “all other requirements of section 45X are met.” The Treasury Department and the IRS have determined that the domestic production requirement is already included by this language and thus, additional clarification is not necessary.

Another commenter questioned whether, in proposed § 1.45X-1(c)(3)(v)(C) (

Example 3

), V must sell the completed wind tower to Z for the special rule in proposed § 1.45X-1(c)(3)(iii) to apply. In the example, V enters into a contract manufacturing arrangement with W, X, and Y to make the wind tower, which V sells to Z. All parties to the contract manufacturing arrangement and Z are unrelated. The commenter stated that if V, W, X, and Y sign a certification statement and Y claims the section 45X credit, Y could claim the section 45X credit in 2025 because that is when it sold the eligible component to V. Contrary to the commenter's conclusion with respect to Y's ability to claim a section 45X credit in 2025, Y is not eligible for the section 45X credit until the eligible component, which is the wind tower comprised of all three wind tower sections, is produced and then sold to an unrelated person (in this case Z). Under the contract manufacturing arrangement, W, X, and Y are collectively viewed as producing the entire eligible component (wind tower) because all three sections together result in a single eligible component. Along with the production of the entire wind tower, V has to sell the completed wind tower to an

unrelated person before the designated party is eligible for a section 45X credit.

A commenter suggested revisions to the proposed rules to allow an allocation of any portion of the credit to parties who extract the mineral and perform initial refining processes, rather than allowing a credit to the taxpayer that purifies the critical mineral to the statutory minimum. Section 45X(c)(6) defines a list of applicable critical minerals with specific minimum purity levels which must be met for the taxpayer to have produced an eligible component. The Treasury Department and the IRS do not have the authority to modify these statutory requirements. However, the Treasury Department and the IRS seek to clarify that a taxpayer who performs extracting and refining activities may benefit from the contract manufacturing provisions described in this section. The final regulations accordingly add § 1.45X-1(c)(3)(v)(D) (

Example 4

) to demonstrate how the contract manufacturing provisions may apply in the situation described by the commenter.

4. Timing of Production and Sale

Proposed § 1.45X-1(c)(4)(i) would have provided that production of eligible components for which a taxpayer is claiming a section 45X credit may begin before December 31, 2022, but production of eligible components must be completed, and the eligible components must be sold, after December 31, 2022. Proposed § 1.45X-1(c)(4)(ii) would have provided an example illustrating the timing of the production and sale rule in proposed § 1.45X-1(c)(4)(i).

Some commenters requested further clarity on when production and sale of an eligible component may take place. One commenter requested that the final rules provide that a specific minimum percentage of production of an eligible component must occur after 2022 and that no sale of the eligible component be reported by the taxpayer before 2023. The Treasury Department and the IRS decline to adopt these percentage test suggestions because Congress clearly recognized that some production could occur prior to 2023 but did not specify an exact amount of production that must occur in taxable years either before or after 2023. Moreover, if a sale occurred before 2023, which requires a facts and circumstances analysis based in part on contractual terms, the component sold is not eligible for the section 45X credit. Accordingly, the final regulations adopt proposed § 1.45X-1(c)(4)(i) and the example in proposed § 1.45X-1(c)(4)(ii) without modification.

Another commenter stated that the Proposed Regulations do not specify whether production activities that qualify for the section 45X credit have to occur after the effective date of the rule or whether the activities can be retroactive. The commenter suggests the final rule specify the applicable period for the production activities and provide a reasonable transition rule for taxpayers who produce eligible components before the effective date of the final regulations. The Treasury Department and the IRS have determined that the Proposed Regulations and these final regulations are clear as to the timing of production and sale requirements under section 45X. For clarification, and as described earlier, section 13502(c) of the IRA provides that section 45X applies to components produced and sold after December 31, 2022. The preamble to the Proposed Regulations clarified application of the section 45X effective date, stating that each of proposed §§ 1.45X-1 through 1.45X-4 would have applied to eligible components for which production is “completed” and sales occur after December 31, 2022, and during taxable years ending on or after the date of publication of these final regulations. Proposed § 1.45X-1(c)(4)(i) would have provided that production of eligible components may begin before December 31, 2022, and only required production of eligible components be completed, and sales must occur, after December 31, 2022. Proposed § 1.45X-1(c)(4)(ii) would have provided an example illustrating proposed § 1.45X-1(c)(4)(i). These final regulations adopt these proposed rules. The Treasury Department and the IRS do not have statutory authority to provide for a section 45X credit in a situation in which production was completed on or before December 31, 2022.

C. Produced in the United States

Consistent with section 45X(d)(2), proposed § 1.45X-1(d)(1) would have provided that sales are taken into account for purposes of the section 45X credit only for eligible components that are produced within the United States, as defined in section 638(1) of the Code, or a United States territory. Proposed § 1.45X-1(d)(2) would have clarified that constituent elements, materials, and subcomponents used in the production of eligible components are not subject to the domestic production requirement provided in proposed § 1.45X-1(d)(1). Thus, while the eligible component must be produced domestically, its constituent elements, materials, and subcomponents need not be.

2

2

See

Joint Committee on Taxation,

General Explanation of Tax Legislation Enacted in the 117th Congress,

JCS-1-23 (December 21, 2023) at 267 (“The credit only applies to sales where the eligible components are produced within the United States or U.S. territories. This requirement is not intended to apply to subcomponents or materials used to produce eligible components.”).

Some commenters agreed with this approach in the Proposed Regulations. According to these commenters, the Proposed Regulations appropriately allowed the credit for eligible components produced in the United States provided that the activities necessary to transform them into eligible components are conducted in the United States. Furthermore, these commenters expressed concern that a contrary rule ignores the reality that some constituent elements, materials, and subcomponents cannot be sourced in the United States and would discourage investment in production activities that rely on foreign-sourced constituent elements, materials, and subcomponents. However, other commenters disagreed with the proposed approach, suggesting that allowing eligible components to be produced using foreign subcomponents is inconsistent with the section 45X credit's objective of incentivizing domestic production of eligible components.

The Treasury Department and the IRS note that, while section 45X specifically requires domestic production of an eligible component for credit eligibility, it is silent regarding the location of production or sourcing of constituent elements, materials, and subcomponents. Accordingly, imposing a domestic production requirement for constituent elements, materials, and subcomponents is not supported by the statutory language of section 45X. For these reasons, the Treasury Department and the IRS decline to adopt these suggestions and adopt the proposed rule without change.

Beyond agreement or disagreement with this proposed rule, some commenters inquired about its scope. One commenter asked whether the domestic production rule applicable to eligible components also applies to eligible components that are both an eligible component and a “constituent element, material or subcomponent” of another eligible component. Another commenter asked whether raw materials and intermediate products used to produce eligible components are included in the definition of “constituent elements, materials or subcomponents.”

The Treasury Department and the IRS confirm that all three of these categories of items are included in the definition of “constituent elements, materials, and subcomponents.” An eligible component that is a “constituent element, material or subcomponent” of another eligible component is not subject to the domestic production rule, and thus, an eligible component may incorporate another eligible component that is also a foreign-sourced “constituent element, material or subcomponent” and still be eligible for a section 45X credit. In addition, raw materials and intermediate products generally qualify as constituent elements, materials, or subcomponents.

A commenter also requested confirmation in the final regulations that there is no requirement that eligible components be

used

in the United States for section 45X credit eligibility. Consistent with section 45X(d)(2), proposed § 1.45X-1(d)(1) would have provided that sales are taken into account for purposes of the section 45X credit only for eligible components that are produced within the United States (or a United States territory). Thus, the Proposed Regulations specify only the location of production of the eligible component, and not the location of the sale or the use of such eligible component. Accordingly, the Treasury Department and the IRS conclude that the additional confirmation requested by the commenter is unnecessary, as there would be no statutory basis for requiring domestic sale or use.

D. Production and Sale in a Trade or Business

Proposed § 1.45X-1(e) would have stated that an eligible component must be produced and sold in a trade or business of the taxpayer, with the term “trade or business” defined as a trade or business within the meaning of section 162 of the Code.

A commenter requested that proposed § 1.45X-1(e) expressly include eligible components that are produced and then used to replace defective units pursuant to a contractual obligation entered into at the time of the original sale. The commenter stated that these warranty transactions do not appear to violate any of the anti-abuse provisions at proposed § 1.45X-1(i). If an eligible component is produced and sold to an unrelated person in the normal course of a trade or business, and the eligible component is then replaced with a new eligible component produced by the same taxpayer, there is no new sale to an unrelated person for the replacement eligible component, but the replacement eligible component relates back to the original sales transaction. The precise issue is whether section 45X should be read to effectively incentivize the production of two eligible components where each is related to a single sales transaction. The Treasury Department and the IRS decline to adopt this suggestion because only one credit may be claimed with respect to the sale of an eligible component.

E. Sale of Integrated Components

1. In General

Section 45X(d)(4) provides that, for purposes of section 45X, a person is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component which is sold to an unrelated person. Proposed § 1.45X-1(f)(1) was intended to be consistent with section 45X(d)(4), and thus would have provided that a taxpayer is treated as having produced and sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person.

Although no comments were received regarding this general rule in the Proposed Regulations, the Treasury Department and the IRS want to clarify that section 45X(d)(4) provides only for deemed sale treatment and not deemed production. A taxpayer must produce (rather than merely purchase or acquire) an eligible component that is integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person in order for the deemed sale rule to apply. Thus, these final regulations clarify that a taxpayer is “treated as having sold” an eligible component to an unrelated person if the taxpayer produced such component and the component is integrated, incorporated, or assembled into another eligible component that is then sold to an unrelated person, rather than “treated as having produced and sold” an eligible component that the taxpayer did not itself produce that is then integrated, incorporated, or assembled into another eligible component and then sold to an unrelated person. Proposed § 1.45X-1(f)(1) is clarified accordingly in these final regulations.

2. Application of Section 45X(d)(4) to Produced Products

Proposed § 1.45X-1(f)(2)(i) would have clarified that a taxpayer may claim a section 45X credit for each eligible component that the taxpayer produces and sells to an unrelated person, including any eligible component the taxpayer produces that was used as an element, material, or subcomponent and integrated, incorporated, or assembled into another complete and distinct eligible component or another complete and distinct product (that is not itself an eligible component) that the taxpayer also produces and sells to an unrelated person. Proposed § 1.45X-1(f)(2)(ii) would have provided an example of the credit eligibility of a sale of a product with incorporated eligible components to a related person.

Commenters expressed agreement with proposed § 1.45X-1(f)(2)(i). One commenter stated that the clarification in § 1.45X-1(f)(2)(i) avoids the need for some vertically integrated producers of eligible components that incorporate the eligible components into another product that is not an eligible component to artificially restructure in order to create an intercompany sale. Another commenter requested a flexible interpretation of section 45X(d)(4) that would apply the section 45X credit as an additive credit across the supply chain to the final assembler. The commenter stated such an interpretation is consistent with the language in section 45X(b)(1), which provides that the section 45X credit amount is determined with respect to any eligible component, including any eligible component it incorporates. For example, in the commenter's view, a taxpayer that produces a structural fastener would be eligible to receive a credit for its production of an eligible component as would the integrator, incorporator, assembler of the structural fastener into another eligible component. Although the Treasury Department and the IRS agree that section 45X(b)(1) provides that the credit amount is determined with respect to any eligible component produced by the taxpayer, including any eligible component the taxpayer incorporates that was also produced by the taxpayer, the Treasury Department and the IRS disagree with the implication that the calculation of the section 45X credit should be additive based on the number of eligible components used to produce an item in a case in which each eligible component is not produced by the taxpayer. Only the producer of an eligible component would be eligible for a section 45X credit. Proposed § 1.45X-1(f)(1) and (2) are finalized with no modifications because the Treasury Department and the IRS conclude the rules provide clarity as currently written.

F. Interaction Between Sections 45X and 48C

1. In General

Consistent with section 45X(c)(1)(B), proposed § 1.45X-1(g)(1) would have provided that, for purposes of section 45X, an eligible component must be produced at a section 45X facility and does not include any property (produced property) that is produced at a facility if the basis of any property that is part of the production unit that produces the produced property is eligible property that is included in a section 48C facility and is taken into account for purposes of a credit allowed under section 48C (section 48C credit) after August 16, 2022.

Proposed § 1.45X-1(g)(2)(i) would have provided that a section 45X facility includes all tangible property that comprises an independently functioning production unit that produces one or more eligible components. Proposed § 1.45X-1(g)(2)(ii) would have provided that a production unit is comprised of the tangible property that substantially transforms material inputs to complete the production process of an eligible component.

Proposed § 1.45X-1(g)(3)(i) would have provided that a section 48C facility includes all eligible property included in a qualifying advanced energy project for which a taxpayer receives an allocation of section 48C credits and claims such credits after August 16, 2022. Proposed § 1.45X-1(g)(3)(ii) would have defined eligible property that is included in a section 48C facility.

With respect to the proposed rules on the interaction between sections 45X and 48C various comments were received. A commenter requested that the final rules not apply section 45X(c)(1)(B) to disallow the section 45X credit in the event that the taxpayer claiming the section 45X credit incorporates into its eligible component a subcomponent that was produced by a section 48C facility, as long as that same taxpayer was not eligible for the section 48C credit with respect to the section 48C facility that produced the subcomponent. Revisions were made to these final regulations to clarify that the only equipment, or other tangible property, that must be included in the section 45X facility is the equipment used by the taxpayer that is necessary to be considered the producer of the potential eligible component. As further explained later, if production of a subcomponent (or like property) is not a requirement to be considered the producer under section 45X, then the equipment that is part of that section 48C facility used to produce the subcomponent is not part of the section 45X facility. As a result, it is possible that the same taxpayer could receive a section 48C credit on equipment used to produce a subcomponent (or like property), and a section 45X credit on the production of an eligible component.

One commenter requested an example to help determine whether an eligible component produced at a facility located “adjacent” to a section 48C facility that received a section 48C credit impacts eligibility for the section 45X credit. The physical proximity of a section 45X facility to a section 48C facility does not determine whether a product may be an eligible component and revisions to these final regulations were made to clarify that point.

Another commenter requested more clarity to determine whether a facility that shares upstream raw materials and processes as a section 48C facility is still eligible for a section 45X credit and requested examples of upstream supply chains and processes that are eligible and ineligible for both sections 48C and 45X. Several commenters requested additional clarity regarding the meaning and extent of the term “production unit.”

Based on the comments and further consideration of the Proposed Regulations, revisions were made in these final regulations to simplify the rules and examples in proposed § 1.45X-1(g)(1) through (4). Specifically, these final regulations make clear that the general rule is that property that would otherwise qualify as an eligible component (otherwise qualified property) is only an eligible component if the property is produced at a section 45X facility and no part of that section 45X facility is also a section 48C facility. These final regulations also revise the definition of section 45X facility, clarifying that a section 45X facility is the independently functioning tangible property used by the taxpayer that is necessary to be considered the producer of the otherwise qualified property within the meaning of § 1.45X-1(c)(1) or (2), as applicable. The Proposed Regulations would have relied on the concept of a “production unit” to define the scope of a section 45X facility, but there was overlap between the term production unit as proposed and the definition of a section 45X facility. After careful consideration, the Treasury Department and the IRS determined that the proposed term “production unit” introduced unnecessary complexity, particularly in light of the revisions to the definition of section 45X facility in these final regulations. Accordingly, these final regulations do not use the term production unit.

The definition of section 45X facility in these final regulations includes independently functioning tangible property that is used and that is necessary for the otherwise qualified property to be considered produced by the taxpayer within the meaning of § 1.45X-1(c)(1) or (2), as applicable. Accordingly, tangible property used to produce a subcomponent or other property which is later integrated, incorporated, or assembled into a distinct and final eligible component is not part of the section 45X facility. This rule, however, does not apply if the other property is of a type that the taxpayer must produce for the resulting eligible component to be considered produced by the taxpayer. This analysis can depend on the definition of the eligible component being ultimately produced. For example, section 45X(c)(3)(B)(ii)(I)(bb) requires a single manufacturer to produce a photovoltaic wafer through formation of an ingot from polysilicon and subsequent slicing. Thus, the section 45X facility with respect to the photovoltaic wafers would include any equipment that is tangible property that is used to produce the ingot and any equipment that is tangible property that is used to perform the subsequent slicing. In contrast, equipment used to produce front glass of a solar module under section 45X(c)(3)(B)(v) could be excluded from a section 45X facility because it is not necessary to use the front glass equipment to be considered the producer of the solar module for section 45X. This rule may benefit a taxpayer that produces a subcomponent or other property of an eligible component using equipment that is also eligible property for purposes of the section 48C credit, but uses other equipment not related to the section 48C credit to produce the eligible component.

Lastly, these final regulations add a specific rule for contract manufacturing arrangements in § 1.45X-1(g)(2)(ii) to address any uncertainty with respect to how to determine a section 45X facility in that situation. This rule clarifies that the tangible property used to produce the otherwise qualified property (regardless of who claims the credit) must be considered.

4. Examples of Sections 45X and 48C Interaction

Proposed § 1.45X-1(g)(4)(i) through (v) would have provided examples to illustrate the application of these rules. A few commenters requested that, contrary to proposed § 1.45X-1(g)(4)(ii) (

Example 2

), ingot and wafer production

should be treated as two separate manufacturing activities so that an ingot facility is eligible for the section 48C credit while a wafer facility is eligible for the section 45X credit. As required by section 45X(c)(3)(B)(ii)(I)(bb), however, a photovoltaic wafer must be produced by a single manufacturer either by forming an ingot from molten polysilicon (for example, Czochralski method) and then subsequently slicing it into wafers, or by forming molten or evaporated solar grade polysilicon or deposition into a sheet or layer (that is, thin-film deposition). As the statute requires production of a photovoltaic wafer by a single manufacturer that both forms an ingot and slices it into wafers, it is not appropriate to treat ingot and wafer production as two separate manufacturing activities. Rather, as both activities are necessary, it follows that the tangible property used to complete each activity must be within a single section 45X facility with respect to the eligible component produced. No comments were received on the other examples in proposed § 1.45X-1(g)(4)(i) through (v). However, all of the examples in proposed § 1.45X-1(g)(4)(i) through (v) were modified consistent with the revisions in § 1.45X-1(g)(1) through (3).

A few commenters suggested that parties in a contract manufacturing arrangement under proposed § 1.45X-1(c)(3)(iii) could circumvent the prohibition under section 45X(c)(1)(B) that disallows a section 45X credit for items produced at a section 48C facility. More specifically, commenters suggested that a taxpayer could enter into a contract manufacturing arrangement under proposed § 1.45X-1(c)(3)(iii) to produce photovoltaic wafers that are then used to manufacture photovoltaic cells. If the taxpayer itself integrated, incorporated, or assembled the photovoltaic cells into solar modules, the taxpayer might claim a section 45X credit for all three products upon their sale, even though the photovoltaic wafers were manufactured by the contract manufacturer at a section 48C facility while the photovoltaic cells were manufactured at a section 45X facility, if the taxpayer was unaware that the contract manufacturer manufactured the photovoltaic wafers at a section 48C facility. The Proposed Regulations did not allow this, and the final regulations would continue to disallow a section 45X credit for the photovoltaic wafers in this scenario. To the extent that the photovoltaic wafers were produced at a section 48C facility, the photovoltaic wafers would not qualify as an eligible component to any party to the contract manufacturing arrangement. As described earlier, these final regulations add a rule in § 1.45X-1(g)(2)(ii) to clarify the rules in a contract manufacturing arrangement situation, and the examples in § 1.45X-1(g)(4) have also been modified.

G. Anti-Abuse Rule

As explained in the preamble to the Proposed Regulations, proposed § 1.45X-1(i)(1) would have provided a general anti-abuse rule that would make the section 45X credit unavailable in extraordinary circumstances in which, based on a consideration of all the facts and circumstances, the primary purpose of the production and sale of an eligible component is to obtain the benefit of the section 45X credit in a manner that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use. Proposed § 1.45X-1(i)(1) would have provided that the rules of section 45X and the section 45X regulations must be applied in a manner consistent with the purposes of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit). A purpose of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit) is to provide taxpayers an incentive to produce eligible components in a manner that contributes to the development of secure and resilient supply chains. Accordingly, the section 45X credit is not allowable if the primary purpose of the production and sale of an eligible component is to obtain the benefit of the section 45X credit in a manner that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use. A determination of whether the production and sale of an eligible component is inconsistent with the purposes of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit) is based on all facts and circumstances. Proposed § 1.45X-1(i)(2) would have provided an example illustrating this anti-abuse rule.

One commenter suggested that, in applying the anti-abuse rule, the taxpayer claiming a section 45X credit should not be held responsible for the activities of the customer after a sale has occurred (unless the customer is a related entity); the determination of whether a component is defective should be made at the factory gate; and “productive use” should include the sale of an eligible component to an entity engaged in the business of directly (such as a utility) or indirectly (such as a project developer) deploying the batteries. Proposed § 1.45X-1(i)(1) provides that a determination of whether the production and sale of an eligible component is inconsistent with the purposes of section 45X and the section 45X regulations (and the regulations under sections 6417 and 6418 related to the section 45X credit) is based on all the facts and circumstances. Under a facts and circumstances analysis, no single factor is determinative, and the considerations listed by the commenter would have to be evaluated in the context of all other facts and circumstances. The Treasury Department and the IRS thus decline to list specific parameters that automatically result in a finding of a favorable or unfavorable primary purpose.

Another commenter suggested adding additional examples to proposed § 1.45X-1(i) to make clear that the section 45X credit is never allowable with respect to any cost the primary purpose of which is to increase the amount of the section 45X credit. While both examples offered by the commenter involve possible abuses, the anti-abuse rule is intended to cover a broad range of abuses. Proposed § 1.45X-1(i) would have provided that a determination of whether the production and sale of an eligible component is inconsistent with the purposes of section 45X and the section 45X regulations is based on all facts and circumstances, and no single factor is determinative. Accordingly, the Treasury Department and the IRS decline to adopt the commenter's suggestion.

III. Sale to Unrelated Person

A. In General

Proposed § 1.45X-2(a) would have stated that the amount of the section 45X credit for any taxable year is equal to the sum of the credit amounts determined under section 45X(b) (and described in proposed §§ 1.45X-3 and 1.45X-4) with respect to each eligible component that is produced by the taxpayer and, during the taxable year, sold by the taxpayer to an unrelated person. Applicable Federal income tax principles apply to determine whether a transaction is in substance a sale (or the provision of a service, or some other disposition). Proposed § 1.45X-2(a) also would have cross-referenced proposed § 1.45X-1(d) and (e) for additional requirements relating to sales. Section

45X(d)(1) provides that persons are treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). Proposed § 1.45X-2(b) would have provided definitions of the terms “person,” “related person,” and “unrelated person” for purposes of the section 45X credit.

A few commenters requested additional clarity in the final rules on how a sale is defined and when a sale is determined for the purpose of section 45X. One commenter recommended that a sale be defined for 45X as the point when a taxpayer signs a binding contractual agreement with a buyer in the taxpayer's trade or business for the purchase of an eligible component. Section 45X provides special rules addressing sales of eligible components to related persons that may be treated as sales to unrelated persons, and a general rule that an eligible component produced and sold by the taxpayer is only taken into account if such production and sale is in a trade or business of the taxpayer, but otherwise does not provide any specific rules regarding whether and when a sale have occurred. Proposed § 1.45X-2(a) would have provided that applicable Federal income tax principles apply to determine whether a transaction is in substance a sale (or the provision of a service, or some other disposition), and those same principles apply in determining when a transaction is a sale. More specific rules on the determination of whether and when a sale occurs is beyond the scope of these final regulations. Accordingly, the Treasury Department and the IRS maintain the standard in proposed § 1.45X-2(a) and finalize the proposed rule without modification.

Another commenter requested further clarification on the sale of eligible components in two scenarios. In the first scenario, Company A is a U.S. based company producing eligible components that it sells to Company B, which is not directly using the eligible components but resells to Company C to use in a manufacturing process or otherwise in its trade or business. For this first scenario, the commenter requested clarification on whether Company A is eligible to claim the section 45X credit for the domestic production and sale of the eligible components. In the second scenario, the commenter assumed the same facts as in the first scenario, but Company B or Company C is using Company A's eligible component outside the United Sates. In this second scenario, the commenter requested clarification on whether Company A remains eligible to claim the section 45X credit for the domestic production and sale of the eligible components.

In both scenarios under the Proposed Regulations, Company A is eligible to claim the section 45X credit for the domestic production and sale of the eligible components if the production and sale is in a trade or business of Company A, regardless of whether the first purchaser is using the eligible component in its trade or business or sells to a subsequent purchaser for use in the subsequent purchaser's trade or business, and regardless of whether the purchaser or subsequent purchaser uses the eligible component in the United States. Because the Proposed Regulations clearly provide this result, no further revision is necessary in these final regulations.

B. Special Rules for Sales to a Related Person

Consistent with section 45X(a)(3)(A), proposed § 1.45X-2(c)(1) would have provided a special rule that, for purposes of section 45X(a), a taxpayer is treated as selling an eligible component to an unrelated person if such component is sold to such person by a person who is related to the taxpayer. Proposed § 1.45X-2(c)(2) would have provided an example to illustrate this special rule.

Given the importance of whether parties are related persons or unrelated persons, a commenter proposed a particular fact pattern and requested clarification on who the purchaser is and whether they were related or unrelated to the producer and seller. In general, section 45X(d)(1) and proposed § 1.45X-2(b)(2) provides that persons are treated as related to each other if such persons would be treated as a single employer under the regulations prescribed under section 52(b). A request for application of the section 52(b) regulations by the Treasury Department and the IRS to a particular fact pattern requiring a facts and circumstances analysis is outside the scope of these final regulations.

Another commenter requested that the final rules clarify whether a Related Person Election is necessary when eligible components are sold by the producer to an unrelated person, who subsequently sells them to a person related to the producer of such eligible components. The commenter proposes amending proposed § 1.45X-2(c) to clarify that direct or indirect sales to a related person qualify if the producer knows or has reason to know the unrelated person is intending to sell the same eligible components to a person related to the producer. To provide assurance to commenter, a Related Person Election is not necessary in this situation because the first sale was to an unrelated party, but the Treasury Department and the IRS have determined that the rules as set out by proposed § 1.45X-2(c) do not require further clarification on this point. In addition, if there are circumstances in which purported sales are made to unrelated persons to circumvent the requirements of section 45X, proposed § 1.45X-2(a) provides that applicable Federal income tax principles apply to determine whether a transaction will be respected as a sale.

C. Related Person Election

1. Availability of Election—In General

Proposed § 1.45X-2(d)(1)(i) would have provided that a taxpayer may make a Related Person Election under section 45X(a)(3)(B) to treat a sale of eligible components by such taxpayer to a related person as if made to an unrelated person. As a condition of, and prior to, a taxpayer making a Related Person Election, the Secretary may require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, or any improper or excessive credit amount determined under section 45X(a)(1). Proposed § 1.45X-2(d)(1)(ii) would have provided the rules regarding the Related Person Election for members of a consolidated group (as defined in § 1.1502-1(h)).

One commenter requested that taxpayers be allowed to exercise the Related Person Election in situations where it is difficult for the taxpayer to determine whether two entities are related under the section 52(b) regulations. Allowing the exercise of the Related Person Election as commenter requested would conflict with the language in section 45X(d)(1), which requires the parties be treated as a single employer under the section 52(b) regulations, not just that it be difficult to determine the status. Therefore, these final regulations do not adopt the commenter's request.

2. Anti-Abuse Rule

Proposed § 1.45X-2(d)(4) would have provided an anti-abuse rule for the Related Person Election consistent with section 45X(a)(3)(B)(ii) for preventing duplication, fraud, or any improper or excessive amount of the section 45X credit. Proposed § 1.45X-2(d)(4)(i) would have provided that a Related Person Election may not be made if the taxpayer fails to provide the information required by proposed § 1.45X-2(d)(2)

with respect to the relevant eligible components, the taxpayer provides information that shows such components were put to an improper use as defined in proposed § 1.45X-2(d)(4)(ii) or were defective as defined in proposed § 1.45X-2(d)(4)(iii), or such components were actually put to an improper use or were defective.

Proposed § 1.45X-2(d)(4)(ii) would have provided that an eligible component is put to an improper use if it is so used by the related person to which the eligible component is sold. The term improper use would mean a use that is wasteful, such as discarding, disposing of, or destroying the eligible component without putting it to a productive use. The Treasury Department and the IRS requested comments in the preamble to the Proposed Regulations on the definition of the term improper use and whether any clarifications to its scope are necessary.

Proposed § 1.45X-2(d)(4)(iii) would have provided that a defective component means a component that does not meet the requirements of section 45X and the section 45X regulations. The Treasury Department and the IRS requested comments in the preamble to the Proposed Regulations on the definition of defective components and whether clarifications to its scope are necessary.

In response to the Treasury Department and the IRS's request for comments, one commenter requested additional guidance regarding when an eligible component can be deemed defective under section 45X. The commenter recommended clarification that an eligible component can be deemed defective and therefore ineligible for a tax credit under section 45X “up until the point of sale of the eligible component to an unrelated party.” However, in circumstances where a taxpayer has made a valid Related Person Election, a sale of eligible components to a related person is treated as if made to an unrelated person, thus making a sale to an unrelated person not relevant for section 45X credit determination purposes. The preamble to the Proposed Regulations stated that the Treasury Department and the IRS are concerned that the Related Person Election may be used by taxpayers to claim a credit for eligible components that are defective, not capable of being used for its intended purpose, do not meet the requirements for the section 45X credit, and therefore are not eligible for the section 45X credit. The Treasury Department and the IRS agree that if an eligible component is not defective at the time of sale, defects arising after the point of sale may occur in the ordinary course of a business and do not generally raise the improper claim concerns regarding defective components described in the Preamble to the Proposed Regulations. Accordingly, the final rules modify proposed § 1.45X-2(d)(4)(iii) to clarify that components with respect to which defects arise after the deemed sale are not considered defective components for purposes of the anti-abuse rule.

Another commenter suggested that the definitions of improper use and defective components should provide an exception for a defective component that can be sold or given to a related or unrelated person conducting legitimate recycling operations and allowing defective components to earn a section 45X credit provided they are properly recycled in the United States. The Treasury Department and the IRS decline to adopt this request because section 45X does not authorize allowing a section 45X credit for a defective component that does not meet the definition of an eligible component and is not capable of being used for its intended purpose without further substantial modification.

D. Sales of Integrated Components to a Related Person

1. In General

Section 45X(d)(4) provides that for purposes of section 45X, a person is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component that is sold to an unrelated person. See Part II.E. of this Summary of Comments and Explanation of Revisions for rules applicable to eligible components that are integrated, incorporated, or assembled into other eligible components and sold to an unrelated person.

Proposed § 1.45X-2(e)(1) would have provided that, for purposes of section 45X and the section 45X regulations (and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit), a taxpayer that produces and sells an eligible component to a related person who then integrates, incorporates, or assembles the taxpayer's eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person may claim a section 45X credit in the taxable year of the sale to the unrelated person.

Proposed § 1.45X-2(e)(2) would have provided examples to illustrate the treatment of sales of multiple incorporated eligible components to related and unrelated persons. One commenter questioned the practical application of the requirements in proposed § 1.45X-2(e)(2)(i) (

Example 1

) and expressed concern that although Company X and Y are related, the proposed rule would require a significant amount of coordination of information. This coordination would be necessary for the credit to be claimed in the proper tax year in which the ultimate product (photovoltaic cells produced by Y using photovoltaic wafers produced by X and purchased by Y) was sold to Company Z. Proposed § 1.45X-2(e)(2)(i) (

Example 1

) illustrates the rule in section 45X(d)(4) requiring an ultimate actual sale to an unrelated person of an eligible component. Because section 45X(d)(4) expressly conditions the deemed sale on an actual subsequent sale to an unrelated person by the related person, the Treasury Department and the IRS do not have the authority to change this statutorily imposed conditional timing requirement despite any practical difficulties taxpayers may experience in obtaining such information. Taxpayers may, however, make a Related Person Election as illustrated in the example in § 1.45X-2(e)(3)(ii) and claim the section 45X credit upon the sale to the related person. This would obviate the need for such taxpayer to know when the related person actually makes the subsequent sale to an unrelated person. For these reasons, the final regulations adopt proposed § 1.45X-2(e)(2)(i) (

Example 1

) without modification.

2. Special Rules Applicable to Related Person Election

Proposed § 1.45X-2(e)(3) would have provided that if a taxpayer makes a valid Related Person Election under section 45X(a)(3)(B)(i) and proposed § 1.45X-2(d)(1), and the taxpayer produces and then sells an eligible component to a related person, who then integrates, incorporates, or assembles the taxpayer's eligible component into another complete and distinct eligible component that is subsequently sold to an unrelated person, the taxpayer's sale of the eligible component to the related person is treated (solely for purposes of the section 45X credit and the section 45X regulations, and the regulations in this chapter under sections 6417 and 6418 related to the section 45X credit) as if made to an unrelated person in the taxable year in which the sale to the related person occurs. One commenter expressed support for this proposed rule, as it applies thoughtfully to vertically integrated electric vehicle manufacturers engaging in sales of

multiple integrated eligible components to related and unrelated persons (with a Related Person Election). No other comments were received on this special rule, so it is adopted in these final regulations without revision.

IV. Eligible Components

A. In General

Proposed § 1.45X-3(a) would have defined the term “eligible component” as any solar energy component, any wind energy component, any inverter, any qualifying battery component, and any applicable critical mineral, as each is respectively defined in the Proposed Regulations. For solar energy components, wind energy components, inverters, and qualifying battery components, proposed § 1.45X-3(b) through (e) would have provided definitions, rules for determining the credit amount, and documentation requirements. Proposed § 1.45X-3(f) would also have provided rules for applying the phase out of the section 45X credit. Proposed § 1.45X-4 would have provided such information for applicable critical minerals (other than rules for applying the phase out, which does not apply to applicable critical minerals).

Commenters addressed certain aspects of these proposed rules, as described in this Part IV. of the Summary of Comments and Explanation of Revisions. These final regulations generally adopt the rules as proposed in § 1.45X-3, with the modifications described in this Part IV. of the Summary of Comments and Explanation of Revisions.

B. Solar Energy Components—in General

Consistent with section 45X(c)(3), proposed § 1.45X-3(b) would have provided that solar energy component means a solar module, photovoltaic cell, photovoltaic wafer, solar grade polysilicon, torque tube, structural fastener, or polymeric backsheet. Several commenters requested that the final regulations add other non-listed solar energy components (or alternatively, to provide a safe harbor) to allow for section 45X credit eligibility. Examples of other non-listed solar energy components commenters raised include the encapsulant used to protect the photovoltaic cells and hold the entire system together; charge transport materials used in photovoltaic cells; photovoltaic wire; solar mirror facets; and solar thermal receivers. A commenter also suggested adopting a functionally interdependent and integral part test analogous to section 48 of the Code to include additional solar energy components.

Section 45X(c)(3) expressly identifies the qualifying solar energy components that are eligible for the section 45X credit. The Treasury Department and the IRS do not have the authority to add to the set of solar energy components that are identified by statute, for example, by applying a functional interdependence or integral part test. For this reason, the Treasury Department and the IRS decline to adopt the commenters' requests in these final regulations.

1. Photovoltaic Cell

Proposed § 1.45X-3(b)(1)(ii) would have provided that the credit amount for a photovoltaic cell is equal to the product of 4 cents multiplied by the capacity of such photovoltaic cell. The proposed rule provided that the capacity of each photovoltaic cell is expressed on a direct current watt basis and capacity is the nameplate capacity in direct current watts using Standard Test Conditions (STC), as defined by the International Electrotechnical Commission (IEC). The proposed rule further provided that in the case of a tandem technology produced in serial fashion, such as a monolithic multijunction cell composed of two or more sub-cells, capacity must be measured at the point of sale at the end of the single cell production unit; and, in the case of a four-terminal tandem technology produced by mechanically stacking two distinct cells or interconnected layers, capacity must be measured for each cell at each point of sale.

A few commenters expressed concern that the proposed rule treats two-terminal and four-terminal tandem technologies differently, and that by labeling a monolithic two-terminal configuration as composed of sub-cells, the proposed rule would require this technology to be measured as a single cell rather than two distinct tandem cells. In contrast, proposed § 1.45X-3(b)(1)(ii) provides that mechanically stacked four-terminal tandem technology consists of “two distinct cells.” In the commenters' view, the proposed rule would allow four-terminal cells to be measured before they are combined, while two-terminal cells would be measured after they are combined, resulting in higher capacity for four-terminal cells and increased credit amounts for four-terminal cells. A commenter also suggested that proposed § 1.45X-3(b)(1)(ii) is currently problematic for future tandem technology cell production and, perhaps unintentionally, directs the development of certain tandem technologies.

The Treasury Department and the IRS agree with the commenters' concerns regarding disparate treatment between four-terminal and two-terminal cells and capacity and credit amounts. Accordingly, these final regulations revise proposed § 1.45X-3(b)(1)(ii) to add additional text at the end as follows: “Where that cell is sold to a customer who will use it as the bottom cell in a tandem module, its capacity should be measured with the customer's intended top cell placed between the bottom cell and the one-sun light source.”

2. Photovoltaic Wafer

Consistent with section 45X(c)(3)(B)(ii), proposed § 1.45X-3(b)(2)(i) would have defined a photovoltaic wafer to mean a thin slice, sheet, or layer of semiconductor material of at least 240 square centimeters that comprises the substrate or absorber layer of one or more photovoltaic cells. A photovoltaic wafer must be produced by a single manufacturer by forming an ingot from molten polysilicon (for example, Czochralski method) and then subsequently slicing it into wafers, forming molten or evaporated polysilicon into a sheet or layer, or depositing a thin-film semiconductor photon absorber into a sheet or layer (that is, thin-film deposition).

Some commenters suggested revisions to the definition of a photovoltaic wafer to include non-traditional methods of producing wafers. For example, a commenter requested expanding the definition to include wafers produced by any of the emerging `kerfless' or `direct' wafer technologies, as well as the polysilicon used by these technologies. The Treasury Department and the IRS have determined that direct wafer technologies fall within the statutory definition of photovoltaic wafers, if they are produced directly from evaporated solar grade polysilicon but disagree that any further clarification is needed in these final regulations.

A commenter requested that the final regulations clarify that ingots must be produced within the United States for solar wafers to be eligible for the section 45X credit. As required by section 45X(c)(3)(B)(ii)(I)(bb), to qualify for a section 45X credit, a photovoltaic wafer must be produced by a single manufacturer either by forming an ingot and then subsequently slicing it into wafers, or by forming molten or evaporated solar grade polysilicon or deposition into a sheet or layer. Thus,

to qualify for a section 45X credit, both the ingot and the wafer must be produced domestically in accordance with section 45X(d)(2). Proposed § 1.45X-1(d)(2) would have clarified that constituent elements, materials, and subcomponents used in the production of eligible components are not subject to the domestic production requirement provided in proposed § 1.45X-1(d)(1). Because the ingot production is part of the wafer production, ingots are not constituent elements, materials, or subcomponents. The Treasury Department and the IRS have determined it is unnecessary to specify that the ingot must be domestically produced as section 45X and proposed § 1.45X-3(b)(2)(i) require the wafer to be domestically produced, which includes production of the ingot. See also Part II.F.2. of this Summary of Comments and Explanation of Revisions for a discussion of proposed § 1.45X-1(g)(4)(ii) (

Example 2

) concerning the production of ingots and wafers.

3. Polymeric Backsheet

Consistent with section 45X(c)(3)(B)(iii), proposed § 1.45X-3(b)(3) would have defined polymeric backsheet to mean a sheet on the back of a solar module that acts as an electric insulator and protects the inner components of such module from the surrounding environment.

Certain commenters recommended that the term be considered to include a product that qualifies solely based on the property's functionality and not the property's composition, in order for backsheets made of glass to be eligible components. One commenter stated that its product is used in solar panels and therefore its request is consistent with Congressional intent of expediting the transition to clean energy, the underlying intent of section 45X to create parity among technologies, and incentivizing the creation of a U.S.-based supply chain for current and future solar technologies. The commenter thought that other energy components were defined based on their function, not their “composition” (for example, inverter, photovoltaic cell, and solar module) and believes that glass performs the same function as a backsheet made of plastic. The commenter suggested that clarity on whether a backsheet made of glass is part of the definition of “polymeric backsheet” is important because it will help with decisions on pursuing a section 48C credit and for avoiding penalties under section 6694 of the Code (preparer penalty) or section 6662 of the Code (substantial understatement). Another commenter recommended adding back glass as a solar energy component because it is better for the environment in that a domestic facility that uses recycled glass from retired solar modules is “cleaner” than an overseas facility.

In considering these comments, the Treasury Department and the IRS determined that the best reading of the statute is that the term “polymeric backsheet” is limited to backsheets made of polymeric materials that also meet the functional definition provided in section 45X(c)(3)(B)(iii). This excludes most glass backsheets because they are typically not composed of a polymer, but of soda-lime glass. The final regulations add the word “polymeric” into the definition as a clarification. In reaching this determination, the Treasury Department and the IRS considered that when drafting the statute, Congress affirmatively included “polymeric” in the term and this inclusion should be given effect. Thus, the final regulations clarify that the definition is limited to a sheet on the back of solar modules composed, at least in part, of a polymer, that acts as an electric insulator and protects the inner components of such module from the surrounding environment.

4. Solar Grade Polysilicon

Consistent with section 45X(c)(3)(B)(iv), proposed § 1.45X-3(b)(4) would have defined solar grade polysilicon to mean silicon that is suitable for use in photovoltaic manufacturing and purified to a minimum purity of 99.999999 percent silicon by mass. A commenter requested that the final rules state that the production of the silicon gas that is used for direct wafer production may receive the section 45X credit for polysilicon for the mass of silicon in the gas. The Treasury Department and the IRS have determined, in close consultation with the Department of Energy, that gas used for direct wafer production includes molecules of silicon contained within another substance. Accordingly, such gas is not a complete and distinct eligible component within the meaning of proposed § 1.45X-1(c)(1)(i). For this reason, the Treasury Department and the IRS decline to adopt this request in these final regulations.

A few commenters requested guidance on how the purity level for solar grade polysilicon should be determined. One commenter requested that the final rules clarify that only impurities that are “material to the industry” should be counted in determining whether the minimum purity level is met. Because these final regulations add the purity standard in SEMI Specification PV17-1012 Category 1 to proposed § 1.45X-3(b)(4), which distinguishes between material and immaterial impurities, the Treasury Department and the IRS decline to adopt the commenter's suggestion of clarifying that the statutory purity level refers only to impurity levels that are “material to the industry.”

A commenter recommended adopting the standards for polysilicon feedstock in SEMI Specification PV17-1012. The Treasury Department and the IRS, in close consultation with the Department of Energy, have determined that SEMI Specification PV17-1012 Category 1 meets the purity standard of 99.999999 percent, while Categories 2 through 5 do not. The Treasury Department and the IRS thus agree with this request but only for Category 1, and these final regulations accordingly revise proposed § 1.45X-3(b)(4) to add the purity standard in SEMI Specification PV17-1012 Category 1.

5. Solar Module

Proposed § 1.45X-3(b)(5)(ii) would have stated that the credit amount for a solar module is equal to the product of 7 cents multiplied by the capacity of such module. The proposed rule also provided that the capacity of each solar module is expressed on a direct current watt basis, and that capacity is the nameplate capacity in direct current watts using STC, as defined by the IEC. A commenter requested producers be required to use “flash” values to determine the value of the tax credit for modules. The preamble to the Proposed Regulations explained that nameplate capacity is an appropriate, accurate, and consistent standard for the measurement of solar module capacity that can be used to measure the capacity of other eligible components. Using an industry standard such as nameplate capacity that is widely applicable to various eligible components provides greater taxpayer certainty, reduces taxpayer compliance burdens, and aids IRS administration. For these reasons, the Treasury Department and the IRS have determined that the best application of the statute is to require the use of nameplate capacity to measure the capacity of a solar module. The Treasury Department and the IRS therefore decline to adopt this suggestion to permit the use of “flash” value capacity measurements in these final regulations.

6. Solar Tracker

Consistent with section 45X(c)(3)(B)(vi), proposed § 1.45X-3(b)(6) would have provided that a solar

tracker means a mechanical system that moves solar modules according to the position of the sun and to increase energy output. Section 45X(c)(3)(B)(vii) provides that torque tubes (as defined in proposed § 1.45X-3(b)(7)) or structural fasteners (as defined in proposed § 1.45X-3(b)(8)) are solar tracker components that are eligible components for purposes of the section 45X credit.

Commenters requested that the definition of a solar tracker (not an eligible component) in section 45X(c)(3)(B)(vi) be modified to allow solar thermal collectors, heliostats, and fixed tilt systems (additional items) to be solar tracker components as defined in section 45X(c)(3)(B)(vii). A solar tracker is defined in 45X(c)(3)(B)(vi) as a “mechanical system that moves solar modules according to the position of the sun to increase energy output.” To be a solar tracker, a device must be a mechanical system that

moves

a solar module. The Treasury Department and the IRS do not have authority to expand the definition of solar tracker to include additional items such as the ones suggested that increase energy output without moving solar modules. Moreover, modification of the definition of a solar tracker in the manner the commenter requested would not result in such additional items qualifying as eligible components because a solar tracker is not a solar energy component that is an eligible component under section 45X(c)(1)(A)(i). Section 45X(c)(3)(B)(vii) provides that torque tubes and structural fasteners are the only two solar tracker components that may qualify as eligible components. The Treasury Department and the IRS do not have authority to expand the categories of eligible solar tracker components. For these reasons, the Treasury Department and the IRS decline to adopt this request in the final regulations.

7. Torque Tube

Consistent with section 45X(c)(3)(B)(vii)(I), proposed § 1.45X-3(b)(7)(i) would have provided that torque tube means a structural steel support element (including longitudinal purlins) that: (i) is part of a solar tracker; (ii) is of any cross-sectional shape; (iii) may be assembled from individually manufactured segments; (iv) spans longitudinally between foundation posts; (v) supports solar panels and is connected to a mounting attachment for solar panels (with or without separate module interface rails); and (vi) is rotated by means of a drive system.

Commenters suggested various statutory revisions to the definition of torque tube in section 45X(c)(3)(B)(vii)(I). A commenter recommended replacing the definition with a more generalized term such as “Tracker Structural Frame” to allow for other common solar collector morphologies. Another commenter requested removing or revising section 45X(c)(3)(B)(vii)(I)(dd) to include single foundation mounted structures or ground-mounted carousel structures. One commenter proposed clarifying that aluminum bearings, steel damper arms, steel saddle brackets, and steel bottom brackets are included in the definition of torque tubes or structural fasteners. Alternatively, the commenter suggested providing either: (i) a non-exclusive list of items that are included in the definition of torque tube or structural fasteners, or (ii) a test similar to the functionally interdependent or integral part tests under proposed § 1.48-9(f)(2)(ii) and (f)(3) to determine when a component is included in the definition of a torque tube or structural fastener.

Because section 45X(c)(3)(B)(vii)(I) specifically defines torque tube for purposes of section 45X, the Treasury Department and the IRS do not have the authority to expand the definition of torque tubes and solar tracker components in the final regulations to include additional solar energy components. As previously discussed, the Treasury Department and the IRS also lack authority to incorporate a functional interdependence or integral part tests that would allow other components not specified in the statute to qualify for the section 45X credit. For these reasons, the Treasury Department and the IRS decline to adopt these comments in the final regulations.

8. Structural Fastener

Consistent with section 45X(c)(3)(B)(vii)(II), proposed § 1.45X-3(b)(8)(i) would have defined a structural fastener to mean a component that is used: (i) to connect the mechanical and drive system components of a solar tracker to the foundation of such solar tracker; (ii) to connect torque tubes to drive assemblies; or (iii) to connect segments of torque tubes to one another.

Several commenters requested revisions to the definition of structural fastener in proposed § 1.45X-3(b)(8)(i). For example, commenters requested that the definition of structural fastener be extended “beyond steel and iron torque tubes to specifically allow for innovations made from other materials,” such as durable plastic; that solar frames made from greenhouse gas reducing steel and roll-form fabricated frames (as opposed to the current industry standard, imported extruded aluminum frames) qualify as structural fasteners, solar modules, or torque tubes; and that the definition of structural fasteners be expanded to include those that secure the photovoltaic module to the torque tube or module interface rails. The Treasury Department and the IRS do not have the authority to expand the definition of structural fasteners and solar tracker components in the final regulations to include additional solar energy components. However, the Treasury Department and the IRS note that a component that is used for any of the functions described in section 45X(c)(3)(B)(vii)(II) would be considered a structural fastener for purposes of section 45X. The Treasury Department and the IRS think that proposed § 1.45X-3(b)(8)(i) and the statutory definition of a structural fastener is sufficiently clear to address the requested clarifications. Proposed § 1.45X-3(b)(8)(i) is therefore adopted in these final regulations without revision.

Proposed § 1.45X-3(b)(8)(iii) would have required that, for substantiation purposes, a taxpayer must document that a structural fastener is used in a manner described in proposed § 1.45X-3(b)(8)(i)(A), (B), or (C), with a bill of sale or other similar documentation that explicitly describes such use. One commenter specifically supported the substantiation requirement for structural fasteners in proposed § 1.45X-3(b)(8)(iii). Another commenter requested the final rules require taxpayers to substantiate that the structural fasteners for which they are claiming the section 45X credit include only the manufactured component (bolt or rivet) itself. The Treasury Department and the IRS have determined there is no need for further clarification of the substantiation requirement for structural fasteners in addition to the specific requirements relating to use in proposed § 1.45X-3(b)(8)(iii) and the general substantiation requirements in section 6001 of the Code. For this reason, the Treasury Department and the IRS decline to adopt this comment in the final regulations.

C. Wind Energy Components

1. In General

Consistent with section 45X(c)(4), proposed § 1.45X-3(c) would have provided that a wind energy component means a blade, nacelle, tower, offshore wind foundation, or related offshore wind vessel. Commenters generally requested expanding proposed § 1.45X-3(c) to include other non-listed wind energy components such as structural fasteners. Section 45X(c)(4) specifically provides a list of qualifying wind energy

eligible components. The Treasury Department and the IRS do not have the authority to expand the statutorily enumerated list of wind energy components eligible for a section 45X credit. For this reason, the Treasury Department and the IRS decline to adopt the commenters request in these final regulations.

2. Nacelle

Consistent with section 45X(c)(4)(B)(iii), proposed § 1.45-3(c)(3)(i) would have defined a nacelle to mean the assembly of the drivetrain and other tower-top components of a wind turbine (with the exception of the blades and the hub) within their cover housing.

A commenter stated that guidance should distinguish between manufacturing of eligible wind energy components (for example, in a manufacturing facility) from the installation of wind energy components at the relevant project site, as the latter does not constitute manufacturing or production of eligible components. The Treasury Department and the IRS have determined that the definition of “produced by the taxpayer” provided in proposed § 1.45X-1(c)(1) is sufficient to clarify that production of an eligible component requires substantially transforming constituent elements, materials, or subcomponents into a complete and distinct eligible component that is functionally different from that which would result from disqualifying minor assembly or superficial modification of the elements, materials or subcomponents.

Another commenter requested that the final regulations recognize that, where a new drivetrain and associated equipment (the pitch bearing, pitch system, main shaft, main bearing, gearbox, flex coupling, and slip ring) are produced for use in repowering of existing wind turbines and installed into an existing nacelle cover housing with certain other used equipment (including yaw bearing and baseplate), the nacelle is eligible for the section 45X credit. Under this commenter's approach, the drivetrain of the nacelle must be new to be eligible for the section 45X credit. Another commenter also suggests inclusion of a “reasonable computation” of the section 45X credit for repowered eligible components.

The Treasury Department and the IRS note that repowering is a form of onsite re-manufacturing that is typically accomplished through a hybrid of primary and secondary production that utilizes a mix of existing and new components. To produce a nacelle within the definition of proposed § 1.45X-3(c)(3)(i), the taxpayer would need to meet the requirements of the definition of “produced by the taxpayer” provided in proposed § 1.45X-1(c)(1), including by substantially transforming the combination of existing and new subcomponents into a new nacelle that is distinct from the original nacelle. In some circumstances, nacelle repowering may constitute production of an eligible component. For example, a taxpayer that manufactures and installs a new drivetrain and associated subcomponents within housing atop a wind tower will be considered to have substantially transformed the combination of new and existing subcomponents, so that taxpayer will have produced an eligible nacelle. In contrast, a taxpayer that merely replaces the controller in a nacelle with a new one will not have substantially transformed the combination of new and existing subcomponents, so that taxpayer will not have produced an eligible nacelle. Routine maintenance or part replacement would fall under the definition of disqualifying minor assembly or “superficial modification.”

3. Related Offshore Wind Vessel

Consistent with section 45X(c)(4)(B)(iv), proposed§ 1.45X-3(c)(4)(i) would have defined related offshore wind vessel to mean any vessel that is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components. Proposed § 1.45X-3(c)(4)(i) would have clarified that a vessel is purpose-built for development, transport, installation, operation, or maintenance of offshore wind energy components if it is built to be capable of performing such functions and it is of a type that is commonly used in the offshore wind industry. Proposed § 1.45X-3(c)(4)(i) would have further clarified that a vessel is retrofitted for development, transport, installation, operation, or maintenance of offshore wind energy components if such vessel was incapable of performing such functions prior to being retrofitted, the retrofit causes the vessel to be capable of performing such functions, and the retrofitted vessel is of a type that is commonly used in the offshore wind industry.

Under proposed § 1.45X-3(c)(4)(ii), consistent with section 45X(b)(1)(F)(i), the credit amount for a related offshore wind vessel would have been equal to 10 percent of the sales price of the vessel. Under the Proposed Regulations the sales price of the vessel does not include the price of maintenance, services, or other similar items that may be sold with the vessel. For a related offshore wind vessel with respect to which a Related Person Election under section 45X(a)(3)(B)(i) has been made, the election would not cause the sale price of such vessel to be treated as having been determined with respect to a transaction between uncontrolled taxpayers for purposes of section 482 of the Code and the regulations thereunder.

One commenter requested clarification on the valuation of retrofitted offshore wind vessels and requested guidance on whether the section 45X credit applies to the cost of the retrofit itself, the value-add of the retrofit, the cost of the final sale of a retrofitted vessel, or some other amount. The Treasury Department and the IRS confirm that the credit amount specified in section 45X(b)(1)(F)(i)—ten percent of the sales price of such vessel—specifically applies to any related offshore wind vessel which is purpose-built or retrofitted as provided in section 45X(c)(4)(B)(iv).

A commenter stated that the definition of an offshore wind vessel is too narrow and that more standard vessel types (for example, tugboats and barges) that are capable of doing offshore wind work should also be eligible for the section 45X credit if they are being constructed or retrofitted for the purpose of offshore wind work. The Treasury Department and the IRS note that section 45X(c)(4)(B)(iv) and proposed § 1.45X-3(c)(4)(i) would have defined a related offshore wind vessel to mean “any vessel” that is purpose-built or retrofitted for purposes of the development, transport, installation, operation, or maintenance of offshore wind energy components. Proposed § 1.45X-3(c)(4)(i) would have clarified that a vessel is purpose-built for development, transport, installation, operation, or maintenance of offshore wind energy components if it is built to be capable of performing such functions and it is of a type that is commonly used in the offshore wind industry. Proposed § 1.45X-3(c)(4)(i) would have further clarified that a vessel is retrofitted for development, transport, installation, operation, or maintenance of offshore wind energy components if such vessel was incapable of performing such functions prior to being retrofitted, the retrofit causes the vessel to be capable of performing such functions, and the retrofitted vessel is of a type that is commonly used in the offshore wind industry. Thus, if a vessel meets the definition of a related offshore wind vessel in proposed § 1.45X-3(c)(4)(i), there are no limitations as to the type of

vessel that may be an eligible component.

The commenter's requested clarification would require an application of the standard in proposed § 1.45X-3(c)(4)(i) to specific cases for which a categorical determination of eligibility for additional vessel types would not be appropriate in these final regulations because such a determination would depend on the specific facts of each case.

Although no comments were received on proposed § 1.45X-3(c)(4)(i), the Treasury Department and the IRS revise proposed § 1.45X-3(c)(4)(i) in these final regulations to clarify that Federal income tax principles apply in determining the accuracy of the sales price used to calculate the section 45X credit. This revision provides greater certainty as to what principles apply for purposes of the section 45X credit and is in addition to the specific exclusions from a vessel's sales price in proposed § 1.45X-3(c)(4)(i), which included maintenance, services, or other similar items that may be sold with the vessel.

4. Total Rated Capacity of the Completed Wind Turbine

Proposed § 1.45X-3(c)(6) would have provided that, for purposes of proposed § 1.45X-3(c), the total rated capacity of the completed wind turbine means, for the completed wind turbine for which a blade, nacelle, offshore wind foundation, or tower was manufactured and sold, the nameplate capacity at the time of sale as certified to the relevant national or international standards, such as IEC 61400, or American National Standards Institute (ANSI)/American Clean Power Association (ACP) 101-1-2021, the Small Wind Turbine Standard (Standard). Under proposed§ 1.45X-3(c)(6), certification of the turbine to such Standards must be documented by a certificate issued by an accredited certification body and the total rated capacity of a wind turbine must be expressed in watts.

One commenter expressed support for the proposal requiring that qualifying wind turbine components must be made and sold for use on certified wind turbines. Another commenter recommended including both American Wind Energy Association (AWEA) 9.1-2009 and ANSI/ACP 101-1-2021 as acceptable wind turbine certification standards. The commenter explained that ANSI/ACP 101-1-2021 is a revision of the AWEA standard (the original small wind certification standard, and all currently certified small wind systems are certified to this standard) that streamlines the certification process, but there is no requirement that turbines with the original certification must recertify to the new ANSI/ACP standard. Thus, the commenter states that including both standards in the final rules will allow currently certified turbines made in the United States to earn section 45X credits as well as new turbines currently in the certification process following the newer standard. The Treasury Department and the IRS agree with this request and these final regulations revise proposed § 1.45X-3(c)(6) to add both AWEA 9.1-2009 and ANSI/ACP 101-1-2021 as acceptable wind turbine certification standards.

A commenter sought clarification as to whether a wind tower producer may rely on a certification of the total rated capacity of the turbine obtained from the original equipment manufacturer (OEM) that produces the completed wind turbine in which the wind tower is incorporated, provided the certificate was issued by an accredited certification body. The commenter noted that requiring wind tower producers to independently verify the capacity of the completed turbine would cause “undue expense and delay.” To provide assurance to the commenter, a wind tower producer may rely on an OEM's certification of the total rated capacity of the completed wind turbine in which the tower was incorporated, but the Treasury Department and the IRS have determined that the rules as set out by proposed § 1.45X-3(c)(6) and (7) do not require further clarification on this point.

D. Inverters

1. In General

Consistent with section 45X(c)(2), proposed § 1.45X-3(d) would define an inverter as an end product that is suitable to convert direct current (DC) electricity from one or more solar modules or certified distributed wind energy systems into alternating current (AC) electricity. Proposed § 1.45X-3(d) would have further provided that an end product is suitable to convert DC electricity from one or more solar modules or certified distributed wind energy systems into AC electricity if, in the form sold by the manufacturer, it is able to connect with such modules or systems and convert DC electricity to AC electricity from such connected source. For purposes of section 45X, the term inverter includes a central inverter, commercial inverter, distributed wind inverter, microinverter, or residential inverter. Proposed § 1.45X-3(d) would have clarified the definition of each of these types of inverters, including the required rated outputs.

The preamble to the Proposed Regulations stated that section 45X(c)(2) requires certain types of inverters be “suitable to” or “suitable for” a statutorily required use or application to be considered an eligible component. Proposed § 1.45X-3(d) would also have provided the calculation of the credit amount for each type of inverter. In general, the credit amount for each type of inverter would be equal to the product of the inverter's total rated capacity and the amount prescribed in section 45X(b)(2)(B) for such inverter.

One commenter requested the final rules provide a credit for utility-scale power converters and that a “utility-scale power converter” be defined in a manner consistent with section 2.1.9 of Underwriters Laboratories Standard 1741 (2002). Specifically, the commenter requested modifying the final rules to provide a credit for products that only convert direct current to direct current or alternating current to direct current. Because section 45X(c)(2)(A) specifically defines the term inverter to mean “an end product which is suitable to convert direct current electricity . . . into alternating current electricity,” the Treasury Department and the IRS do not have the authority to expand the definition of inverter in the final regulations to include these additional products. For this reason, the Treasury Department and the IRS decline to adopt this comment in the final regulations.

Another commenter requested that, for each type of inverter provided for under section 45X(c)(2), the rated output of alternating current power be defined as “the maximum continuous grid-tied power rating the inverter is capable of handling.” The commenter asserts that the suggested change will “ensure consistent interpretation across technologies despite consumer-driven decisions impacting output.” Section 45X(c)(2) uses the term “rated output” to define, in part, a commercial inverter, distributed wind inverter, microinverter, residential inverter, or utility inverter. The Treasury Department and the IRS decline to adopt this comment in the final regulations because the term rated output is in the statutory definition for these inverters.

Several commenters requested that the final rules provide a section 45X credit for inverters that convert direct current from sources other than solar modules or certified distributed wind energy systems as long as these inverters meet the technical requirements of an inverter defined under section 45X(c)(2). Section 45X(c)(2)(A)

specifically defines the term inverter to mean “an end product which is suitable to convert direct current electricity from one or more solar modules or certified distributed wind energy systems into alternating current electricity.” Other types of inverters such as bidirectional electric vehicle inverters or utility and commercial inverters that are in practice used with battery modules can meet the existing suitability standard within the definition without additional clarification required. For this reason, the Treasury Department and the IRS decline to adopt this comment in the final regulations.

2. Central Inverter

Consistent with section 45X(c)(2)(B), proposed § 1.45X-3(d)(2)(i) would have defined a central inverter as an inverter that is suitable for large utility-scale systems and has a capacity that is greater than 1,000 kilowatts, expressed on an alternating current watt basis. Proposed § 1.45X-3(d)(2)(i) would have further clarified that an inverter is suitable for large utility-scale systems if, in the form sold by the manufacturer, it is capable of serving as a component in a large utility-scale system and meets the core engineering specifications for such application. Proposed § 1.45X-3(d)(2)(ii) would have provided a credit equal to the product of 0.25 cents multiplied by the total rated capacity of the central inverter where the total rated capacity is expressed on an alternating current watt basis.

One commenter requested the credit amount available for a central inverter be changed to match the credit available for utility inverters because utility inverters are eligible for a credit that is six times higher than central inverters. Because section 45X(b)(2)(B) provides the credit amounts available for central inverters and utility inverters, the Treasury Department and the IRS do not have the authority to make the requested change. For this reason, the Treasury Department and the IRS decline to adopt this comment in the final regulations.

3. Commercial Inverter

a. Definition

Consistent with section 45X(c)(2)(C), proposed § 1.45X-3(d)(3)(i) would have provided that a commercial inverter means an inverter that is suitable for commercial or utility-scale applications, has a rated output of 208, 480, 600 or 800 volt three-phase power, and has a capacity expressed on an alternating current watt basis that is not less than 20 kilowatts and not greater than 125 kilowatts.

One commenter requested the definition of a commercial inverter be changed to provide a credit for inverters with a rated output greater than 800 volt three-phase power. Section 45X(c)(2)(C)(ii) defines a commercial inverter, in part, as having “a rated output of 208, 480, 600, or 800 volt three-phase power.” The Treasury Department and the IRS do not have the authority to expand the definition of a commercial inverter in the final regulations to those with a rated output greater than 800 volt three-phase power. For this reason, the Treasury Department and the IRS decline to adopt this comment in the final regulations.

A few commenters requested that the final rules modify the definition of a commercial inverter to include a DC optimized commercial inverter system, and that, when DC optimizers are paired with a commercial inverter, the credit amount available for commercial inverters should be determined in a manner similar to the credit computation for direct current optimized inverter systems (DC optimized inverter systems, as the term would have been defined in Proposed § 1.45X-3(d)(5)(iii)(B) and discussed in Part IV.D.3.a. of this Summary of Comments and Explanation of Revisions). Generally, these commenters requested that, with the modified definition of commercial inverter, the available credit be computed as a product of $0.02 multiplied by the lesser of the sum of the alternating current capacity of each DC optimizer when paired with the inverter in the DC optimized inverter system or the alternating current capacity of the inverter in the DC optimized inverter system. No language in the statutory text or proposed rules prohibits the use of direct current optimizers with commercial inverters. Thus, it is unnecessary to modify the final rules to state that DC optimizers may be used with a commercial inverter.

Section 45X(b)(1)(I) provides that the amount of the section 45X credit for an inverter is equal to the applicable amount with respect to each type of inverter multiplied by the capacity of such inverter (expressed on a per alternating current watt basis). The Treasury Department and the IRS do not have the authority to change the method for computing the credit for commercial inverters. In contrast, language that appears only in the definition of “microinverter” in section 45X(c)(2)(E) (`suitable to connect to one solar module') does require clarification about how to apply the definition to DC optimized systems and multi-module microinverters. Because this language does not appear in the definition of “commercial inverter” in section 45X(c)(2)(C), there is no analogous need to clarify the application of the definition or credit calculation. For this reason, the Treasury Department and the IRS decline to adopt these requests pertaining to commercial inverters in the final regulations.

b. Credit Amount

Proposed § 1.45X-3(d)(3)(iii) would have provided a credit equal to the product of 2 cents multiplied by the total rated capacity of the commercial inverter where the total rated capacity is expressed on an alternating current watt basis.

Commenters requested that DC optimizers be allowed to be paired with commercial or utility scale system configurations, like microinverters. This comment is not adopted for the reasons provided in Part IV.D.3.a. of this Summary of Comments and Explanation of Revisions.

4. Microinverters

a. Definition

Consistent with section 45X(c)(2)(E), proposed § 1.45X-3(d)(5)(i) would have defined a microinverter as an inverter that is suitable to connect with one solar module; has a rated output of 120 or 240 volt single-phase power, or 208 or 480 volt three-phase power; and has a capacity, expressed on an AC watt basis, that is not greater than 650 watts. One commenter requested the final rules change the maximum capacity limit for the microinverter from 650 watts to 700 watts to accommodate future technological advancements. Because section 45X(c)(2)(E)(iii) provides the maximum capacity of a microinverter, the Treasury Department and the IRS do not have the authority to make the requested change. For this reason, the Treasury Department and the IRS decline to adopt this comment in the final regulations.

b. Suitable To Connect to One Solar Module—in General

Proposed § 1.45X-3(d)(5)(iii)(A) would have clarified that an inverter is suitable to connect to one solar module if, in the form sold by the manufacturer, it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity.

Proposed § 1.45X-3(d)(5)(iii)(B) would have clarified that a DC optimized inverter system may qualify as a microinverter. Proposed § 1.45X-

3(d)(5)(iii)(B) would have defined a DC optimized inverter system to mean an inverter that is comprised of an inverter connected to multiple DC optimizers that are each designed to connect to one solar module. Proposed § 1.45X-3(d)(5)(iii)(B) would have provided that a DC optimized inverter system is suitable to connect with one solar module if, in the form sold by the manufacturer, it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity. Proposed § 1.45X-3(d)(5)(iv)(B) would have provided that a DC optimized inverter system qualifies as a microinverter if each DC optimizer paired with the inverter in a DC optimized inverter system meets the requirements of section 45X(c)(2)(E) and a taxpayer must produce and sell the inverter and the DC optimizers in the DC optimized inverter system together as a combined end product.

Several commenters agreed with the proposed rule permitting DC optimizers paired with an inverter to qualify as microinverters and receive the corresponding credit amount. One commenter suggested revising the definition of a DC optimized inverter systems to more clearly define the qualifying system components of a DC optimized inverter system. This commenter proposed that qualifying system components include items that control the DC output of one or more solar modules and are integral to the function of the inverter and modules. The Treasury Department and the IRS, in consultation with the Department of Energy, conclude that the additional confirmation the commenter is requesting is not necessary as it would not provide additional clarity. For this reason, the Treasury Department and the IRS decline to adopt this suggestion in the final regulations.

Several commenters requested that the final rules remove the requirement that a taxpayer produce and sell both the inverter and the DC optimizers in the DC optimized inverter system as a combined end product. One commenter expressed the view that the requirement distorts the market, provides an unfair advantage to companies that already manufacture both items, and requires companies to seek out partnerships solely for the purpose of obtaining the section 45X credit. Other commenters that manufacture both products state that the proposed requirement is inconsistent with standard industry practices where a manufacturer sells the items separately. In contrast, one commenter supported the “combined end product” requirement and suggested it also be applied to multi-module inverters to prevent multiple entities from claiming section 45X credits for the same system. Section 45X(c)(2)(A) defines an inverter as an end product that is suitable to convert DC electricity from one or more solar modules or certified distributed wind energy systems into AC electricity. For each type of inverter listed under section 45X(c)(2), section 45X(b)(1)(I) provides the applicable credit is determined as an amount equal to the product of each inverter's applicable amount multiplied by the capacity of such inverter. The section 45X credit is separately computed for each inverter. The Treasury Department and the IRS do not have the authority to allow a credit solely for a DC optimizer, because it does not convert DC electricity into AC electricity as the definition of inverter in section 45X(c)(2) requires. The Treasury Department and the IRS also do not have the authority to change the number of inverter units used to compute the available credit amount. For these reasons, the Treasury Department and the IRS decline to adopt these comments in these final regulations. However, while proposed § 1.45X-3(d)(5)(iv)(B) requires that the inverter and DC optimizer in the DC optimized inverter system must be produced and sold as a combined end product, the Treasury Department and the IRS clarify that the inverter and the DC optimizer do not need to be physically packaged together at sale, and the inverter and DC optimizer do not need to be fully interconnected and assembled at the time of sale.

Proposed § 1.45X-3(d)(5) would have clarified that a multi-module inverter may also qualify as a microinverter. Proposed § 1.45X-3(d)(5)(iii)(C) would have defined a multi-module inverter to mean an inverter that is comprised of an inverter with independent connections and DC optimizing components for two or more modules. Proposed § 1.45X-3(d)(5)(iii)(C) would have further provided that a multi-module microinverter is suitable to connect with one solar module if it is capable of connecting to one or more solar modules and regulating the DC electricity from each module independently before that electricity is converted into alternating current electricity. Proposed § 1.45X-3(d)(5)(iv)(C) would have provided that multimodule inverter qualifies as a microinverter if it meets the requirements of section 45X(c)(2)(E).

One commenter suggested revising the definition of a multi-module inverter to more clearly define the qualifying system components of a multi-module inverter. The commenter suggested that qualifying system components should be those items that control the DC output of one or more solar modules and are integral to the function of the inverter and modules. The same commenter also suggested revising the definition of a multi-module inverter to clarify that for a multi-module inverter to qualify as a microinverter, a taxpayer must produce and sell the inverter and the DC optimizers together as a combined end product. A different commenter agreed with this suggestion.

A few commenters suggested revising the definition of a multi-module inverter to provide that a multi-module inverter includes a DC optimized inverter system such that each DC optimizer may connect with more than one solar module and the credit amount in such a system is computed similarly to a DC optimized inverter system, except that the DC optimizers are not required to be sold with the inverter as a “combined end product.” Other commenters disagreed with this suggestion and support the proposed rule that would not have allowed solar modules to share a connection to a multi-module inverter.

The reasons provided for retaining the rule for DC optimized inverter systems also apply to adopting the requirement for multi-module inverters. The Treasury Department and the IRS think that requiring taxpayers to produce and sell the inverter and the DC optimizers together as a combined end product will create parity with DC optimized inverter systems and avoid potential abuse. For these reasons, the Treasury Department and the IRS adopt these comments in the final regulations.

c. Credit Amount

Proposed § 1.45X-3(d)(5)(iv)(A) would have provided that generally, the credit amount for a microinverter is equal to the product of 11 cents multiplied by the total rated capacity of the microinverter where the total rated capacity is expressed on an alternating current watt basis.

Proposed § 1.45X-3(d)(5)(iv)(B) would have clarified how to determine the credit amount for a DC optimized inverter system that qualifies as a microinverter. Proposed § 1.45X-3(d)(5)(iv)(B) would have provided that the credit amount for a DC optimized inverter system that qualifies as a microinverter is equal to the product of 11 cents multiplied by the lesser of the sum of the alternating current capacity of each DC optimizer when paired with

the inverter in the DC optimized inverter system or the alternating current capacity of the inverter in the DC optimized inverter system where capacity is measured in watts of alternating current converted from DC electricity by the inverter in a DC optimized inverter system.

One commenter requested that the alternating current capacity of each DC optimizer when paired with the inverter in the DC optimized inverter system be calculated as the product of the optimizer's rated input power capacity, the optimizer's DC-to-DC conversion efficiency percentage, and the inverter's DC-to-AC conversion efficiency percentage. Section 45X(b)(1)(I) provides the applicable credit is determined as an amount equal to the product of each inverter's applicable amount multiplied by the capacity of such inverter (expressed on a per alternating current watt basis). The requirement that capacity is “expressed on an alternating current watt basis” already factors in any DC-to-DC conversion efficiency upstream of the DC-to-AC conversion, and the inverter's DC-to-AC conversion efficiency percentage is accounted for by the use of “capacity of such inverter” (expressed on a per alternating current watt basis). Therefore, these requirements are duplicative of rules contained in the statutory text. For this reason, the Treasury Department and the IRS decline to adopt this suggestion in the final regulations.

5. Utility Inverter

Consistent with section 45X(c)(2)(G), proposed § 1.45X-3(d)(7)(i) would have defined a utility inverter as an inverter that is suitable for commercial or utility-scale systems, has a rated output of not less than 600 volt three-phase power, and has a capacity expressed on an alternating current watt basis that is greater than 125 kilowatts and not greater than 1000 kilowatts.

One commenter requested reducing the required rated output from “not less than 600 volt three-phase power” to “not less than 480 volt three-phase power.” Section 45X(c)(2)(G)(ii) defines a utility inverter, in part, as having “a rated output of not less than 600 volt three-phase power.” The Treasury Department and the IRS decline to adopt the commenter's request because defining a utility inverter to include those with a rated output of not less than 480 volt three-phase power would be inconsistent with the statute.

E. Qualifying Battery Components

Proposed § 1.45X-3(e)(1) would define a qualifying battery component as electrode active materials, battery cells, or battery modules.

1. Electrode Active Materials

a. In General

Proposed § 1.45X-3(e)(2)(i)(A) would have defined electrode active materials to include cathode electrode materials, anode electrode materials, and electrochemically active materials that contribute to the electrochemical processes necessary for energy storage. In general, electrode active materials are materials that are capable of being used within a battery for energy storage. Proposed § 1.45X-3(e)(2)(i)(A) would also have provided that the following materials in a battery or vehicle would not qualify for the section 45X credit as an electrode active material: battery management systems, terminal assemblies, cell containments, gas release valves, module containments, module connectors, compression plates, straps, pack terminals, bus bars, thermal management systems, and pack jackets. Proposed § 1.45X-3(e)(2)(v) would have clarified that a taxpayer may claim only one section 45X credit with respect to a material that qualifies as both an electrode active material and an applicable critical mineral.

Some commenters recommended altering the definition of electrode active materials as defined in section 45X(c)(5)(B)(i) and in proposed § 1.45X-3(e)(2)(i)(A). The Treasury Department and the IRS do not have the authority to alter the definition of electrode active materials as provided by the statute. For this reason, the Treasury Department and the IRS decline to adopt these recommendations in the final regulations.

One commenter raised a concern that certain definitions in the Proposed Regulations applicable to electrode active materials would inadvertently exclude separators from being treated as an eligible component because those definitions do not include language specific to the separator production process. As proposed § 1.45X-3(e)(2)(i)(D) specifically included separators in the definition of electrochemically active materials, such changes to definitions are unnecessary, and the Treasury Department and the IRS decline to adopt the commenter's recommendation.

b. Cathode Electrode Materials and Anode Electrode Materials

Proposed § 1.45X-3(e)(2)(i)(B) would have defined “cathode electrode materials

”

to mean the materials that comprise the cathode of a commercial battery technology, such as binders, and current collectors (that is, cathode foils). Proposed § 1.45X-3(e)(2)(i)(C) would have defined “anode electrode materials” to mean the materials that comprise the anode of a commercial battery technology, including anode foils.

A commenter recommended that the definition of cathode electrode materials in proposed § 1.45-3(e)(2)(i)(B) and of anode electrode materials in proposed § 1.45-3(e)(2)(i)(C) be clarified to specify that the materials be “battery-grade” so the precursor materials are eligible for the section 45X credit. Because these proposed definitions would require that the materials comprise the cathode or anode of a commercial battery technology, the Treasury Department and the IRS conclude that specifying that such materials be “battery-grade” would be redundant. For this reason, the Treasury Department and the IRS decline to adopt these recommendations in the final regulations.

Another commenter recommended that the definition of cathode electrode materials be clarified to address its concern that the qualifier “commercial battery technology” excludes hydrogen fuel cells contrary to the definition of the term in the statute, which contains no such qualifier. The Treasury Department and the IRS do not have the authority to alter the definition of electrode active materials as battery components as provided by the statute. For this reason, the Treasury Department and the IRS decline to adopt this recommendation in the final regulations. The Treasury Department and the IRS note, however, that although electrode active materials in general must be capable of being used within a battery for energy storage, such materials would still be eligible for the section 45X credit if they are also capable of being used in other applications, such as hydrogen fuel cells.

c. Electrochemically Active Materials

Proposed § 1.45X-3(e)(2)(i)(D) would define “electrochemically active materials that contribute to the electrochemical processes necessary for energy storage” to mean the battery-grade materials that enable the electrochemical storage within a commercial battery technology. In addition to the list of electrochemically active materials provided in section 45X(c)(5)(B)(i) (that is, solvents, additives, and electrolytic salts), these may include electrolytes, catholytes, anolytes, separators, and metal salts and oxides.

One commenter requested the definition of electrochemically active

materials explicitly include solid-state electrolytes. Solid-state electrolytes are included in the definition of electrochemically active materials because Proposed § 1.45X 3(e)(2)(i)(D) includes “electrolytes,” with no particular form required. The Treasury Department and the IRS conclude that specifying that such materials are included in this definition would be redundant. For this reason, the Treasury Department and the IRS decline to adopt these recommendations in the final regulations.

d. Battery Grade Materials

Proposed § 1.45X-3(e)(2)(i)(F) would have defined “battery-grade materials

”

to mean the processed materials found in a final battery cell or an analogous unit, or the direct battery-grade precursors to those processed materials. A few commenters requested the final rules clarify the meaning of direct battery-grade precursors. Commenters also requested the final rules provide that silane gas, ultra-high molecular weight polyethylene, and needle coke meet the definition of electrochemically active materials as direct battery-grade precursors. While the Treasury Department and the IRS understand the desire for assurance, listing specific precursors that qualify as electrochemically active materials would not be possible or advisable because it could imply that unlisted materials do not qualify as electrochemically active materials, particularly as battery technologies may evolve over time. For this reason, the Treasury Department and the IRS decline to adopt these recommendations in these final regulations.

e. Production Costs Incurred

Proposed § 1.45X-3(e)(2)(iv) would have provided that costs incurred for purposes of determining the credit amount includes costs as defined in § 1.263A-1(e) that are paid or incurred within the meaning of section 461 of the Code by the taxpayer for the production of an electrode active material only. Thus, under the Proposed Regulations, production costs with respect to an electrode active material would not include any costs incurred after the production of the electrode active material.

The Proposed Regulations would not have allowed direct material costs as defined in § 1.263A-1(e)(2)(i)(A), indirect material costs as defined in § 1.263A-1(e)(3)(ii)(E), or any costs related to the extraction or acquisition of raw materials to be taken into account as production costs. This limitation disallowed, for purposes of calculating the credit: the inclusion of the cost of acquiring the raw material used to produce the electrode active materials; the cost of materials used for conversion, purification, or recycling of the raw material; and other material costs related to the production of electrode active materials. The Proposed Regulations applied section 263A and the regulations under section 263A (section 263A regulations) solely to identify the types of costs that are includible in production costs incurred for the purpose of computing the amount of the section 45X credit. The Proposed Regulations did not apply section 263A or the section 263A regulations for any other purposes, such as to determine whether a taxpayer is engaged in production activities.

The preamble to the Proposed Regulations explained that the rationale for the proposed rule was that the credit for the production of electrode active materials provides incentives for taxpayers to conduct activities that add value to the production of electrode active materials. Merely purchasing raw materials may enable a taxpayer to produce an electrode active material but it is not by itself an activity that adds value. In addition, excluding the costs of acquiring electrode active materials mitigates the risk of crediting the production costs for the same underlying material more than once as that material is used in various stages of the production process. For these reasons, material costs were not creditable costs under the Proposed Regulations.

The Treasury Department and the IRS requested comments on the proposed rule for determining the costs incurred with respect to the production of electrode active materials. Specifically, comments were sought as to whether and how extraction and other similar value-added activities in the production of raw materials used in electrode active materials should be taken into account and how extraction should be defined, including whether the term should be defined consistent with proposed § 1.30D-3(c)(8). Comments were also requested with respect to applicable critical minerals, which are summarized in Part V.C. of this Summary of Comments and Explanation of Revisions. Many of these comments had similarities, and the reasoning and revisions in these final regulations are described in this Part IV.E.1.e. of this Summary of Comments and Explanation of Revisions and are adopted for both electrode active materials and applicable critical minerals.

Approximately 72 of the comments received addressed the definition and scope of production costs generally. Many commenters recommended that, contrary to the Proposed Regulations, all costs with respect to the production of electrode active materials be included in production costs for purpose of determining the credit, including direct material costs as defined in § 1.263A-1(e)(2)(i)(A), indirect material costs as defined in § 1.263A-1(e)(3)(ii)(E), and costs related to the extraction of raw materials.

A significant number of commenters focused their recommendations on material costs or the costs of extraction, but there was agreement among many of them that “costs of production” should be interpreted broadly to include all costs. In support of this position, commenters asserted that section 45X(b)(1)(J) and (M) do not place limits or otherwise qualify production costs eligible for the credit and that the regulations should not impose limitations not explicitly present in the Code itself. Some of these commenters also argued that, because the costs excluded from production costs in the Proposed Regulations are often a substantial or predominant portion of the total costs of producing some electrode active materials, substantial limitations on the inclusion of these costs would contradict Congress's goal of incentivizing the production of electrode active materials. Commenters also disputed that direct and indirect costs are not incurred in value-adding activities.

Some commenters also disagreed that the potential for over crediting (that is, crediting the same production costs multiple times) justifies denying a credit for these costs. A subset of these commenters disagreed that over crediting was a legitimate concern, arguing instead that section 45X provides a credit for costs incurred at different stages of production attributable to the same underlying material. Others agreed that over crediting might not be permissible but that the concern was insufficient to deny entirely credits for all costs that might be impermissibly claimed more than once for the same underlying material. In the view of these commenters, prohibiting crediting these same production costs multiple times would be the proper approach rather than entirely denying all credits for these costs. Some commenters noted that, in the case of certain specifically identified electrode active materials, there was no risk of crediting the same production costs multiple times and thus direct and indirect costs should be included in the costs of production for these electrode active materials. A third

set of commenters argued that credits should be permissible once under section 45X(b)(1)(M) for applicable critical minerals and again under section 45X(b)(1)(J) for electrode active materials.

In the case of electrode active materials that are precursors for the production of other electrode active materials, one commenter recommended that the cost of the precursor electrode active materials only be included in the cost of production for which a credit may be claimed if the precursor electrode active materials are completely consumed in the production process and are not used for any other commercial purpose.

A number of commenters proposed solutions to the problem of potentially crediting the same production costs multiple times. One solution commenters proposed was to reduce the basis of property for which a credit has been claimed by an upstream producer. Commenters also proposed a system under which a taxpayer would only be eligible for a credit on costs of material for which no other taxpayer had previously claimed a credit. This arrangement could be administered through a system of certifications in which taxpayers would be required to verify that its suppliers had not previously claimed credits for costs associated with the same materials for which the taxpayer is claiming credits. A commenter also urged that producers of electrode active materials be able to claim a credit if they can establish that the acquired electrode active materials and applicable critical minerals used in the production of electrode active materials were acquired from extraction or production outside the United States and thus were previously ineligible for a section 45X credit.

In addition to general comments regarding the inclusion of direct, indirect, and extraction costs, commenters recommended clarification about more specific costs, including costs associated with transportation. Another commenter requested the final rules be modified to include costs of the production of anodes used in the aluminum production to convert alumina into aluminum. Other commenters asserted that the costs of processing and purification of materials in the production of electrode active materials add value and should, on that basis, be included in the scope of the credit.

Several commenters recommended that the direct and indirect costs of the production of electrode active materials from recycled feedstock should be classified as production costs for purposes of the credit. According to one commenter, recycling processes begin with waste products at what is essentially a new supply chain.

A commenter supported the Proposed Regulations' exclusion of direct material, indirect material, and extraction costs from production costs eligible for the credit. This commenter was concerned that a contrary rule would invite fraud, waste, and abuse and that, in the case of extraction costs, would be difficult to administer without the creation of a tracing system.

With respect to costs related to extraction, the Proposed Regulations would have excluded extraction costs because extraction could be far removed, particularly in the case of electrode active materials, in the supply chain from the ultimate production of the eligible component. However, commenters highlighted the critical importance of extraction to the production of both applicable critical minerals and electrode active materials as well as the close connection these costs often have to the final production of these materials.

The Treasury Department and the IRS have reconsidered the treatment of extraction costs in these final regulations for taxpayers that extract raw materials domestically and for taxpayers that acquire either domestically or foreign-sourced extracted raw materials. For both electrode active materials and applicable critical minerals, the final regulations in §§ 1.45X-3(e)(2)(iv) and 1.45X-4(c)(3), respectively, allow taxpayers to include extraction costs related to the extraction of raw materials in the United States or a United States territory, but only if those costs are paid or incurred by the taxpayer that claims the section 45X credit with respect to the relevant electrode active material or applicable critical mineral. The Treasury Department and the IRS note that the section 45X credit is available only to taxpayers that produce and sell an eligible component. Thus, the final regulations provide that extraction costs may be included in production costs consistent with the rules provided under section 263A only if such costs are incurred by the taxpayer that claims the section 45X credit with respect to the relevant applicable critical mineral or electrode active material. The Treasury Department and the IRS have determined that this inclusion of extraction costs incurred by the taxpayer most accurately captures the meaning “the costs incurred by the taxpayer with respect to the production of” applicable critical minerals and electrode active materials under section 45X(b)(1)(J) and (M). If, however, a taxpayer acquires extracted raw material as a direct (or indirect) material cost, the material costs may be included as production costs consistent with the rules provided under section 263A regardless of whether the extracted material is domestically- or foreign-sourced.

With respect to direct and indirect material costs, the Proposed Regulations would have excluded direct and indirect material costs from production costs for both applicable critical minerals and electrode active materials. The Proposed Regulations excluded material costs from production costs based on an interpretation of the term “costs incurred by the taxpayer with respect to production” in section 45X(b)(1)(J) and (M) as being limited to value-added activities in the production process. Electrode active materials and applicable critical minerals differ from all other eligible components described in section 45X because their credit amounts are calculated as a percentage of production costs rather than specifying a fixed dollar amount or rate. The preamble to the Proposed Regulations stated that the mere purchase of materials does not itself add value in a production process despite being a necessary part of such process. Furthermore, it is unlikely that Congress intended to allow production costs associated with applicable critical minerals or electrode active materials to be credited multiple times, due to the high risk of fraud, waste, and abuse; the administrative burden of preventing these outcomes; and the limited effectiveness in supporting domestic production of new eligible components. The exclusion of direct and indirect material costs addressed these concerns.

Numerous commenters highlighted the importance and appropriateness of including material costs in production costs. There was, however, disagreement as to whether and to what extent the costs of non-U.S. produced constituent elements, materials, and subcomponents used in the production of electrode active materials should be included in production costs. Some commenters recommended that the costs of all materials be included while others urged limitations to only credit materials produced domestically. One commenter proposed that the final regulations modify the proposed rule regarding constituent elements, materials, and subcomponents used in the production of applicable critical minerals to distinguish between imports of materials otherwise available from domestic sources and imported

materials that are not available from domestic sources.

The Treasury Department and the IRS, after consultation with the Department of Energy, have reconsidered the proposed exclusion of all material costs based on these comments. The final regulations adopt a rule allowing taxpayers that produce applicable critical minerals and electrode active materials as specified in the statute to include direct and indirect materials costs (as described in the referenced section 263A regulations) in production costs if certain conditions are met, but only if those direct or indirect material costs do not relate to the purchase of materials that are an eligible component at the time of acquisition (such as an electrode active material or applicable critical mineral). In addition, two examples illustrating the revised production costs rule are included in § 1.45X-3(e)(2)(iv)(A)(

2

).

In finalizing this rule, the Treasury Department and the IRS considered the provisions of section 45X and determined this final rule appropriately implements the statute as a whole. Section 45X(a)(1) and (2) limit the section 45X credit to the sum of the credit amounts determined under section 45X(b) with respect to each eligible component that is produced by the taxpayer and, during such taxable year, sold to an unrelated person in the taxpayer's trade or business. The statute allows a section 45X credit for the sale of an applicable critical mineral or electrode active material produced and sold by the taxpayer in its business. The section 45X credit for an applicable critical mineral or electrode active material is equal to 10 percent of the costs incurred by the taxpayer with respect to production, under section 45X(b)(1)(M) and (J), respectively.

In calculating a taxpayer's costs incurred in the production of applicable critical minerals and electrode active materials, it is necessary to consider situations involving the integration of eligible components (whether directly made by the taxpayer or purchased from another taxpayer) in the course of producing an applicable critical mineral or electrode active material. Generally, integrating one eligible component into another produced eligible component results in two credits pursuant to section 45X(d)(4) if the taxpayer produced both, while integrating a purchased eligible component into another produced eligible component will only result in a credit for the eligible component produced by the taxpayer. In the case of an applicable critical mineral or electrode active material, however, the section 45X credit calculation differs from the other eligible components. Thus, further examination was needed to determine how a credit should be calculated in such a case.

The Treasury Department and the IRS considered the treatment of a vertically integrated taxpayer. For example, assume a taxpayer produced an applicable critical mineral or electrode active material and incurred $50X of costs with respect thereto (EC 1) and integrated EC 1 into a separate applicable critical mineral or electrode active material (EC 2), incurring an additional $100X of costs with respect to the production of EC 2 (total production costs of $150X), with EC 2 ultimately being sold by the taxpayer to an unrelated person. In calculating the section 45X credit, pursuant to section 45X(d)(4), taxpayer is treated as having sold an eligible component to an unrelated person if such component is integrated, incorporated, or assembled into another eligible component which is sold to an unrelated person. It is important to note that section 45X makes no distinction between integrated eligible components that were purchased or produced by the taxpayer. As section 45X(d)(4) directs the taxpayer to treat itself as selling both EC 1 and EC 2 to the unrelated person, it is necessary to determine a credit for each EC 1 and EC 2 when both were produced by the taxpayer.

In this example, the $50X of production costs attributable to EC 1 were not incurred with respect to the production of EC 2, since the production of EC 2—in other words, the substantial transformation of EC 1 into EC 2—does not include the production of EC 1. Thus, the taxpayer would be eligible for a total section 45X credit of $15X: $5X (10% of $50X) for EC 1 and $10X (10% of $100X) for EC 2. If the $50X of production costs attributable to EC 1 were included for both EC 1 and EC 2, then the same costs would be double credited. Double crediting would result in the taxpayer generating a $20X credit from the sale of EC 1 and EC2, which would provide an increased credit amount as compared to the credit amount that should result from the $150X of actual production costs incurred (or, stated differently, a section 45X credit that was 13.33 percent of the taxpayer's actual $150X of production costs in the example). The correct result is taxpayer should be viewed as having incurred $50X of production costs for EC 1 and $100X of production costs for EC 2, resulting in a $15X credit, which also matches 10 percent of the taxpayer's actual production costs ($150X) and does not create a double crediting of costs.

Alternatively, consider a taxpayer that, instead of producing EC 1, purchases EC 1 for $60X. The taxpayer then spends another $100X producing EC 2, using EC 1. Similar to the vertically integrated taxpayer, when the taxpayer sells EC 2, pursuant to section 45X(d)(4), the taxpayer is treated as having sold EC 1 and EC 2 to an unrelated person. The difference is that in this case the taxpayer did not produce EC 1, and therefore the taxpayer does not satisfy section 45X(a)(1)(A) for a section 45X credit for the sale of EC 1. If the taxpayer were permitted to include the costs for EC 1 ($60X) in calculating the credit for EC 2, then the taxpayer would receive a larger credit for producing EC 2 than if the taxpayer had produced both EC 1 and EC 2. Without a clearer indication in the statute that Congress intended to treat these two fact patterns differently, in a way that disadvantages vertically in

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