The section 45X tax credit

What is the 45X tax credit?

The Inflation Reduction Act of 2022 established the section 45X Manufacturing Production Tax Credit (PTC) to expand the domestic supply chain of critical components used in advanced energy production. According to 45x tax credit guidance, wide range of components qualify for the tax credit. Companies with vertical integration can be eligible to claim credits for multiple products within the operating footprint.

There is no application process to claim the credits. 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 for full benefits through tax year 2029 and partial benefits through tax year 2032.

Manufacturers often have significant depreciation that reduces taxable income, which can reduce the attractiveness of tax credits when they cannot be utilized quickly. In order to assist with this industry challenge, the program offers two alternative monetization options:

1. Direct pay – a manufacturer may request direct payment of the credit beginning in a specific tax year and the subsequent four tax years during the credit period
2. Transferability of the credits, partial or full, to unrelated taxpayers to facilitate liquidity for the manufacturer

Investing in facilities and technologies eligible for the section 45X credit significantly enhances a company's return on investment (ROI) by reducing tax liability, improving cash flow and allowing for reinvestment into innovation or business development. The transferability of the 45X credit is a strategic advantage that offers companies the flexibility to monetize credits that cannot immediately be utilized. Transferability can directly impact financial performance and ROI.