Month: January 2025

The section 45X advanced manufacturing production tax credit, introduced as part of the Inflation Reduction Act (IRA) of 2022, represents a transformative step in bolstering domestic clean energy manufacturing. With a focus on incentivizing the production of advanced energy components such as solar panels, wind energy components, batteries and critical minerals. The 45X credit aims to strengthen the U.S. supply chain, reduce reliance on imports and support the transition to a clean energy economy.

This article delves into the key aspects and implications of section 45X, guiding manufacturers through its complexities. Be sure to watch our video addressing questions we are hearing in the market and download our comprehensive checklist at the end of the article for actionable insights and preparation tips.

What is section 45X?

The section 45X tax credit is a federal tax incentive designed to reward domestic manufacturers for producing qualifying advanced energy components. These include solar and wind energy components, battery modules, inverters and the refining or recycling of critical minerals.

In October, the Treasury released section 45X final regulations, including the new rules for critical minerals, it’s even more crucial for manufacturers to understand the additional nuances or opportunities. The addition of mining and extraction costs as eligible activities under the 45X credit opens new opportunities but also adds layers of complexity.

Eligible manufacturers can claim the credit directly on their tax return without needing a formal application process, simplifying access to this powerful incentive. The value of the credit is calculated based on specific metrics—such as production volume, electrical capacity or cost—and is fully transferable, allowing manufacturers to sell unused credits for immediate cash benefits.

The program offers full credit benefits presently through 2029, with a phased reduction beginning in 2030. Notably, critical minerals remain exempt from this phase-out. By ensuring long-term visibility into the credit’s value, the 45X incentive has already fueled a significant increase in clean energy manufacturing investment, reflecting its impact on the sector’s growth trajectory.

What manufacturers need to know before filing

Navigating the complexities of federal tax credit programs for manufacturers requires thorough due diligence and careful compliance to avoid potential pitfalls. A key requirement for claiming the section 45X advanced manufacturing production tax credit is meeting the IRS’s definition of “substantial transformation.” This means that the raw materials or components used in the manufacturing process must undergo significant processing to become a new and distinct product with a different name, character or use. This goes beyond simple assembly or minor modifications. The transformation must fundamentally change the raw inputs into a final product that can be independently sold.

For example, turning raw silicon into solar cells or refining lithium into battery-grade material qualifies as substantial transformation. However, merely assembling imported solar panels or basic processing of materials without significant alteration would not meet this criterion.

This requirement underscores the importance of maintaining detailed records of the manufacturing process, ensuring that each step can be documented and verified as meeting the substantial transformation standard. Failure to properly substantiate this transformation could lead to disqualification from the credit, along with potential audits and penalties.

Eligibility and domestic manufacturing requirements

To claim the credit, components or products must be manufactured within the U.S. or its territories, ensuring domestic production and reducing reliance on international supply chains. The value of the 45X credit for a manufactured product can then be calculated using one of three primary methods: a fixed value based on component size or weight, a rate per unit of electrical capacity (e.g., cents per watt) or as a percentage of the cost of production. Eligible components and their credit amounts include;

Solar energy components

Solar-grade polysilicon — $3 per kilogram (kg)PV wafer — $12 per square meter (m2)PV cell (crystalline or thin-film) — 4¢ per watt-direct current (Wdc)Polymeric back sheet — 40¢ per m2PV module — 7¢ per WdcTorque tube — 87¢ per kgStructural fasteners — $2.28 per kg

Wind energy components

Blade — 2¢ multiplied by the total rated capacity of the completed wind turbineNacelle — 5¢ multiplied by the total rated capacity of the completed wind turbineTower — 3¢ multiplied by the total rated capacity of the completed wind turbineOffshore wind foundation (fixed) — Equal to the product of 2¢ multiplied by the total rated capacity of the completed wind turbineOffshore wind foundation (floating) — Equal to the product of 4¢ multiplied by total rated capacity of the completed wind turbine

Inverters

Central inverter — 0.25¢ per watt-alternating current (Wac)Utility inverter — 1.5¢ per WacCommercial inverter — 2¢ per WacResidential inverter — 6.5¢ per WacMicroinverter — 11¢ per WacDistributed wind inverter — 11¢ multiplied by the total rated capacity of the distributed wind inverter

Batteries and critical minerals

It’s worth noting that while the finished goods must be manufactured domestically, their subcomponents (such as steel, framing or electrical parts) do not need to originate in the U.S. This flexibility allows manufacturers to leverage global supply chains for constituent materials without jeopardizing eligibility for the credit.

Given the complexities and potential for IRS scrutiny, due diligence is essential. The IRS has emphasized rigorous oversight of tax credits like section 45X to prevent misuse. Manufacturers should carefully evaluate their processes and maintain meticulous documentation to validate their eligibility. The three key requirements to note however are;

Unrelated third-party sale: The manufactured product must be sold to an unrelated third-party to qualify for the 45X credit. Internal transfers or inventory stockpiling are not eligible.Documentation: Manufacturers must maintain thorough records, including details of the manufacturing process, descriptions of finished goods and proof of sale to third parties.No prevailing wage requirements: Unlike many other clean energy tax credits, 45X does not require compliance with prevailing wage and apprenticeship standards.

Sale to unrelated third-party

The sale to an unrelated third-party is a critical step in verifying that a substantial transformation has occurred. This requirement ensures that the product resulting from the transformation is genuinely intended for market use rather than for further internal processing or use within the same supply chain. By mandating the sale to an unrelated third-party, the regulation seeks to establish a clear, market-driven valuation and application of the newly transformed product.

Here’s how this works in practice:

Market validation: The sale demonstrates that the product has a distinct and independent value in the market, separate from the raw materials used to create it.Independence: The third-party should be unrelated and have no significant business ties to the producer, ensuring an unbiased transaction that reflects the true value and nature of the transformed product.Documentation: Proper documentation of the sale, including contracts, invoices and shipping records, supports compliance and provides evidence that the transaction is legitimate and meets the regulatory criteria.

At Baker Tilly, we specialize in helping manufacturers navigate federal tax credit programs, including the complexities of the IRA section 45X tax credit. Our team provides independent assessments to determine eligibility, assists in substantiating claims with proper documentation and helps implement future-state strategies to ensure compliance. We support companies in establishing robust production and sale tracking systems, such as ERP and manufacturing floor tracking systems, to substantiate activities at the individual product level, including serial or lot numbers.

With Baker Tilly, manufacturers can confidently claim section 45X credits while minimizing risks. Contact an IRA tax credit specialist to learn more.

In terms of North American trade, the stakes have never been higher, as the findings of DP World’s 2025 Trade in Transition report attest. The annual report, co-authored with Economist Impact, examines the headwinds of global trade in 2025 and their impact around the world. 

The regional North American report, “North America: Balancing Growth, Resilience and Compliance,” analyzes shifting trade dynamics. It finds 50% of North American executives rank geographical diversification as their top supply-chain strategy — higher than the global average of 46%. But in true North American fashion, this isn’t just about playing it safe. For many businesses, diversification isn’t just a safety net; it’s a growth engine.

In the wake of Donald Trump’s return to the White House, North American businesses face a volatile trade landscape. From renewed debates over the United States-Mexico-Canada Agreement (USMCA) to rising protectionism, companies must navigate a maze of policies, geopolitical tensions, and economic pressures. This year’s survey sheds light on these challenges.

Diversification: A Growth Strategy with a Side of Stress
Diversifying supply chains is a lifeline for North American companies bracing for tariffs or trade restrictions. Canadian and Mexican businesses reliant on the U.S. market see diversification as critical to survival. 

But let’s not sugarcoat it: diversification isn’t without hurdles. Expanding supplier relationships or relocating production can spike administrative costs and complicate logistics. Edward Brzytwa, vice president of trade at the Consumer Technology Association, notes, “Diversification efforts often raise administrative costs, but they also mitigate risks and create new growth opportunities.”

The numbers back him up. Nearly three-quarters of North American companies are expanding supplier relationships, opting for broader networks over the risk of putting all their eggs in one basket. And while this strategy might involve some headaches, it provides a crucial buffer against disruptions and uncertainties.

Nearshoring and Reshoring: Mexico’s Moment?
While diversification is the star of the show, nearshoring and reshoring are gaining traction, with 38% of U.S. businesses prioritizing these strategies. Mexico is emerging as a key player, with its skilled labor force and expanding infrastructure, reaping the benefits from the USMCA’s streamlined customs procedures and digital trade provisions. The Port of Manzanillo, for instance, is undergoing a $2.7 billion expansion to more than double its capacity, targeting a position among the world’s top 20 container ports. This expansion is part of the country’s broader push to attract manufacturing investment, particularly in industries like automotive and aerospace.

But let’s not get ahead of ourselves. Mexico faces challenges. Energy nationalization policies have deterred investors, and labor shortages remain a concern. As Leila Afas, director of global public policy at Toyota, bluntly puts it, “Mexico should have benefited far more from nearshoring trends, but its policies have held it back.”

The USMCA: A Love-Hate Relationship
The USMCA is the glue holding North American trade together — or at least trying to. Stricter rules of origin are encouraging companies to source materials from within the region, boosting intra-regional trade. Proposed tariffs on Mexican car imports, though, have created uncertainty, particularly in the automotive sector, pushing companies like John Deere to reconsider plans to move production south of the border. 

While Trump’s renewed focus on reshoring may win him points with American manufacturers, it’s creating headaches for Mexican factories reliant on the U.S. market. While some tweaks to the agreement are anticipated, for now at least it remains a cornerstone of regional trade integration.

Self-Sufficiency and Friendshoring
With rising geopolitical tensions, 27% of North American executives prioritize self-sufficiency, compared with a global average of 20%. As an alternative to slamming the door on international trade, businesses are exploring “friendshoring,” relocating supply chains to trusted allies like Mexico and Vietnam. Since 2018, China’s share of U.S.-manufactured imports has declined, with Mexico and the EU stepping in. Continued reliance on Chinese suppliers for critical components makes true diversification more of a long-term goal than an immediate solution.

Labor Shortages: The Ongoing Challenge
If there’s one issue keeping North American executives up at night, it’s labor shortages. The tight labor market, particularly in advanced manufacturing sectors, complicates supply-chain reconfiguration. Automation offers hope, with 51% of executives believing technology can offset shortages. Companies like Toyota are adopting “co-bot” systems where humans and robots collaborate to boost productivity. However, automation isn’t a silver bullet. Upskilling the workforce and addressing immigration restrictions remain critical to solving the labor crisis.

The Bottom Line
North American trade is at a crossroads. Diversification, nearshoring, and automation can provide pathways to growth and resilience, but they come with their own set of challenges. From Mexico’s manufacturing boom to the labor shortages plaguing the region, the trade landscape is as dynamic as ever.

For businesses navigating this new normal, the key is adaptability. By embracing diversification, investing in technology, and leveraging regional trade agreements like the USMCA, companies can turn challenges into opportunities.

Curious to learn more about the findings shaping North American trade? Click here to download a copy of the full report and discover how your business can thrive in this evolving landscape.