The Section 45X Advanced Manufacturing Production Credit
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November 7, 2024
The Section 45X Advanced Manufacturing Production Credit
P.L. 117-169, commonly known as the Inflation Reduction Act of 2022 (IRA), enacted a The 45X credit subsidizes the production of five types of goods: solar energy components, wind energy components, battery components, inverters, and critical minerals. When the credit was enacted, its list of 50 eligible critical minerals precisely matched the February 2022 list of critical minerals published by the U.S. Geological Survey (USGS). Changes to future USGS lists will not affect which minerals qualify for the credit; adding new minerals, or removing existing ones, can only be done by an act of Congress. (Congress added metallurgical coal in P.L. 119-21.) new tax credit for the production of component parts and critical minerals used in clean energy equipment. The credit is referred to as either the Advanced Manufacturing Production Credit or the 45X credit based on the credit’sits Internal Revenue Code section (26 U.S.C. §45X). This In Focus describes the credit, summarizes its legislative history, and discusses its potential impacts on the economy, the environment, and the federal budget.
Description of the 45X Credit
). This In Focus summarizes the 45X credit and policy issues that have arisen following its creation.
Credit Description
The 45X credit subsidizes the production of five types of goods: solar energy components, wind energy components, battery components, inverters, and critical minerals. Businesses may only claim the credit for goods produced in the United States or its territories. Goods produced from recycled materials qualify for the credit. While Section 45X provides credits for many different clean energy goodsa wide array of products, there are three general methods that are used to calculate thefor calculating credit values for different goods:
• GoodsGoods used to produce, transmit, or store energy
receive credits proportional to their output, transmission, or energy storage capacities. For example, solar modules are eligible for a credit equal to 7 cents multiplied by the module’'s capacity per direct-current watt; commercial inverters are eligible for a credit equal to $2 multiplied by the inverter’'s alternating-current-watt capacity; and battery cells are eligible for a credit of $35 multiplied by the maximum kilowatt-hour capacity of the cell.
•
Subcomponent goods are eligible for either flat credits
or credits proportional to the subcomponents’' size or weight. Blades used in wind turbines, for example, are eligible for a flat credit of 2 cents per blade. Polymeric backsheets (which insulate the backs of solar panels) are eligible for a credit of 40 cents per square meter, and torque tubes (which are used to cojoin and support solar panels) are eligible for a credit of 87 cents per kilogram.
•
Critical minerals and electrode active materials, except for metallurgical coal, are are
eligible for credits equal to 10% of the production costs of the given mineral or material. According to a final rule released by the IRS in October 2024, the costs2024 IRS rule, the costs of extracting, acquiring, processing, purifying, refining, and converting critical minerals and electrode active materials are consideredall count as qualifying production costs.
One exception to these general rules is that offshore wind vessels—vessels used to transport and install turbines at offshore wind farms—are eligible for a credit equal to 10% of the vessel’'s sales price. Sales prices are not used to calculate credit amounts for any other good. A second exception is that solar-grade polysilicon, which is arguably more similar to a critical mineral than a subcomponent part, is eligible for a credit of $3 per kilogram.
To qualify for the credit, goods generally must be sold by producers to “unrelated persons,” a term interpreted by the IRS to mean individuals and organizations not under common control. However, 26 U.S.C. §45X(a)(3)(B)(i) states that “[a]t the election of the taxpayer ... a sale of components by such taxpayer to a related person shall be deemed to have been made to an unrelated person.” Based on its interpretation of this language, the IRS created a Related Persons Election (RPE) in its final rule. Under the RPE, a taxpayer may receive the 45X credit if “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.” This allows certain intercompany sales to qualify for the credit, which is consistent with the IRS’s interpretation of Section 45X as “contribut[ing] to the development of secure and resilient supply chains.”
Section 45X credits are calculated based on the year a product is sold, which may differ from the year it is produced. Businesses may receive full credits for goods sold from 2023 through 2029, then may receive 75% of normal credit amounts for goods sold in 2030, 50% for goods sold in 2031, and 25% for goods sold in 2032. The credit expires for most 45X credit-eligible products in 2033. Neither the phaseout nor the expiration apply to the credits for critical minerals.
Production facilities that have previously been awarded a qualifying advanced energy project tax credit (26 U.S.C. §48C) are not eligible for the 45X credit. A facility that has been awarded a Section 48C credit for some but not all of its production units may claim the 45X credit for production units not used to claim the 48C credit.
Budgetary Cost and Economic Impact
According to estimates published by the Joint Committee on Taxation (JCT) in December 2023, the 45X credit is projected to reduce federal revenues by $72.7 billion between FY2023 and FY2027. Of the 41 energy tax expenditures studied by the JCT, the 45X credit had the highest projected five-year cost.
The 45X credit could potentially bolster domestic clean energy supply chains, which could lead to lower greenhouse gas (GHG) emissions, increased energy security, and more domestic manufacturing jobs. The credit’s impact on clean energy output and domestic onshoring depends on its ability to change producers’ behavior. If the credit increases the number of clean energy manufacturing facilities or the amounts produced at existing facilities, it could increase domestic manufacturing and decrease GHG emissions. If the credit is instead claimed by producers who would have manufactured their products absent the credit, then Section 45X mainly provides
The Section 45X Advanced Manufacturing Production Credit
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windfall benefits to producers. Likely due to the recent enactment of the credit, a CRS search did not identify any published studies attempting to estimate its economic and environmental effects.
Investment in manufacturing facilities for batteries, solar energy, wind energy, and critical minerals has increased since the enactment of the IRA. Between the second quarter of 2022 and the second quarter of 2024, such investment increased by 686% in inflation-adjusted dollars. It is not clear how much of this increase is due to the 45X credit as opposed to other policy reforms or nonpolicy factors. The increase may partially owe to technological and economic trends predating the IRA, as investment in the previously mentioned types of manufacturing facilities grew 169% between the second quarter of 2020 and the second quarter of 2022. Total investment in such facilities was $17.1 billion (in 2023 dollars) as of the second quarter of 2024.
Section 45X credits subsidize the production of intermediate clean energy goods. Producers use intermediate goods to produce final goods sold to consumers. Critical minerals, wind turbine blades, and other items subsidized under Section 45X are generally used to produce or transmit electricity (the final good, in this case). Traditional economic theory suggests that taxing or subsidizing intermediate goods is less economically efficient than taxing or subsidizing final goods because it distorts the choice of inputs. The 45X credit may be a less efficient means of cutting greenhouse gas emissions than credits that directly subsidize zero-emissions electricity production. (Studies find that tax credits targeted at renewable energy production are a cost-efficient means of reducing GHG emissions.)
Direct Payments and Credit Transfers
For most goods, 45X credits are calculated based on the year the product is sold, which may differ from the year it is produced. Credits for critical minerals are based on the year of production. The 45X credit is in place temporarily, meaning it is scheduled to expire under current law: Facilities that have previously been awarded a credit under 26 U.S.C. §48C are ineligible for the 45X credit. The 45X credit was enacted as part of the IRA in 2022. It remained unchanged for three years before being reformed by P.L. 119-21, commonly known as the One Big Beautiful Bill Act, in 2025. P.L. 119-21 made six changes to the 45X credit. First, the act disallowed the credit for wind energy components produced and sold after December 31, 2027. Under the IRA, credits for wind energy components were subject to the same phaseout schedule as for solar energy components, battery components, and inverters (as described above). Second, whereas the IRA enacted permanent tax credits for critical minerals, P.L. 119-21 scheduled those credits to gradually phase out from 2031 to 2034, as described above. Third, P.L. 119-21 allowed metallurgical coal—the type of coal used in steelmaking—to qualify as a critical mineral under Section 45X. The credit equals 2.5% of production costs (as compared to 10% for other critical minerals), and qualifying metallurgical coal must be produced either in the United States or abroad no later than December 31, 2029. Metallurgical coal is the only 45X-eligible product not subject to a domestic production requirement. Fourth, as described in CRS Report R48611, Tax Provisions in P.L. 119-21, the FY2025 Reconciliation Law, P.L. 119-21 applied three "foreign entity" restrictions to the 45X credit. These restrictions were meant to limit the involvement of companies and individuals from China, Russia, Iran, and North Korea in the downstream supply chains of companies qualifying for the credit. Fifth, P.L. 119-21 modified 26 U.S.C. §45X(d)(4) such that if an eligible "primary component" is integrated, incorporated, or assembled into a "secondary component" produced at the same manufacturing facility, and if the secondary component is sold to an "unrelated person," then the 45X credit may be allowed for the sale of the secondary component only if at least 65% of the total direct material costs paid or incurred by the taxpayer to produce such secondary component are attributable to primary components mined, produced, or manufactured in the United States. This modification applies to components sold during taxable years beginning after December 31, 2026. Sixth, P.L. 119-21 required that battery modules qualifying for the credit be composed of all other essential equipment needed for battery functionality, such as current collector assemblies and voltage sense harnesses, or any other essential energy collection equipment. IRA Enactment and P.L. 119-21 Reforms
Direct Payments and Credit Transfers
The 45X credit is eligible for two tax mechanismstwo new programs known as direct payments and credit transfers. Both programs apply exclusivelymechanisms apply only to tax credits enacted or modified by the IRA.
Direct payments, sometimes called elective payments or direct cash payments, allow certain untaxed organizations to receive cash payments of equivalent value to 12 energy tax credits. Because tax credits are traditionally used to reduce the amount of taxes an organization owes, untaxed entities—including 501(c)(3) organizations and rural electricity cooperatives—have no use for such credits. The direct payments program, however, provides incentives for untaxed entities to undertake clean energy investments, regardless of their non-tax-paying status.
Credit transfers were enacted under the IRA to provide an incentive for clean energy investments among entities with low tax liabilities. With credit transfers, businesses may buy and sell certain IRA tax credits in exchange for cash. With an ordinary (nonrefundable) tax credit, if the value of the credit exceeds a company’s tax liability, the company does not receive a refund for the excess credit amount. For example, if a business owes $40,000 in taxes but is eligible for a credit worth $65,000, the credit reduces the business’s tax liability to $0, but the government does not send the business a check for the remaining $25,000. (The remainder can offset tax liabilities up to 20 years in the future, but companies that consistently have credits in excess of their liabilities can still have unused credits over the long term.)
Under the credit transfers program, the hypothetical company described above could sell its credit for a price between $40,000 and $65,000, while the credit buyer could benefit by reducing its tax liabilities by $65,000 after having bought the credit for less than that amount. Firms purchasing 45X credits cannot receive them as direct payments.
Unlike with most IRA energy credits, the 45X credit can be claimed as a direct payment by any entity, including for- profit businesses, for up to five years. In effect, this allows all organizations to receive maximum-value 45X credits. When the JCT estimated the 10-year cost of the IRA in August 2022, it projected that direct payments would constitute 48% of the credit’s cost.
Nonetheless, the 45X credit has also been among the most highly traded IRA credits. Trading the 45X credit would generally seem unnecessary, given that businesses may already receive the full credit amount in the form of a direct payment. One possible explanation for this phenomenon is timing: Businesses may only receive direct payments after filing their taxes, but credits may be sold for cash at any time. When financing new expenses, businesses may prefer to sell their 45X credits at less than their full value instead of taking out interest-bearing loans. Research shows that 45X credits generally traded at 92-95 cents on the dollar in the first half of 2024, suggesting that 45X credit sellers are unwilling to sell the credit far below its maximum value.
Legislative Reform Proposals
Goods qualifying for the 45X credit must be produced in the United States, but there are no prohibitions on foreign ownership of the companies receiving the credits. Various legislative proposals aim to reduce the potential influence of foreign adversaries or foreign entities of concern on 45X credit-eligible supply chains. The Protecting American Advanced Manufacturing Act (H.R. 6762; S. 3486) would prohibit companies from receiving the 45X credit if they are “associated with foreign adversaries,” including companies that have 10% or higher ownership from Chinese, Iranian, Russian, or North Korean nationals, or companies that have debt, leasing, or manufacturing arrangements with entities linked to those countries. The American Tax Dollars for American Solar Manufacturing Act (S. 4873) would disallow 45X credits for goods produced by foreign entities of concern, including entities “owned by, controlled by, or subject to the jurisdiction or direction of” the governments of China, Iran, Russia, and North Korea. H.R. 9338 would impose the same restriction and would also remove 45X credit eligibility for battery components “produced using technology designed, developed, manufactured, licensed, or supplied by a foreign entity of concern.”
The Nuclear USA Act of 2024 (H.R. 9201) would add uranium to the list of eligible critical minerals. Uranium is the primary mineral used in nuclear power plants, whereas the current list of eligible critical minerals targets those used in batteries and renewable energy equipment.
Nicholas E. Buffie, Analyst in Public Finance
IF12809
The Section 45X Advanced Manufacturing Production Credit
https://crsreports.congress.gov | IF12809 · VERSION 1 · NEW
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material.
Credit transfers allow businesses to buy and sell certain IRA credits in exchange for cash. With ordinary tax credits, if the value of the credit exceeds a company's tax liability, the company does not receive a refund for the excess credit amount. By allowing tax credit sales, businesses with large credits and low tax liabilities are more likely to reap the full benefits (or something close to it) of 45X and other credits.
Cost and Impact
According to estimates published by the Joint Committee on Taxation (JCT) in December 2025, the 45X credit is projected to reduce federal revenues by $20.1 billion from FY2025 through FY2029. Of the 53 energy and natural resources tax expenditures studied by the JCT, the 45X credit had the fifth-highest projected five-year cost.
The 45X credit could bolster domestic clean energy supply chains, which could lead to lower greenhouse gas (GHG) emissions, increased domestic energy security, and more manufacturing jobs. The credit's impact on clean energy output and domestic manufacturing depends on its ability to change producers' behavior. If the 45X credit increases the number of clean energy manufacturing facilities or the amounts produced at existing facilities, it could increase domestic manufacturing and decrease emissions. If the credit is instead claimed by producers who would have manufactured their products absent the credit, then Section 45X mainly provides windfall benefits to credit recipients. If credit-eligible goods mostly displace imports, the credit would have little effect on GHG emissions but may enhance domestic energy security, as much of the world's clean energy equipment and critical minerals are currently produced in China.
Perhaps due to the relative newness of Section 45X, CRS did not identify any post hoc analyses of the credit's broad economic or environmental effects. Various forward-looking studies, published from 2023 to 2025, projected the credit's effects on the prices of clean energy products; such studies did not examine how these lower prices would affect GHG emissions, U.S. reliance on foreign imports, or domestic manufacturing employment. These studies found that the 45X credit would lower the costs of solar and wind components to below average import prices (though the studies were conducted before P.L. 119-21 enacted the end-of-2027 termination date for wind energy components). Studies also projected that the 45X credit would lower the costs of producing electric vehicle (EV) batteries, which would lower the final costs of EVs bought by consumers.
Investment in manufacturing facilities for batteries, solar energy components, wind energy components, and critical minerals has increased since the enactment of the IRA. Between the second quarter of 2022 and the second quarter of 2026, such investment rose from $1.9 billion to $6.2 billion in constant 2024 dollars, an increase of 227%. It is not clear how much of this increase is due to the 45X credit as opposed to other policy reforms or nonpolicy factors.
Section 45X subsidizes the production of what economists call intermediate goods. Producers use intermediate goods to manufacture final goods sold to consumers. Critical minerals, wind blades, and other items subsidized under Section 45X are generally used to produce or transmit electricity (the final good, in this case). Traditional economic theory suggests that taxing or subsidizing intermediate goods is less economically efficient than taxing or subsidizing final goods because it distorts the choice of inputs. The 45X credit may therefore be a less efficient means of reducing GHG emissions than credits that directly subsidize zero-emissions electricity production. (Studies find that credits for renewable electricity generation are a cost-efficient means of cutting emissions.)