Interested and eligible manufacturers, developers, and sponsors looking to pursue new advanced energy project tax credits under Internal Revenue Code Sections 48C and 45X have been faced with an important question: Should you apply for the Advanced Energy Project Tax Credit under Section 48C or claim the Advanced Manufacturing Production Credit under Section 45X?

These options should be analyzed carefully because your selection could have significant financial consequences.

Section 48C refers to the Qualifying Advanced Energy Project Credit, which offers a credit equal to up to 30% of the taxpayer’s basis in qualified investments – generally speaking, equipment and other tangible personal property – made as part of a qualifying advanced energy project.

Section 45X refers to the Advanced Manufacturing Production Credit, which offers tax credits of varying amounts depending on the type of “eligible component” – such as components within solar panels, wind turbines, batteries, and other products – produced by the taxpayer and sold to third parties. Due to the overlap, many taxpayers eligible for the Section 48C Credit are also eligible for the Section 45X Credit – however, a taxpayer cannot claim a Section 45X credit and Section 48C credit for products produced at the same “facility”, so the two tax credits are generally¹ mutually exclusive.

Despite some overlap in scope, the two credits differ in some material ways:

• The Section 48C Credit is an “application-based” credit. Congress allocated $10 billion to the Section 48C Qualifying Advanced Energy Project Credit program (up to $4 billion allocated in the first round of Section 48C tax credits for which concept papers are currently being accepted). In contrast, a taxpayer can claim a Section 45X Credit without engaging in a competitive application process.
• The Section 48C Credit is based on cost to build, whereas the production tax credit is calculated and payable after eligible components are sold. This impacts not only the aggregate dollar amount of the credit, but also the timing of receipt of funds. Both factors must be considered when choosing a credit program.
• The Section 48C Credit may be sold by the taxpayer who initially received it (presumably at some discount), but it is not eligible for the IRS “Direct Pay” program that would monetize 100% of the credit in a manner economically akin to a refundable tax credit, whereas the Section 45X Credit can avail itself of both monetization opportunities.

Manufacturers debating the Section 48C v. 45X question appear to have a very short window in which to make a decision – the deadline to file concept papers for the first round of the Section 48C credit is 12 p.m. EDT on July 31, 2023.

Fortunately, this first phase of the application process is not unreasonably labor-intensive. It consists of the project’s concept paper, which can be no longer than four (4) pages, a workforce, and community engagement plan for the project (which can be no longer than one (1) page), and a data sheet containing projections about the project’s economic and environmental impact. In addition, there is no penalty for withdrawing an application once made. For these reasons, to the extent a taxpayer is seriously considering the Section 48C credit – even if not yet 100% certain whether it will claim the Section 48C credit or go another route – we consider it prudent to submit a concept paper before the deadline in order to preserve the right to continue the competitive application process.²

If you have any questions regarding Section 48C, Section 45X, or other energy tax credits, please contact the authors of this article or any other member of the Taft Tax Credits & Incentives team.

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¹ It is possible for the same taxpayer to claim the Section 48C credit and Section 45X credit, but not on the same “facility.” IRS Notice 2023-44 stated that “[f]or purposes of the § 45X credit, all tangible property that comprises an independently functioning production unit that produces one or more eligible components will be treated as a single facility (§ 45X Facility).” Thus, a building with multiple independently functioning production units could claim the Section 45X credit for production units that are not already receiving the Section 48C credit. The Treasury Department and IRS intend to further define the term “production unit” in forthcoming guidance.

² In Notice 2023-44, the IRS encourages potential applicants to evaluate the program that may be most beneficial to them before submitting a concept paper. This is understandable for administrative reasons and we certainly do not condone the filing of frivolous concept papers. However, it may not be practical for certain taxpayers to know with full certainty which program is best before July 31, 2023 for a myriad of reasons unique to each project. We believe it is reasonable that taxpayers caught in this scenario should submit their concept papers on time to preserve their right to decide between the two programs.