Navigating Upcoming IRS Guidance on Section 45X

The stakes around Section 45X have never been higher. For developers, manufacturers, and investors in the clean energy and infrastructure space, the difference between qualifying for these credits and losing them entirely can hinge on decisions made months — sometimes years — before the IRS finalizes its guidance. Getting this wrong isn't just a paperwork problem; it's a project-killing problem.

Treasury and the IRS are actively working through the regulatory framework that will govern how Section 45X credits are claimed, verified, and potentially clawed back. Comments have been submitted, positions are being staked out, and the prohibited foreign entity rules — a set of restrictions that could disqualify otherwise creditworthy projects — are at the center of the debate.

Here's what infrastructure and energy professionals need to understand before that guidance drops.

Understanding Section 45X: What It Actually Does

Section 45X of the Internal Revenue Code, formally known as the Advanced Manufacturing Production Credit, was created under the Inflation Reduction Act to incentivize domestic production of clean energy components. Unlike investment tax credits that reward capital deployment, 45X is a production credit — meaning it pays out per unit manufactured on U.S. soil.

The credit covers a specific list of eligible components: solar modules, wind turbine parts, inverters, battery cells and modules, and critical minerals processed domestically. The amounts aren't trivial. Solar modules qualify for $0.07 per watt of capacity. Battery cells earn $35 per kilowatt-hour. For a large-scale manufacturing facility running at volume, these figures compound into nine-figure annual credit values.

That's not a rounding error — it's the difference between a viable business model and one that doesn't pencil.

The structural logic here is deliberate. Congress didn't want to just subsidize clean energy deployment; it wanted to rebuild U.S. manufacturing capacity that had largely been offshored over the prior two decades — particularly to China. Section 45X is as much an industrial policy tool as it is a tax provision.

Which is exactly why the prohibited foreign entity rules exist.

The Prohibited Foreign Entity Rules: Who Gets Cut Out

This is where Section 45X gets complicated — and where the IRS guidance currently being developed will have the most significant practical impact.

The Inflation Reduction Act and subsequent legislative provisions created restrictions around what are called "foreign entities of concern" (FEOCs). These are entities with ties to certain foreign governments — primarily China, Russia, North Korea, and Iran — that Congress determined should not benefit from U.S. tax credits designed to build domestic industrial independence.

The rules operate on multiple levels. A company that is owned or controlled by a prohibited foreign entity cannot claim 45X credits. But the restrictions don't stop at direct ownership. Supply chain relationships, licensing arrangements, and even technology transfer agreements are under scrutiny. A U.S.-incorporated manufacturer using components, IP, or processes substantially derived from a FEOC-affiliated source faces real exposure.

The practical challenge is that "substantially derived" and "controlled by" are phrases that require regulatory definition — and that definition doesn't fully exist yet.

This ambiguity is exactly what the forthcoming Treasury and IRS guidance is being asked to resolve. Industry commenters have pushed hard on several fronts: clear de minimis thresholds for incidental FEOC involvement, workable definitions of "control," and transition relief for supply chains that cannot be restructured overnight. These aren't frivolous asks. Solar manufacturing, in particular, involves raw materials and equipment — polysilicon, ingots, wafers — that flow through supply chains with significant Chinese involvement. Untangling that in a compliance-sound way requires precision that broad statutory language simply doesn't provide.

What Recent Guidance Has Clarified — and What It Hasn't

Treasury has issued initial proposed rules on Section 45X, and the comment period produced a substantial record. A few things are clearer now than they were at enactment.

The credit applies on a per-item, per-year basis, meaning manufacturers claim it annually based on actual production output — not on projected capacity or capital deployed. The eligible component definitions have been refined somewhat, particularly around battery modules versus battery cells (these are distinct line items with different credit rates). Treasury has confirmed that contract manufacturers — companies producing components on behalf of another taxpayer — can potentially qualify, though the rules around who claims the credit in those arrangements remain a pressure point.

What remains genuinely unsettled is the FEOC framework's interaction with real-world manufacturing structures. Joint ventures with foreign partners, technology licenses from overseas IP holders, and raw material procurement from state-affiliated mining operations all sit in a gray zone that sophisticated counsel can argue either way — which is precisely why definitive IRS guidance matters so much.

For infrastructure compliance purposes, the absence of clear rules creates a painful choice: move forward and accept regulatory risk or wait and lose competitive positioning. Neither option is comfortable.

Impacts on Infrastructure Development and Manufacturing Projects

For project developers and manufacturers building or financing facilities with 45X credits in the capital stack, the implications are immediate and concrete.

Lenders and tax equity investors are already stress-testing 45X credit streams against FEOC exposure scenarios. If there's meaningful uncertainty about whether a facility's supply chain is clean under the forthcoming rules, investors will either price that risk into their returns or walk away from the deal. In a market where tax equity is still the preferred monetization vehicle for most manufacturers, that's not a theoretical concern.

Due diligence processes have lengthened substantially. Where a supply chain audit once took weeks, FEOC compliance reviews are now multi-month exercises involving trade counsel, customs specialists, and sometimes third-party forensic accountants. Buyers acquiring manufacturing businesses are demanding representations and warranties around FEOC status that would have been unthinkable two years ago.

The practical best practices forming in the market right now include:

• Document everything upstream. If your raw material supplier has any foreign government ownership, you need that documented, analyzed, and opined on before you file, not after.
• Build contractual FEOC representations into supplier agreements. Make your suppliers warrant their status and notify you of any changes. This creates both legal protection and an early warning system.
• Model the credit with and without FEOC risk haircuts. Any project finance model that treats 45X credits as certain — rather than probability-weighted — is not being intellectually honest about current regulatory conditions.
• Engage with the guidance process. Treasury and IRS are still collecting industry input. Organizations with specific, well-documented fact patterns have an opportunity to shape how ambiguous provisions get resolved.

Preparing for What Comes Next

The forthcoming guidance is expected to address FEOC definitions with more specificity, clarify the treatment of complex ownership structures, and potentially introduce safe harbors for certain supply chain configurations. Industry coalitions representing solar manufacturers, battery developers, and critical mineral processors have all submitted detailed comment letters laying out their preferred frameworks.

A few things are worth watching closely.

The de minimis question will likely be one of the most contested. How much FEOC-affiliated content can a product contain before the credit is at risk? A 0% threshold is practically unworkable for many products. A 25% threshold might be too permissive for Congressional intent. Where Treasury lands on this number will reshape procurement strategies across the sector.

Transition relief timelines matter enormously for facilities already under construction. If a manufacturer broke ground on a facility based on one set of supply chain assumptions and the final rules shift those assumptions materially, they need time to adapt. Whether Treasury builds in reasonable transition periods — or drops final rules with immediate effect — will determine whether some projects survive the regulatory transition intact.

The broader direction is clear even if the details aren't: the U.S. is using tax policy to build a domestic clean energy manufacturing base, and the FEOC rules are the enforcement mechanism that ensures those credits stay onshore.

For developers and investors, the right move is not to wait passively. Engage trade counsel now. Map your supply chains with the assumption that documentation will be required. Structure new agreements with FEOC compliance language that can survive whatever Treasury ultimately publishes.

The guidance will come. The question is whether you're positioned to comply with it — or scrambling to catch up.

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[INTERNAL LINK: Section 45X Overview]

[INTERNAL LINK: FEOC Compliance Best Practices]

[INTERNAL LINK: Clean Energy Manufacturing Trends]