The “One, Big, Beautiful Bill” and the implications for corporate taxpayers and the clean energy industry

The current state of the residential ("resi") solar market

Residential, or "resi," solar, like much of the clean energy industry, has experienced its fair share of ups and downs in the past several years. Despite the obstacles, the industry remains resilient, and its leaders are more committed than ever to continually improving the ecosystem.

Poised for strong growth

2024 was a period of contraction for the resi solar industry, with an estimated 26% decline in installed capacity. This decline is largely attributable to a higher-for-longer interest rate environment that significantly impacted the cost of capital across the value chain, coupled with the phase out of NEM 2.0 in California.

However, the resi solar market is expected to grow significantly through 2030.

Increasingly financed through third-party ownership (TPO) arrangements

The bulk of resi solar is sold to customers as a financed product. Just as with other consumer finance asset classes such as auto, financing options make the product more accessible to a majority of homeowners. Resi financing comes in two flavors: loans and third-party ownership.

For much of the past decade, the resi solar market was dominated by loans. However, due to the combined effects of rising interest rates and the introduction of ITC bonus credit adders only available to TPO, the industry has shifted to a largely TPO-heavy financing model, which generate ITCs that are eligible for transferability.

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Considerations for buyers evaluating resi solar third-party ownership (TPO) tax credits

Exempt from prevailing wage and apprenticeship (PWA) requirements

Resi solar is exempt from PWA given the size of the systems (generally 5-30 kilowatts), which are well under the 1 megawatt threshold. This in turn reduces complexity and scope of diligence (and can drive cost savings) relative to other projects requiring PWA compliance.

Easily structured around quarterly payments in arrears

Large resi solar developers operating at scale are placing systems in service on a daily basis, resulting in the creation of sizable portfolios of projects that are available for sale to tax credit buyers on a regular, recurring basis — often quarterly. This structure benefits buyers seeking to make payments quarterly in arrears to align with quarterly estimated tax payments, maximizing buyers’ internal rate of return.

Minimized placed-in-service risk

Project delays typically impact only a portion of a resi portfolio. In contrast, a large-scale project that delays placed-in-service beyond year-end has a binary risk that 100% of credits slip to the subsequent tax year.

Geographical diversity

Resi solar credit opportunities are sold as portfolios, which consist of many projects that are likely to be distributed across multiple geographies (i.e., across several states, territories, or counties).

This geographic distribution provides a natural hedge against unexpected weather or other events impacting all projects / tax credits in the portfolio (including unforeseen delays or recapture risk — see more below).

Recapture risk mitigants

Before jumping right into risk mitigants, let’s first explore tax credit recapture itself — what are the requirements?

The IRS requires that:

1. Property remains a qualified energy property for five years after being placed in service. A property ceases to be a qualified energy property when an asset is disposed of, or otherwise ceases to be an investment credit property (i.e., destroyed and not rebuilt, abandoned, or repurposed to sell something other than electricity).
2. There is no change in ownership of property during the five-year recapture period, which commences once a project has been placed in service.

Should a project fail to meet either of these requirements, the IRS will recapture the unvested portion of the ITC, which vests equally over a five-year period — 20% of the total ITCs claimed will vest on each anniversary of the project’s placed in service date.

With recapture risk now defined, how does resi solar measure up and what mitigants exist?

1. The most common reason for a solar project ceasing to be a qualified energy property is the destruction of the project coupled with a failure to rebuild. Given resi solar projects are highly dispersed in location, systemic destruction is extremely unlikely. Furthermore, even if projects within a portfolio are destroyed, there is no mandated rebuild time following an insurable event — the developer must simply demonstrate intent to rebuild and place projects back in service.
2. Resi solar customer agreements (leases/PPAs) commonly contain clauses that prohibit a change in ownership during the recapture period (i.e., customer cannot buyout system in first five years). Customers are generally contractually allowed to prepay contract at any time and/or request a contract transfer and reassignment to another homeowner, however, neither of these events constitutes a change in ownership.

As a tax credit buyer, conducting appropriate due diligence on all aspects of the transaction, including a review of items such as P&C insurance limits/exclusions, ongoing operations and maintenance support, and customer agreements, is paramount.

Reunion supports its customers through every step of the transaction process, including due diligence, and we invite all interested parties to reference our Section 48 ITC due diligence guide.

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Market sizing and opportunity

Using back-of-the-envelope math and conservative assumptions, we estimate that the resi solar market will generate approximately $6 billion in 2025 investment tax credits and continue to grow. Of course, not all of these ITCs will be transferred, as some developers may pursue traditional tax equity, retain the credits, or utilize direct pay, but as we note in our Q3 2024 market intelligence report, we expect roughly half of the clean energy tax credit market to be transferred.

This represents a sizable market for tax credit buyers with a strong potential for repeat transactions. The team at Reunion is excited to be working with many of the largest and most established resi solar developers in the space, and we look forward to supporting new and existing buyers in every step of the transaction process.

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Frequently asked questions

Business model

What is the most common business model for resi solar developers operating at scale?

There are many different business models, but most scaled resi solar developers operate using an EPC/Sales Dealer model.

How does an EPC / Sales Dealer model work?

Under this model, the developer partners with EPCs (licensed contractors performing engineering, procurement and construction work) who design and install solar projects that are in turn purchased by the developer.

Occassionally, EPCs also employ salespeople to acquire new customers (i.e., homeowners). Most often, though, this work is subcontracted out to sales dealers employing individual sales reps at scale.

Customer acquisition

Who acquires new customers and what is the process?

Sales reps acquire new customers (typically single-family homeowners) via door-to-door sales. This conversation often involves looking at homeowner’s current utility bill and comparing future utility payments with and without solar. Developers often require upfront customer savings before moving forward with a customer and engaging an EPC.

How does a sales rep get paid?

Sales reps are paid a commission on each successful sale by the sales org employing him/her. EPC knows what it will get paid by the developer for each system configuration in each market and what it is willing to install the system for (the “redline”). Any amount over the redline goes to the sales rep as commission.

System construction and purchase

How is the system installed?

EPC procures equipment that is compliant with developer’s approved vendor list (including any manufacturer warranty requirements), designs and installs system subject to developer’s guidelines, and works with local utility to ensure system achieves permission to operate (PTO).

Who estimates the system production?

Developer typically partners with one or multiple approved system design tool platforms that are integrated into its systems. The production estimation engine behind these tools is often tested and validated by an independent engineering firm and published in a report.

What happens once the system is installed?

Developer “acquires” fully installed system from EPC at pre-determined price based on system configuration and utility market, aiming to achieve a minimum project-level rate of return on expected system cashflows (customer payments, net of expenses). Developer typically funds EPCs in two milestone payments to align incentives — a majority at install complete and the balance at PTO.

Developer third-party ownership

Who owns the system?

Developer owns the system and executes a lease or PPA with the homeowner that governs the monthly billing and terms of service which commonly include an operations and maintenance (O&M) obligation and a performance guarantee (PeGu) obligation.

Who is responsible for system repairs?

Developer is liable for any operations and maintenance (O&M) issue or system underperformance that is not the direct fault of the customer.

San Francisco, CA – Reunion, a leading platform for clean energy tax credit transfers, is proud to have facilitated two transactions, entered into on December 6, 2024, for a third-party to purchase up to $870 million in advanced manufacturing production tax credits from Arizona-headquartered First Solar, the Western Hemisphere’s largest solar technology and manufacturing company.

The credits are associated with the fully integrated manufacturing of advanced thin film photovoltaic (PV) solar panels – equivalent to the production of wafers, cells and modules – at certain First Solar manufacturing facilities in both Ohio and Alabama in 2024.

First Solar, which has manufactured in the United States since 2002, operates three manufacturing facilities in Ohio and a fourth in Alabama. The company also operates what is believed to be one of the most extensive solar supply chains in the U.S., using 100% U.S.-made glass and steel. As a result of its American manufacturing footprint, which is expected to include a fifth factory in Louisiana in the second half of 2025, and domestic supply chain, First Solar expects to support over 30,000 direct, indirect, and induced jobs across the nation, representing a payroll of almost $2.8 billion per year by 2026.    

Reunion served as a trusted advisor and facilitator throughout the transactions’ lifecycle. The firm identified a suitable buyer and led a thorough negotiation of deal terms between the parties. Reunion also played a key role in spearheading the technical and commercial due diligence process.

“We are excited to have supported these transactions through to close, which underscores our expertise in helping the largest and most sophisticated organizations navigate the tax credit diligence and purchase process. These transactions demonstrate the impact that tax credit transfers can have on strengthening America’s solar manufacturing capabilities,” said Andy Moon, CEO of Reunion.

These transactions are one of the largest advanced manufacturing tax credit transfers to date, reflecting the growing scale of the domestic power generation technology manufacturing base.

First Solar (NASDAQ: FSLR) disclosed the transaction in an 8-K. The 8-K included copies of the tax credit transfer agreements, which disclosed key deal terms such as price ($0.955), counterparty, and payment terms.

Novogradac Journal of Tax Credits | December 2024 | Volume XV | Issue XII

RETC Transfers Boom Throughout 2024, Including Community Solar Portfolio in Virginia

Nick DeCicco, Senior Writer, Novogradac

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Transfer of federal renewable energy tax credits (RETCs) exploded in 2024, according to professionals in the field, including a team who transacted in August on a portfolio of community solar systems in Virginia.

Reunion Infrastructure teamed earlier this year with Summit Ridge Energy, a commercial solar company based in Arlington, Virginia, to facilitate the transfer of $40 million in investment tax credits (ITCs) to a privately held real estate company.

The transaction is the wheelhouse of Reunion, a San Francisco-based clean energy finance company that has closed more than $2.5 billion in transfers as of early November. The firm has facilitated transfer transactions of ITCs, production tax credits (PTCs), Section 45X and Section 30C credits varying in size from under $10 million to more than $500 million, said Billy Lee, co-founder and president of Reunion.

“We’re seeing a lot of activity, both large and small deals,” said Lee. “One of the beauties of transferability is that it levels the playing field. For example, small developers who have projects generating relatively small volumes of credits are still able to get deals completed efficiently."

Lee said the Virginia portfolio buyer is a “sophisticated investor and and has a keen interest in community solar.” Jake Compton, Summit Ridge Energy’s senior director of project finance, said the systems are in varying stages of completion, with some already online and others slated to come online before year’s end as well as into 2025.

Compton said the Virginia portfolio was not Summit Ridge’s first transfer, although it did fall within the first batch of the company’s transfers.

“It was in parallel with a few others,” Compton said. “This one was appealing for a couple of reasons. The buyers had the opportunity to think about this as a long-term partner. We were also able to pair this with an existing tax equity investment in the portfolio and do a hybrid of tax equity and transfer in [the] same transaction.”

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Content with domestic content

Having an existing tax equity partner who liked the Virginia market combined with the transfer buyer and the opportunity to expand the tax equity investment was a winning combo, said Compton.

“Our investment will be exclusively providing energy to low-income households throughout the state,” said Compton. “Our goal as a company is to do exactly that. ... It’ll let us continue to expand our footprint.”

The transaction also was one of Summit Ridge’s first to apply domestic content adder guidance from the Inflation Reduction Act of 2022. The expansion of solar cell manufacturer Hanwha Qcells Co.’s facilities increased the supply of American-made solar cells for projects such as Summit Ridge’s Virginia portfolio. Compton said the increase in output of cells, combined with clarification from the Internal Revenue Service and the Department of Energy about the domestic content regulations, allowed Summit Ridge to “cement (its) plans” to deploy 800 megawatts of Hanwha’s Qcells.

“If I look at projections of the need for tax investment, the tax equity market alone just can’t keep pace with the available credits from these projects,” said Compton. “Reunion estimated $22 billion of tax equity this year, but out of a total market appetite of $45 billion. Other groups have come up with very similar projections. That’s a great problem to have, so for us, it’s a ‘yes, and’ strategy – to meet our ambitious goals of expanding community solar and access to clean energy for all, we’re going to need all of both the tax equity and tax credit transfers that we can arrange.”

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A learning curve

Lee and Compton said education is an important component of RETC tax credit transfers.

Compton said many tax credit transfer buyers are new to the RETC market, bringing a need to learn about the nuances of the process as well as a desire for a low-touch transfer.

“They may have different concerns than we’re used to with a more typical equity investor,” said Compton.

Lee outlined a two-stage process for most transfers: Educating taxpayers about the overall transfer opportunities and then guiding participants through the transaction process, from term sheet to closing.

“We spend a significant amount of time getting buyers 'transaction ready,' which often includes getting internal stakeholders up to speed and ensuring approvals are in place," said Lee. "At that point, we start sharing opportunities that fit the buyer's specific requirements. Our buyers are busy finance and tax professionals, so we provide a very curated approach. We can provide a lot of insights and market data to help buyers differentiate deals that, on the face of it, may appear to be very similar."

Lee said Reunion weighs factors beyond the headline credit amount and price, factoring in seller motivation, urgency, competitive dynamics, and other more qualitative aspects.

“We want to make sure we are truly giving them opportunities that fit their needs and align with their expectations,” said Lee.

Moving buyers and sellers through the process is one area where Lee and Reunion’s experience and history in renewable energy is valuable. Lee said the company brings a “deep data set” that informs commercial terms, structuring of indemnities and insurance, and more. He said Reunion also provides a due diligence review for buyers to help streamline their evaluation of the transaction.

“For sellers, the value we bring is certainty and speed of execution,” said Lee. "Critically, we have direct relationships with tax credit buyers, which gives us insights into the priorities and the readiness of the buyers." Lee said the timing from term sheet to close for most transfers that Reunion participates in is measured in weeks, which differs from many RETC transactions, for which a standard transaction is about six months.

Most buyers want to do one or two transfers transactions per year and move on, Lee said.

"Finding a buyer and seller who want to transact on a similar amount of credits is only part of the challenge," said Lee. "Buyers have varying requirements: some want PTC or 45X. Some want ITC. Some want insurance, while others want a creditworthy or investment-grade seller. Some are comfortable with higher basis step-ups assuming risk mitigation measures are in place, while others are not. There are a lot of factors in finding the right buyer and seller in order to complete a successful transaction."

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Evolution of transfers

Lee said there was “a pioneering aspect” to taking on transfer deals earlier this year when the opportunity was fresher. As the year progressed, Lee said the transaction process has become more efficient. Many transfers require only a few major transaction documents, including the tax credit purchase agreement, an insurance policy (if required) and a guaranty agreement (if required). Lee said Reunion’s goal is to continue to streamline transactions and take a lot of friction out of transfer transactions for buyers and sellers.

"The amount of hours needed to transact on one of these transactions is fairly limited," said Lee. "We have a finely tuned playbook on what the buyer and sellers need to do to get a deal done. We're getting pretty good at identifying and resolving any issues early in the deal process, as opposed to at the 11th hour."

Although the Virginia deal was a mid-sized deal in the pantheon of Reunion's experience, Lee said the challenges and complexities of transfers don't necessarily grow with scale.

"We don't see a huge correlation between size and deal complexity," said Lee. "Some of our most challenging deals are really small."

Likewise, Lee said larger developers are not always the most sophisticated, noting some experienced sellers are relatively inexperienced in transfers and need a fair amount of hand-holding while some smaller developers are highly sophisticated and much more transaction ready.

"Right now, there is no rule of thumb in terms of what deals are more challenging or more complex than others," said Lee. "That's where we step in and provide guidance and support."

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Into the future

Lee said those considering transfer transactions such as the Virginia community solar portfolio should know that transferability still benefits from the guidance of deal teams that have deep transaction experience.

"There's still a lot of detail and nuance to deals," said Lee. "Particularly for first-time buyers and sellers, having a transaction partner who can identify risk and has the experience to structure solutions that properly mitigate and allocate that risk will significantly increase the likelihood of a successful transaction."

Compton expressed excitement for the future possibilities of transfers.

"The transfer market opens up an enormous aperture of the pot of investors to get involved with projects," said Compton. "It's created its own set of challenges and nuances. It's certainly interesting to see how it evolves. Everyone has tax equity as reference points. This arose as a unique animal in response to its own quirks. It's fascinating to see how the market evolves. Does it stay very close to tax equity, which is kind of a reference point? Or will it look and feel like something different? There's a lot of reasons to be doing transfers."

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Copyright Novogradac 2024 - All Rights Reserved

This article first appeared in the December 2024 issues of the Novogradac Journal of Tax Credits. Reproduction of this publication in whole or in part in any form without written permission from the publisher is prohibited by law.

Notice pursuant to IRS regulations: Any discussion of U.S. federal or state tax issues contained in this article is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code; nor is any such advice intended to be used to support the promotion or marketing of a transaction. Any discussion on tax issues reflected in the article are not intended to be construed as tax advice or to create an accountant-client relationship between the reader and Novogradac & Company LLP and/or the author(s) of this article, and should not be relied upon by readers since tax results depend on the particular circumstances of each taxpayer. Readers should consult a competent tax advisor before pursuing any tax savings strategies. Any opinions or conclusions expressed by the author(s) should not be construed as opinions or conclusions of Novogradac & Company LLP.

This editorial material is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding property compliance or any other material covered in this article can only be obtained from your tax advisor. For further information, visit www.novoco.com.

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The IRA has fueled clean energy deployment

The Inflation Reduction Act has had a significant impact on clean energy deployment in the U.S., leading to accelerated growth among solar, wind, battery storage, and other clean energy technologies:

• The two-year post-IRA period has seen $89 billion in investment in new, US-based clean energy manufacturing, versus $22B in the two years preceding the IRA (see Figure 1)
• Investment in clean energy production and industrial decarbonization is $161 billion since the passage of the IRA, a 43% increase from the comparable pre-IRA period

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Americans overwhelmingly support clean energy

Clean energy is now a major part of the US economy, employing over 3.5 million workers. Since 2020, the clean energy industry has added 400,000 new jobs, significantly outpacing the rest of the energy sector.

The federal solar investment tax credit was first passed under the George W. Bush administration via the Energy Policy Act of 2005, and for the last 20 years there has been a looming threat that this tax credit will be removed. But it has persisted, because it has been highly effective in driving solar adoption, and solar energy is extraordinarily popular among Americans.

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The IRA has growing, bipartisan support

Similarly, the Inflation Reduction Act has bipartisan support:

• In August 2024, a group of 18 Republican Congress members wrote to a letter to Speaker Mike Johnson saying: “Prematurely repealing energy tax credits, particularly those which were used to justify investments that already broke ground, would undermine private investments and stop development that is already ongoing.” Speaker Johnson responded that when making changes to the IRA, “you’ve got to use a scalpel and not a sledgehammer.”
• The total clean investment of $493 billion in the two-year post-IRA period has flowed into all 50 states, but over half of that has gone to Republican states

We have reason for optimism that the major provisions in the Inflation Reduction Act will persist. It’s unlikely that a majority of Congress will support a significant repeal of a law that is driving new jobs and significant investments in clean energy. Repealing the IRA after it has been in force for over two years will also upend many private businesses, which have made billions in investments under the anticipation that the law will be in force for a decade, if not substantially longer.

Furthermore, the final house race was called December 2nd, landing at 220 Republican seats and 215 Democrat seats. Given that 218 votes are required to form a majority and pass legislation, Republicans have a very thin margin for defections - only two.

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Buyers and sellers remain active in the market for 2025 tax credit and beyond

In the tax credit transfer space, we continue to see a heavy dose of activity that is, in fact, ramping up, particularly from buyers wanting to lock in 2024 and 2025 tax credits before any potential changes.

The team at Reunion remains highly optimistic about a clean energy future and stand ready to support all existing and new customers.

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How President-elect Trump’s incoming administration might affect tax guidance and what grenades, if any, a Republican-held Congress might lob at the Inflation Reduction Act energy credits are looming questions for tax practitioners. What the administration and Congress could do and what they’re likely to do are two different things. We have no crystal ball, but we do have four years of observations from the prior Trump administration. One thing is fairly certain: There will be plenty of work for Tax Notes readers in the next four years, and especially for the rest of this year for those facilitating energy credit transactions. Most of the IRA probably isn’t going anywhere, despite its costs and the impending expiration of many provisions of the Tax Cuts and Jobs Act, which Republicans in Congress and Trump would like to renew.

Battery Low?

The BBC’s Top Gear was channeling The Onion, but its satire writers identified a likely target for possible elimination in the IRA credits when they wrote: “All Electric Cars in the US to Be Retrofitted With V8s.” The “unused batteries will be repurposed into massive monster truck ramps,” explained the subheading. Section 30D might see some legislative changes, but whether the battery life of the electric vehicle credits has really reached its end is debatable. Some trimming around the credit’s edges might be the likeliest outcome for now.

The history of the EV credits is potentially instructive. Individual consumer credits have largely had bipartisan support, although over time the consensus has started to crack along party lines. The alternative fuel vehicle credit of the early 2000s gave taxpayers a deduction of up to $2,000 for an alternative fuel vehicle or a hybrid. The Energy Policy Act of 2005 replaced the deduction with a credit of up to $4,000. It passed the Senate 74 to 26 and the House 275 to 156, with then-Sen. Joe Biden voting no and Sen. John Thune, R-S.D., voting yes. Section 30D was added by the Energy Improvement and Extension Act of 2008 with nearly all senators voting in favor, including Thune, and the House mostly split along party lines. The credit was raised to $7,500, with a phaseout after a manufacturer sold 250,000 vehicles. The phaseout was intended to be the point at which alternatives to the combustion engine had reached commercial viability. But the credit didn’t end; instead, Congress expanded it.

Individual consumer credits have largely had bipartisan support, although over time the consensus has started to crack along party lines.

The IRA, which passed on a hard party-line vote, overhauled section 30D to add income thresholds for car buyers, manufacturers’ suggested retail price caps, and production requirements in North America. Half of the credit is now dependent on meeting the critical minerals requirement, and the other half, the battery components requirement. The IRA’s updates also switched out the term “new qualified plug-in electric drive motor vehicle” for “new clean vehicle” and increased the minimum battery capacity requirement from four to seven kilowatt-hours. The vehicles-sold limitation was removed.

The presidential transition team is reportedly looking at ways to eliminate section 30D. Nothing has been said about the other EV-related credits, such as the alternative fuel refueling property credit, the credit for previously owned clean vehicles, and the credit for commercially owned clean vehicles. The Joint Committee on Taxation’s updated 10-year cost estimates in April 2024 for the clean vehicle credits included only the refueling property credit, at $1.3 billion, a drop from the $1.7 billion estimated in 2022 (JCX-7-23). The 2022 estimate for all of the clean vehicle changes in the IRA was $14.2 billion (JCX-18-22).

Legislators have already proposed changes to section 30D. In the End Chinese Dominance of Electric Vehicles in America Act of 2024 (H.R. 7980), House Ways and Means Committee member Carol D. Miller, R-W.Va., proposed changing the excluded entities in section 30D(d)(7) to strengthen the foreign entity of concern rules. (Prior analysis: Tax Notes Federal, Apr. 29, 2024, p. 778.) The JCT estimated that the effects of the bill would be $660 million between 2024 and 2034.

And now for the obligatory Elon Musk mention: The Tesla CEO and prospective Department of Government Efficiency co-leader has suggested that eliminating the EV credits would help his company, but he has a history of opposition to the IRA’s version of section 30D. In December 2021, when asked about the plan to subsidize EVs and charging station production through credits, Musk responded: “I’m literally saying get rid of all subsidies.”

Planning for Transition

Practitioners working with energy tax credits have become comfortable with uncertainty, said Jenny Speck of Vinson & Elkins LLP. That’s by necessity. “Many of the credits that were enhanced in the IRA have been around for decades,” she noted, but many survived over the years through a series of last-minute or even post-expiration retroactive extensions by Congress. The prior Trump administration did not remove them. In fact, the Bipartisan Budget Act of 2018 enhanced the credit amount for carbon sequestration in section 45Q by expanding the scope of eligible taxpayers and increasing the credit amount. For various reasons, it seems likely that Congress will look for less dramatic changes to the energy tax credits than full repeal. The transition raises the potential that lawmakers might scale back eligibility for some credits or the amount of credits, Speck said. But there is also the possibility that the new Congress will instead use the opportunity to ensure that the investments are directed where legislators intend, she said.

Practitioners working with energy tax credits have by necessity become used to uncertainty.

Speck said she hasn’t seen a slowdown in stakeholder interest in selling or purchasing credits. The market has been on a solid, upward trajectory as sellers and buyers become acclimated to the transferability regime, and that seems likely to continue.

There are some steps that taxpayers should consider in light of the calendar and the administration transition. Speck noted that some credits sunset this year and the required domestic content percentage increases for bonus credits in the new year. Accordingly, developers might want to start construction by the end of the year, she said. Credit buyers should ensure that they have clear change-in-law provisions in their contracts, particularly if credits will be procured in the future, said Andy Moon of Reunion, an energy tax credit marketplace.

Advanced Manufacturing Changes?

Treasury and the IRS released the final regulations (T.D. 10010) for the section 45X advanced manufacturing production tax credit in October, but there could be some changes in store from the new Congress. (Prior analysis: Tax Notes Federal, Nov. 11, 2024, p. 1108.) The likeliest is the addition of a rule blocking credits for companies owned by entities in specific foreign countries. That might not have a large revenue effect, but it would suit political objectives. Many Energy Department loan programs already have restricted ownership requirements, so this type of change has a blueprint.

Folks, This Ain’t Normal

Does it portend anything for tax that Joel Salatin is rumored to be slated for a position at the Department of Agriculture? For readers who have never contemplated owning backyard chickens, Salatin is a farmer in Virginia who writes books (including the one referenced in the heading above) that remind his readers that it’s best to work with nature rather than against it. Salatin’s livestock fertilizes his pastures, and he has given tours of his farm to showcase his environmental and agricultural practices. One can make a reasonably good guess about his opinion of biogas derived from larger dairy operations.

Even if some incoming appointees might disfavor certain forms of biogas, targeting those forms would require Congress to act, because the IRA put them into section 48. There were bipartisan efforts to include qualified biogas property in 2021 when Thune joined then-Sen. Sherrod Brown, an Ohio Democrat, to propose the Agriculture Environmental Stewardship Act of 2021. The House companion bill was sponsored by then-Ways and Means members Ron Kind, a Wisconsin Democrat, and Tom Reed, a New York Republican. Ways and Means Committee member Mike Thompson, D-Cal., also included biogas in the Growing Renewable Energy and Efficiency Now (GREEN) Act of 2021, but that had no Republican cosponsors.

Paring back the credits for biogas might be unpopular even among Republicans, because of where most of the methane for biogas comes from — dairy operations and waste facilities in rural areas — and the oil and gas industry’s involvement in renewable natural gas.

Tariffs

Trump likes tariffs as domestic protection measures. In his discursive interview with podcast host Joe Rogan, he cited as an example of his approach a planned automobile factory in Mexico owned by a Chinese company that would sell cars into the United States. “I said if I’m there when I’m president, I will put 100 or 200 percent tariffs on every car; they’ll be unsalable in the United States. They just announced they’re not going to build the plant,” he said. “To me, the most beautiful word — and I’ve said this the last couple of weeks — in the dictionary today is the word ‘tariff.’” Rogan challenged him on whether he’d actually try to eliminate income taxes and replace them with tariffs. Trump shrugged. “Yeah, sure, why not,” he replied, and then cited the tariffs supported by President William McKinley. “Try” is the operative word in that response. Trump knows it’s far from likely, which is why the transition team and Republicans in Congress are spending time on the TCJA renewal instead. There will almost certainly be tariff increases, because Congress ceded its power to set tariff rates to the president long ago. (Prior analysis: Tax Notes Federal, Oct. 21, 2024, p. 409.)

In 2018 the Trump administration imposed a 30 percent tariff that declined by 5 percent annually over four years on solar cells and modules after the U.S. International Trade Commission found that increased foreign imports of solar panels were causing “serious injury” to domestic manufacturers. Cells that were less than 2.5 gigawatts were exempt.

The consternation about tariffs in the energy sector might be exaggerated.

The consternation about tariffs in the energy sector might be exaggerated. The Biden administration on May 14 announced an increase in tariffs on Chinese EVs from 25 percent to 100 percent. The tariffs on lithium-ion EV batteries and battery parts were slated to increase from 7.5 percent to 25 percent in 2024. On May 16 the administration announced that it had doubled the tariff rate on Chinese solar cells and models, from 25 percent to 50 percent. Still, the Rhodium Group and MIT’s Center for Energy and Environmental Policy Research concluded in a report that “if all announced and under-construction battery manufacturing facilities come online as scheduled and produce at expected volumes, the U.S. will produce more battery cells and modules than what domestic demand will consume by 2030.” Domestic EV manufacturing is expected to exceed domestic demand by 2027, if all the facilities that are operating, under construction, and announced are completed, but it could fall short of projected demand by 2030, according to the report.

Looking Ahead

The inherent uncertainty in the transition could unsettle the market for buying and selling tax credits. But history suggests that the energy credits are quite durable. Wind and solar credits have survived almost 20 years of extender legislation packages. Moon said that tax equity participants have long questioned whether it was worth the effort to plan tax equity transactions because the ability to do them could be revoked, but they persist. And ultimately, clean energy enjoys high levels of popularity, he said.

The potential uncertainty is unlikely to dampen demand for credits in the near term. Moon said that Reunion expects to remain busy facilitating transfers into 2025. “There is a lot of activity, particularly from buyers looking to lock in 2024 and 2025 tax credits before any potential changes,” he said. He added that it is important for the new administration to provide policy clarity as quickly as possible. “Having certainty one way or the other is most helpful,” Moon said. Any statutory changes Congress pursues will take time to undergo the legislative process, and will almost certainly not be retroactive.

On October 24, 2024, the Department of Treasury and the Internal Revenue Service (IRS) issued final regulations for the Advanced Manufacturing Production Credit (§45X). The final regulations were published in the Federal Register on October 28, 2024 and are largely consistent with the proposed regulations issued on December 15, 2023.

Noted below are key changes as well as clarifying guidance that were issued in the final regulations. Jump to a section:

• Key changes
• Clarifying guidance
• Key dates
• Appendices

For a primer on 45X credits and due diligence, please refer to our insights here.

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Distinguishing "minor assembly"

The final regulations replace each instance of "mere assembly" with "minor assembly" to clarify what activities meet the substantial transformation threshold required to qualify for §45X tax credits.

The guidance recognizes that certain eligible components such as a solar module or a battery module are produced primarily by assembling other components. In these cases, the assembly required to achieve production of the ultimate eligible component (solar module or battery module) should not generally be viewed as disqualifying “minor assembly.”

Furthermore, eligible components that have completed substantial transformation, are considered “produced by the taxpayer,” and have been produced and sold to a third-party, in which only “minor assembly” remains, does not disqualify the original party from claiming the §45X credit. As a result, the ensuing third-party who performs the “minor assembly” would not be eligible to claim the credit.

Production costs expanded for critical minerals and electrode active materials

The final guidance is intended to recognize the value of material costs while addressing concerns regarding multiple-crediting and unintended incentives. The proposed regulations did not specifically allow direct material costs, indirect material costs, or any costs related to the extraction or acquisition of raw materials to be considered as production costs. However, the Treasury Department and the IRS, after consultation with the Department of Energy, have reconsidered the proposed exclusion of all material costs based on comments received and revised the regulations to include extraction costs for raw materials sourced in the U.S. or its territories if incurred by the taxpayer claiming the credit.

Additionally, if a taxpayer acquires extracted raw material as a direct (or indirect) material cost, the material costs may be included as production costs consistent with the rules provided under section 263A regardless of whether the extracted material is domestic or foreign-sourced.

Furthermore, any inclusion of direct and indirect material costs may be included if certain conditions are met, but only if they are not for materials that are already an eligible component at the time of purchase (e.g., applicable critical mineral or electrode active material), and as such, an additional credit cannot be claimed on costs relating to the acquisition and use of other eligible components.

See also "Additional substantiation requirements for critical minerals and electrode active materials."

Additional substantiation requirements for critical minerals and electrode active materials

In order to include direct or indirect materials costs as production costs when calculating a §45X credit for the production and sale of critical minerals or electrode active materials, a taxpayer must include certifications from each supplier, as an attachment to the tax return, and maintain specific books, records, and documentation to substantiate the credit.

The certifications must include the supplier’s employer identification number, be signed under penalties of perjury, and state that the supplier is not claiming a §45X credit for the materials purchased, nor is the supplier aware of any prior supplier claiming a §45X credit in the chain of production for the materials.

The books, records, and documentation requirements include, whether prepared by the taxpayer or (ideally) a third-party:

• An analysis of any constituent elements, materials, or subcomponents that concludes the material did not meet the definition of an eligible component (for example, an applicable critical mineral or electrode active material) at the time of acquisition by the taxpayer
• A list of all direct and indirect material costs and the amount of such costs that were included within the taxpayer’s total production cost for each applicable critical mineral
• A document related to the taxpayer’s production activities with respect to the direct and indirect material costs that establishes the materials were used in the production of the applicable critical mineral

Failure to provide this documentation with the return filing, or failure to provide an “available upon request” statement, would constitute a failure to substantiate the tax credit claim.

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Definition of produced by the taxpayer

‍The final regulations expanded the definition of “produced by the taxpayer” to confirm that taxpayers may produce eligible components using recycled materials (secondary production). The updated definition now reads, “Primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials.”

Clarification on §45X vs §48C facility

‍The final regulations simplified the definition of a §45X facility, replacing the term “production unit” with “independently functioning tangible property” that is used and necessary for the eligible component to be considered produced by the taxpayer, regardless of physical location. Accordingly, tangible property used to produce a subcomponent which is later integrated, incorporated, or assembled into a distinct and final eligible component may not be part of the section 45X facility.

This clarification allows the use of subcomponents manufactured at a separate §48C facility without tainting the ability to qualify for a §45X credit, as long as the subcomponent is not part of the determination that the taxpayer is the producer of the eligible component.

The final regulations also added a specific rule to address §48C taints in a contract manufacturing arrangement - the tangible property determination for a 45X facility would apply to either party in the transaction, regardless of which party to the contract manufacturing arrangement is claiming the credit.

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Effective date

‍December 27, 2024

Applicability dates

‍As noted in § 1.45X–1(j), §1.45X–2(f), §1.45X–3(g), and §1.45X–4(d), these final regulations apply to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending on or after October 28, 2024.

Taxpayers may choose to apply these regulations to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending before October 28, 2024, provided that taxpayers follow these regulations in their entirety and in a consistent manner.

Additionally, §5.05(2) of Notice 2023–18 and §3 of Notice 2023–44, which relate to the interaction between §45X and §48C, are superseded for eligible components for which production is completed and sales occur after October 28, 2024.

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Appendix 1 — Additional technology-specific changes

Clarification on tandem cells

‍The final regulations addressed commenters concerns regarding disparate treatment between different types of tandem cells and the resulting capacity and credit amount. The Treasury Department and IRS agreed with commentators, and to prevent potentially incentivizing the development of certain tandem technology, added additional text for cells that are either mechanically stacked or using interconnected layers: “Where that cell is sold to a customer who will use it as the bottom cell in a tandem module, its capacity should be measured with the customer’s intended top cell placed between the bottom cell and the one-sun light source.”

Definition of "polymeric backsheet"

‍The final regulations clarify that the definition is limited to a sheet on the back of solar modules composed, at least in part, of a polymer, that acts as an electric insulator and protects the inner components of such module from the surrounding environment. This added definition for "polymeric" excludes most glass backsheets because they are typically not composed of a polymer, but of soda-lime glass.

Solar grade polysilicon measurement standards

‍The final rules added that satisfaction of the minimum purity requirement will be determined in accordance with the standards provided in SEMI Specification PV17-1012 Category 1. This standard also provides additional clarification by including guidance to distinguish between material and immaterial impurities.

Determining credits from related offshore wind vessels

‍§1.45X-3(c)(4)(ii) was revised to include the application of Federal income tax principles to determine inclusions and exclusions for the sales price used to calculate the §45X credit for offshore wind vessels.

Additional standards allowed to certify rated capacity of completed wind turbines

‍The final regulations revise proposed §1.45X-3(c)(6) to add both AWEA 9.1-2009 and ANSI/ACP 101-1-2021 as acceptable wind turbine certification standards.

Clarification to DC optimized microinverter systems

‍§1.45X-3(d)(5)(iv)(B) requires that the inverter and DC optimizer in the DC optimized inverter system to be produced and sold as a combined end product. The Treasury Department and the IRS retained this rule while also clarifying that the inverter and the DC optimizer do not need to be physically packaged together at sale, and the inverter and DC optimizer do not need to be fully interconnected and assembled at the time of sale.

No separate credit is created solely for a DC optimizer, and no changes were made to the number of inverter units used to compute the available credit amount, as these changes are beyond the authority of the Treasury Department and IRS.

Battery cell energy density requirements refer to volumetric energy density

‍When determining if a battery cell has an energy density of not less than 100 watt-hours per liter, the final regulations clarify that energy density is referring to volumetric energy density in §1.45X-3(e)(3)(i)(B) (e.g., as opposed to gravimetric, mass-based, energy density).

Clarification on modules using battery cells

Many commenters expressed concerns regarding the proposed regulations which would not have permitted a credit for the production of a module that is not the end-use configuration. Other commenters acknowledged that the proposed regulations could create confusion as the definition of battery module could potentially include items that are referred to in the industry as “battery packs.”

To address this confusion, §1.45X-3(e)(4)(i)(A) of the final regulations:

• Redefine an end-use configuration as “the product that ultimately serves a specified end use combines cells into a module such that any subsequent manufacturing is done to the module rather than to the cells individually”
• Clarify that “where multiple points in a supply chain may be eligible under this section, the first module produced and sold that meets the requirements of this section and the kilowatt-hour requirement in paragraph (e)(4)(i) of this section will be the only module eligible”

Clarification on modules not using battery cells for thermal and thermochemical battery technology

‍Taxpayers producing thermal and thermochemical battery modules with no battery cells must convert the energy storage to a kilowatt-hour basis, provide both the methodology and testing regarding this conversion, and maintain this testing as part of its books and records.

Additionally, the kilowatt-hour conversion cannot exceed the direct conversion of the total nameplate capacity of the thermal battery module to kilowatt-hours (the capacity that is sold to the consumer), and the taxpayer claiming the §45X credit must use the same methodology consistently, subject to any updated standard of the same methodology and testing, for all battery modules (with or without cells) sold in the taxpayer’s trade or business. The final regulations incorporate these clarifications in §1.45X-3(e)(4)(ii).

Additional guidance forthcoming for aluminum

‍As noted in the Summary of Comments and Explanation of Revisions, a number of comments were received regarding additional clarification for the definition of aluminum, and the Treasury Department and the IRS have determined that additional consideration is necessary prior to finalizing proposed §1.45X-(b)(1) with respect to this definition.

Appendix 2 — Additional contract manufacturing and relation person election changes

Additional critical minerals use case for contract manufacturing

‍The final regulations also added an additional contract manufacturing example to demonstrate a way to structure and claim a tax credit on initial extracting and refining activities that do not meet the minimum purity levels required for an eligible component until the initial materials are later purchased, completed, and sold.

Anti-abuse rule measured at point of sale for Related Person Election

‍The final regulations added a clarification regarding defects with regard to a related person election. If an eligible component is not defective at the time of sale, defects arising after the point of sale may occur in the ordinary course of a business and do not generally raise the improper claim concerns regarding defective components.

Appendix 3 — Select items upheld in final regulations

Confirmation of the scope for domestic production and use

‍The final regulations adopted the proposed rules that require eligible components to be produced within the United States, whereas constituent elements, materials, and subcomponents used in the production of the eligible components are not subject to a domestic production requirement.

In addition, the eligible components do not ultimately have to be used in the United States for §45X eligibility.

Production efforts required to stack or claim additional credits for integral components that are also eligible components

‍The final regulations upheld the temporary regulations perspective that a taxpayer must produce (rather than merely purchase or acquire) an eligible component that it then integrates, incorporates, or assembles into another eligible component that is then sold to an unrelated person in order to claim credits on both components.

No additional credits for defective units that are subsequently replaced

‍A commenter proposed that eligible components that were used to replace defective units pursuant to a contractual obligation do not appear to violate proposed anti-abuse provisions. However, the final regulations confirmed the replacement of a defective unit does not represent a new sale to an unrelated person, and §45X does not incentivize the production of two eligible components related to a single sales transaction.

Rejection to expand eligible components and applicable critical minerals

‍Commenters requested to expand the list of eligible components and applicable critical minerals, but the Treasury Department and the IRS declined, citing the lack of statutory authority to expand the list.

Rejection of proposed safe harbor for contract manufacturing arrangements

‍The Treasury Department and the IRS declined a commenter’s request to establish a safe harbor for contract manufacturing agreements in place before the applicability date of the proposed regulations.

However, a taxpayer may still elect to apply the special rule (§1.45X-1(c)(3)(iii)), which allows the parties of a contract manufacturing arrangement to agree on which party to the contract will claim the credit.

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