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Buying §45X Advanced Manufacturing Production Credits & Due Diligence Considerations

Published:
April 25, 2024
Updated:
January 22, 2025
8 min read

Buying 45X Advanced Manufacturing Production Credits & Due Diligence Considerations

A guide to buying §45X tax credits and conducting due diligence.

Connie Chern, CPA

Head of Transactions and Finance

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The IRA created a new clean energy tax credit, the §45X AMPC

The Inflation Reduction Act of 2022 introduced a new class of production tax credit — the §45X advanced manufacturing production credit (AMPC). The credit is for eligible components produced and sold after December 31, 2022 and is transferable under §6418.

The §45X tax credit is generated via the production and sale of:

  • Sustainable energy components: Five categories of eligible sustainable energy components including solar modules, battery cells, or wind blades, nacelles, or towers
  • Critical minerals: 50 applicable critical minerals that attain a specified purity level

A list of eligible components, critical minerals, and related tax credit amounts is included below.

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§45X transfers have taken off since the IRS issued guidance in December 2023

In December 2023, the Department of the Treasury released proposed regulations on §45X tax credits, which opened the door for transactions to begin.

Notably, Fiserv (NYSE: FI) agreed to purchase $700M in §45X tax credits from First Solar (NASDAQ: FSLR) at a price of $0.96 per dollar of credit, resulting in $28M of tax savings for the 2023 tax year. The public announcement of a large-scale transaction has led to significant interest from corporate buyers in §45X tax credits.

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Key characteristics of §45X AMPCs

Generated over time

§45X AMCPs are generated on a rolling basis from the (i) production and sale of eligible components or the (ii) conversion of critical minerals to a specific purity level. As we'll discuss below, this opens the door for buyers to negotiate quarterly or monthly payment terms.

No recapture risk or prevailing wage and apprenticeship requirement

There is no recapture or prevailing wage and apprenticeship (PWA) provision, reducing risk associated with §45X tax credits.

Eligible for direct pay or transfer

As with §45Q and §45V credits, generators of §45X credits may elect to be treated as an “applicable entity” for the limited purpose of making an elective payment election, also known as direct pay.

Careful consideration should take place before electing in or out of direct pay for §45X credits. The election is rigid in that there are no partial elections:

  • The election applies to all eligible credits from the applicable facility, and
  • The election applies to the entire taxable year for which the election was made and all subsequent taxable years ending before January 1, 2033

Additionally, an electing taxpayer may file an irrevocable election to revoke the elective payment, but the revocation applies to the entire taxable year in which the election to revoke takes place and all subsequent taxable years remaining before January 1, 2033.

In short, AMPC generators may elect to take five years of direct pay with the IRS or transfer the credits to another taxpayer, and the ability to do both is significantly limited.

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Commercial guidelines for buyers of transferred §45X tax credits

Sellers

Sellers of §45X tax credits range from large, multinational companies to smaller, domestic producers. Tax credit buyers may require sellers to procure tax credit insurance if there is uncertainty around their longevity and/or ability to cover indemnities relating to the sale of credits.

"Unaffiliated third party" buyers

In order to generate AMPCs from the production and sale of eligible components, buyers of manufactured components must be unaffiliated third parties unless a related party election has been made under §45X(a)(3)(B).

All sales must be for “productive purposes” and not solely to claim the §45X tax credit.

Pricing

In Q1 2024, median pricing to buyers ranged from $0.91 to $0.95 for single-year 45X credits. The relatively high pricing reflects the lower risk profile of AMPCs compared to investment tax credits (ITCs).

Drivers of larger price discounts include smaller transaction sizes, less established sellers, and forward contracts for credits that have not yet been generated.

Payment terms

AMPCs are sold in arrears of generation. Unless the AMPCs are sold in a single closing, most sellers will accept quarterly or monthly payment terms, allowing buyers to recognize the value of the credit before issuing payment to sellers.

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Due diligence checklist for §45X tax credits

While §45X credits are not subject to PWA requirements and do not carry the same recapture or basis-related qualification risks as §48 ITCs, they do carry additional qualification risks that are absent from other, power generation-related tax credits such as the §45 production tax credit (PTC).

Buyers and their advisors should conduct due diligence on several core aspects of §45X tax credit qualification to avoid a situation where credits are improperly accounted for and subsequently disqualified — a risk that flows through to the buyer in a transferability transaction. 

Diligence point Required documentation Explanation
Correct credit amount Description of component type with technical specifications; copies of audited production and sales volumes. Section §45X provides a list of eligible components, their associated AMPC amount, and any design parameters / capacity limits that are required to qualify for credits. The production of eligible components must be completed in 2023 or later, and the tax year where credits may be claimed is driven by the year in which the sale is completed.
Ensure components were “produced by taxpayer” Third-party verification that the seller conducted “substantial transformation” of the related components. Copies of any contract manufacturing agreements. The credit is awarded only to the taxpayer who conducted the “substantial transformational” in a trade or business of the taxpayer. The regulations differentiate between “substantial transformation” versus “mere assembly” where the former is required to claim a credit. Parties to a contract manufacturing arrangement may choose who claims the credit by signed agreement prior to the completion of eligible components.
Domestic production Documentation of the physical location where the eligible component was produced. Only eligible components produced in the United States and its territories are eligible for a tax credit. Elements, sub-components, and materials used in the product of an eligible component are not subject to the domestic requirement.
No §48C investment tax credits Confirmation the facility is not claiming §48C investment tax credits anywhere in the assembly line for the §45X components. Facilities that claim §48C investment tax credits are only eligible for AMPCs if the assembly line for §45X eligible components operates independently from the §48C assembly line or factory.
Third-party sale for productive purposes Confirmation that components are sold, for a productive purpose, to third parties, or that a valid “related person election” is/will be filed with the IRS. Generally, §45X tax credits are only generated upon component sales to a third-party, so a sale to an affiliate would not generate a tax credit until subsequent resale by the affiliate to a third party. An annual election can be made with the IRS to treat an affiliate as a third party for purposes of determining §45X tax credits.

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Eligible components and related §45X tax credit amounts

The table below shows the eligible components that qualify for §45X credits as well as the amount of tax credit.

Solar energy components
Eligible Component Value per Unit Unit
Thin film or crystalline photovoltaic cell $0.04 Capacity in Wdc
Photovoltaic wafer $12.00 Square meter
Solar-grade polysilicon $3.00 Kilogram
Polymeric backsheet $0.40 Square meter
Solar module $0.07 Capacity in Wdc

Wind energy components
Eligible Component Value per Unit Unit
Related offshore wind vessel 10% Sales price of vessel
Blade $0.02 Watt of completed turbine capacity
Nacelle $0.05 Watt of completed turbine capacity
Tower $0.03 Watt of completed turbine capacity
Offshore wind foundation using fixed platform $0.02 Watt of completed turbine capacity
Offshore wind foundation using floating platform $0.04 Watt of completed turbine capacity

Torque tube and structural fastener components
Eligible Component Value per Unit Unit
Torque tube $0.87 Kilogram
Structural fastener $2.28 Kilogram

Inverter components
Eligible Component Value per Unit Unit
Central inverter $0.0025 AC watt capacity
Utility inverter $0.015 AC watt capacity
Commercial inverter $0.02 AC watt capacity
Residential inverter $0.065 AC watt capacity
Microinverter or distributed wind inverter $0.11 AC watt capacity

Electrode active materials
Eligible Component Value per Unit Unit
Electrode active materials 10% Costs incurred by the taxpayer with respect to the production of electrode active materials

Battery components
Eligible Component Value per Unit Unit
Battery cell $35.00 Capacity in kWh (limitations apply - see instructions to IRS Form 7207)
Battery module which uses battery cells $10.00 Capacity in kWh (limitations apply - see instructions to IRS Form 7207)
Battery module which does not use battery cells $45.00 Capacity in kWh (limitations apply - see instructions to IRS Form 7207)

Critical minerals

For critical minerals, the tax credit value is 10% of the production cost. §1.45X-4 of the proposed regulations clarifies what costs are includable or excludable in the 10% calculation.

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 Zirconium

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Subject to a four-year phase-out (except for critical minerals)

With the exception of critical minerals, the amount of credit begins phasing out for sales occurring after December 31, 2029. As a result, the amount of tax credit is 75% for components sold during calendar year 2030, 50% for components sold during calendar year 2031, 25% for components sold during calendar year 2032, and 0% thereafter.

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Learn more

Reunion is actively transferring §45X tax credits from a variety of clean energy manufacturers. To learn more about sourcing, diligencing, and purchasing §45X AMPCs, please contact Reunion's experienced transactions team.

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Section 48 ITC Due Diligence and Documentation Guide

Executive summary

Transferable tax credits are sold at a discount to face value, providing attractive financial benefits to corporate investors. They are not without risk, however, and tax credit buyers should have a clear sense of how to identify, track, and mitigate relevant risks.

At the same time, clean energy developers should understand the scope of due diligence during a tax credit transfer.

This due diligence checklist and documentation guide gives tax credit buyers, sellers, and their respective advisors a set of shared expectations on the required analysis and documentation for §48 investment tax credits.

To download a PDF version of this guide, please visit our resources page.

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Transaction overview

The transaction overview should include an overall description of the transaction, including:

  • Brief description of sponsor
  • Technology
  • Project size in MW AC, location, and description
  • Placed in service (PIS) date
  • Eligible cost basis
  • Resulting ITC credit amount
  • Description of tax credit percentage, including bonus credit adders and compliance with, or exemption from, prevailing wage and apprenticeship requirements
  • Details on how the project is financed

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Major deal participants

Tax credit transfers involve a range of stakeholders on the buy- and sell-sides, all of whom should be memorialized for reference during the five-year recapture period.

Diligence item Discussion
Seller Name of company, principal place of business
Guarantor Name of company, principal place of business, relationship to Seller
Offtaker Entity that purchases power from the Project
Seller counsel Name of company, POC
Tax credit insurance broker Name of company, POC
Tax credit insurer Name of company, POC

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Seller diligence

Diligence item Discussion
Organization chart Summary of Seller and related entities, including ownership percentages and federal tax treatment (e.g., partnership, C-corporation, disregarded entity, etc.).
Affiliate transactions Buyer should investigate whether fees included in the cost basis are from affiliate transactions. For example, the EPC fee may not be eligible for inclusion in the Project’s cost basis if the EPC is an affiliate of the Seller.
Organizational documents Corporate documentation of the project company (if applicable), Seller, and the guarantor (if applicable).
Financial statements [Audited] financial statements of the Seller and/or Guarantor, for purposes of understanding the financial strength of Seller and/or Guarantor and its ability to fulfill indemnification obligations. If the financial strength of Seller is in doubt (e.g., if the indemnity is not provided by a creditworthy guarantor), then Buyer or Seller can also procure tax credit insurance from an investment grade insurer.
Fiscal year end The Seller’s fiscal year end will impact the tax year in which the Buyer can take the credit.
Upstream ownership If Seller is not a widely held C-corporation, Buyer should perform diligence on whether Seller is subject to at risk rules of Section 49. Ensure that any project financing in place does not limit Seller’s ability to sell credits.
Tax return filing date Understand timing of when Seller intends to file. This may impact the timing of when a transaction needs to be closed (e.g., if Seller is planning to file taxes by April 15, Seller will want to close the transaction in advance of filing).
Legal actions Buyer will confirm that there is no ongoing or pending legal action or notice of legal action concerning the Project.

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Qualification

Buyer should validate that the Project qualifies for the §48 tax credit. Buyer should ensure that the Project qualifies as energy property, the proper cost basis is used, and that the Project was placed in service in the appropriate tax year.

Diligence item Discussion
Description of asset/project Brief overall description of the Project.
Begun construction date Begun construction date only needs to be investigated in certain situations, such as when the Project claims exemption from prevailing wage and apprenticeship requirements due to construction starting prior to January 29, 2023. If a certain “begun construction” date is claimed, Buyer should look for documentation on how safe harbors were met (e.g., 5% test or physical work test).
Placed in service date Buyer should validate when the Project was placed in service, to ensure that credits are applicable to the desired tax year. The IRS and various courts consider five tests to determine when a project was placed in service. The Seller should ideally provide evidence that all five tests are met: (1) the receipt of required licenses and permits; (2) the passage of control of the facility to the ultimate taxpayer; (3) the completion of critical tests; (4) the commencement of regular operations; and (5) the synchronization of the facility into a power grid for generating electricity to produce income.
Cost segregation study Buyer should ensure that the cost basis for purposes of calculating a §48 ITC is validated through a cost segregation study (and section 1060 analysis, if applicable) from a reputable accounting firm with energy project experience.
EPC/installation contracts documentation Buyer should review the Seller’s Equipment, Procurement, and Construction (EPC) contract(s). Buyer should validate that the primary EPC and the subcontractors are not related to the Seller, as fees charged by a related entity may not be valid for purposes of calculating cost basis for a §48 ITC. The EPC contract will also need to include representations and warranties around compliance and documentation with respect to prevailing wage and apprenticeship requirements for both employees and subcontractors if the Project is not exempt from PWA requirements.
Appraisal In certain cases, especially when there is a step-up in cost basis for purposes of calculating a §48 ITC, Buyer should ensure that an appraisal is performed by a qualified third-party valuation firm. Buyer should ensure that the Project’s cost basis falls within the range of the appraised fair market value (FMV) based on a reasonable analysis of cost, income, and market approaches to valuation. Buyer should request a copy of the appraisal and form reliance letter.
Transfer filing and registration Buyer should obtain a copy of transfer filing documentation with registration number(s) for the Project(s).

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Structure

Buyer should validate that Seller is an eligible transferor, and that the Seller’s underlying legal structure will be respected by the IRS.

Diligence item Discussion
Structure documentation Buyer should validate that the Seller is entitled to claim and to transfer the tax credits and that the Seller’s legal structure (e.g., sale leaseback, partnership) will be respected by the IRS. For example, a clean energy project company might be sold to a joint venture with ownership from an arms-length third party, to effectuate a “step-up” in the cost basis for purposes of calculating the §48 tax credit. Buyer should ensure that the Seller entity has sufficient equity ownership from an arms-length third party, and that the third party is a true equity owner (with both upside and downside risk). Buyer should also validate that the JV is eligible to claim and to transfer the tax credits. A legal firm can provide a memo on validity of structure.

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Recapture

To avoid recapture, a §48 ITC requires that (1) the property remains qualified energy property for five years and (2) there is no change in ownership of the property for five years. If a project fails to meet these requirements, the IRS will recapture the unvested portion of the ITC.

The ITC vests equally over a five-year period, meaning 20% of the total ITCs claimed will vest on each anniversary of Project’s placed in service date.

Qualified energy facility

A property can cease to be qualified energy property when an asset is disposed of, or otherwise ceases to be investment credit property to the eligible taxpayer during the recapture period. For example, the asset is:

  • Destroyed and not rebuilt and placed back in service
  • Abandoned
  • Repurposed to sell something other than electricity derived from the qualified generation asset

Key risk mitigation measures include sufficient property and casualty insurance, adequate site control and interconnection rights, and identification of alternatives in the event of an Offtaker default.

Diligence item Discussion
Site control documentation Buyer should validate that the Project has an unencumbered right to operate on the site during the five-year recapture period. If the site is leased, a recorded lease with title insurance may improve Buyer comfort that the site is secure. If the Project cannot be moved, Buyer should also confirm there are no environmental issues on the site that could materially impact Project operations. Environmental issues are typically flagged in a Phase I environmental site assessment report with a map and/or description of any Recognized Environmental Condition located on the site.
Interconnection documentation Buyer should confirm that the Project has approval for interconnection during the five-year recapture period.
O&M contracts documentation §48 ITCs are subject to recapture if the project is placed out of service during the five-year recapture period. Buyer should review the O&M contract to ensure that the Project will be adequately maintained. The O&M contract will also need to include covenants around compliance and documentation with respect to prevailing wage and apprenticeship requirements unless the Project is exempt from prevailing wage and apprenticeship requirements.
Property and casualty insurance Buyer should validate that Property and Casualty insurance is in place, and that coverage is high enough for the Seller to rebuild the Project in the event of a P&C event. If the Project is taken out of service due to a P&C event, the §48 ITC may be subject to recapture.
Offtake/revenue contract As §48 ITCs are subject to recapture if the Project is placed out of service during the five-year recapture period, Buyer should validate that the Project will earn sufficient revenues during the recapture period to continue operating. If electricity is being sold on a merchant basis, Buyer should validate that the Project has the ability to sell electricity to the grid. If electricity is sold to a separate power purchaser, Buyer should review the Seller’s power purchase agreement or similar contract, diligence the ability of the power purchaser to fulfill contractual obligations and understand alternative revenue sources if the power purchaser is unable to pay.

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Change in ownership

A change in ownership can occur if the project owner transfers its ownership of the facility during the five-year recapture period. If a lender has a collateral interest in the project company, a foreclosure can trigger recapture due to change in ownership.

Key risk mitigation measures include a forbearance agreement with lenders, structuring the debt in a way that foreclosure will not trigger a recapture, and indemnification from the seller.

Diligence item Discussion
Project financing documentation Buyer should confirm there is no tax-exempt financing for the Project. Buyer should also confirm if there is any financing agreement where such lenders or other financing parties have collateral security in the Project or in any intermediate holding company between the project company and Seller. If a change in ownership is triggered by a foreclosure during the recapture period, the unvested portion of the §48 ITC will be subject to recapture. Ideally, debt should be structured in a way that a foreclosure will not result in a recapture, or a forbearance agreement should be in place with lenders.

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Prevailing wage and apprenticeship requirements

Buyer should validate that the Project is exempt from, or compliant with, prevailing wage and apprenticeship requirements. Prevailing wage rules require that certain workers are paid a minimum prevailing wages specified by the U.S. Department of Labor during the construction of a facility or property, and during alteration or repair of a facility or property for a certain number of years after the project is placed in service.

Buyers should require proper documentation that the correct wage was paid.

Exempt from PWA
Diligence item Discussion
Prevailing wage and apprenticeship Project is exempt from PWA requirements under two scenarios:
  • Project began construction prior to January 29, 2023. Buyer should look for documentation on how safe harbors were met (e.g., 5% test or physical work test)
  • Project’s maximum net output is less than one megawatt (as measured in alternating current) or the capacity of electrical or equivalent thermal storage is less than one megawatt (as measured in alternating current). Buyer should validate size of Project through audit of contracts

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Compliant with PWA
Diligence item Discussion
Prevailing wage and apprenticeship If Project requires compliance with PWA, Buyer should validate that proper documentation was collected, including payroll records for each laborer and mechanic (including each qualified apprentice) employed by the taxpayer, contractor, or subcontractor employed. Buyer should review the representations and warranties in the contract with the primary EPC (and potentially with their subcontractors) to validate that all parties will comply with PWA requirements.

The IRS also recommends collecting additional documentation, which are listed in proposed regulations §1.45-12(b) and (c) and can be requested by Buyer to further validate PWA documentation practices.

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Bonus credits

If a Project claims a bonus credit adder (domestic content, low-income community, or energy community), the Buyer should substantiate that the Project qualifies for the relevant bonus credit adder.

Domestic content
Diligence item Discussion
Domestic content If Project claims the domestic content bonus adder, Buyer should verify supporting cost analysis from a third-party engineer, and/or supporting documentation from legal counsel.

If the Seller utilized the domestic content safe harbor under IRS Notice 2024-41, Buyer will want to validate the developer’s safe harbor calculations, collect documentation confirming the sourcing of components and sub-components included in the calculations, and view the developer’s safe harbor certification. In many cases, a legal memorandum may be prepared by seller counsel to analyze and confirm compliance with domestic content requirements.

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Energy community
Diligence item Discussion
Energy community If Project claims the energy community bonus adder, Buyer should verify documentation that Project is located in the “Brownfield Category, the Statistical Area Category, or the Coal Closure Category” as described in IRS Notice 2024-30.

For §48 and §48E ITCs, eligibility for the energy community bonus credit is determined on the date that the Project is placed in service, and in the event the Project is only partially located in an energy community, the following guidance applies:
  • A project qualifies for the energy community bonus if at least half (50%) of its nameplate capacity is in an energy community. According to the IRS, nameplate capacity is the DC capacity that the project is capable of producing on a steady-state basis during continuous operation under standard conditions
  • If a project does not have a nameplate capacity, it can qualify for the energy community bonus under the “footprint test.” If 50% or more of the project’s square footage is located in an energy community, then the project qualifies for the bonus. The percentage is determined by dividing the square footage of the project that is located in the energy community by the total square footage of the project

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Low-income community
Diligence item Discussion
Low-income community If the Project claims the low-income community bonus adder, Buyer should verify that the Project received an acceptance/allocation notice from the IRS as well as confirmation that the project was placed in service within a statutorily set four-year period.

To validate that the project was properly placed in service, the developer must provide documentation and make attestations in the DOE low-income community application portal.

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Tax credit insurance

If a Seller is unable to offer an indemnity from a creditworthy guarantor, tax credit insurance is commonly purchased to provide additional risk mitigation in the event of a disallowance or recapture of credits.

There is a robust market for tax credit insurance, which has been utilized on tax equity transactions for over a decade. Tax Credit Insurance Brokers can help place insurance with a wide selection of investment-grade insurance carriers.

Diligence item Discussion
Tax credit insurance Buyer should validate that tax credit insurance covers desired risks, which potentially include:
  • Qualification, recapture, and structure risk
  • Representations and warranties
  • Prevailing wage and apprenticeship compliance or exemption
  • Bonus credit adders
Buyer should confirm that the insurance policy is adequately sized to cover potential damages, including lost credits, tax gross-up, penalties, interest, and contest costs in the event of a disallowance or recapture of credits.

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Download Reunion's Section 48 ITC due diligence guide

To download Reunion's Section 48 due diligence guide in PDF format, please visit our resources page.

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