Incentive opportunities and compliance solutions for manufacturers

It’s been almost two years since the Inflation Reduction Act (IRA) was signed into law and many incentives are available in the form of tax credits for the manufacturing industry. Below are some of the key IRA programs and compliance requirements that are affecting manufacturers.

Section 48C:

Section 48C offers an investment tax credit for manufacturing expansions. The initial $4 billion was allocated in March 2024 to various technologies, providing a 30% transferable tax credit. The second round, totaling $6 billion, requires a concept paper application and is due to the Department of Energy (DOE) by June 21. Applicants who were not awarded in the first round can apply for the second round. The process involves submitting a concept paper, with the DOE and Treasury reviewing submissions. Selected concept papers will be invited to submit full applications, aiming to receive allocation letters by Jan. 5, 2025.

Various investments can qualify for this tax credit. These include clean energy manufacturing, such as solar, wind, battery and other technology production. The second category covers industrial decarbonization, which refers to projects that reduce current state greenhouse gas emissions by at least 20% or more. Lastly, the third type of eligible projects are critical materials processing, refining and recycling.

Meeting the PW&A requirement is critical to these projects as failure to do so could result in a substantially lower credit or forfeit of the credit.

45X Production Tax Credit:

The Inflation Reduction Act introduced Section 45X, which offers a production tax credit for domestically manufacturing components used in solar and wind energy, inverters, battery components, and critical minerals. Manufacturers who produce and sell the qualifying product while meeting the requirements of the program can claim the credits on their tax return. The program provides full benefits through tax year 2029 and partial benefits through tax year 2032. The eligible components include a wide range of items such as:

• Solar energy components: This includes things like solar panels (photovoltaic cells), solar modules, photovoltaic cells and wafers, solar grade polysilicon, torque tubes, structural fasteners and polymeric back sheets.
• Wind energy components: Such as blades, nacelles, towers and both fixed and floating platforms for offshore wind foundations, as well as vessels related to offshore wind.
• Inverters: There is a wide variety of inverters to convert energy generated into power usable.
• Battery storage components: This includes electrode active materials, battery cells and battery modules, focusing on the production of operational components rather than supporting hardware.
• Critical mineral processing and refining: There are 50 critical minerals, essential for modern technology and clean energy solutions that qualify for the tax credit.

If you are thinking about 45X you should consider your products, process and commercial structure. Below are five things we suggest manufacturers to consider:

1. Substantial transformation: Ensure that your product results in substantial transformation.
2. U.S. activity: The manufacturing process must occur within the United States.
3. Anti-abuse rule: The product should be of high quality and intended for a qualifying end use.
4. Related party sales and transfers: Be mindful of transactions involving related parties.
5. Documentation: Clearly document that all requirements are met.

Section 30D

Section 30D offers federal tax credits to encourage investment in energy-efficient transportation options. These credits apply to the purchase of electric vehicles (EVs) and plug-in hybrid vehicles. The maximum credit remains at $7,500 per vehicle but is now divided into two equal parts of $3,750 each. One part is based on meeting critical minerals requirements, while the other depends on meeting battery components requirements.

The critical minerals requirement specifies that a portion of the critical minerals used in a vehicle’s battery must either originate from the U.S. or a country with which the U.S. has a free trade agreement or be recycled within North America.

Domestic content:

Domestic content is a focus area where U.S. based manufacturers can gain a competitive advantage by emphasizing their domestic activity. Manufactured domestic content refers to the goal of expanding the U.S. supply chain for critical components. An applicable project satisfies the domestic content requirement if the steel or iron requirement is satisfied, and the manufactured products requirement is satisfied.

Below is how to prepare for domestic content requirements:

1. Categorization: Clearly categorize manufactured products and their components.
2. Documentation: Thoroughly document manufacturing activities.
3. Costing models: Develop costing models with traceability for manufactured products.
4. Data protection: Plan to share cost data with customers through trusted third parties.
5. Contract review: Review contracts with domestic content reporting requirements before finalizing supply agreements.

Watch a 5-minute demo of our domestic content compliance tool:

Baker Tilly’s specialized IRA team can help simplify this process and keep you informed on the everchanging guidance. Our industry specialists can help your organization understand the complexities and how to effectively position your project to receive and maximize eligible credits.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.