45x Credit and Contract Manufacturing

Outsourcing production sounds simple until a tax credit worth millions enters the picture. Then the question of ownership gets complicated fast.

The 45x credit, formally the Advanced Manufacturing Production Credit under the Section 45X of the Internal Revenue Code, was designed to reward domestic production of clean energy components. Solar wafers, battery cells, wind turbine parts, critical minerals. If you make them in the United States, the credit flows to you. But what happens when “you” is actually two companies, one holding the brand and the contracts, the other running the factory floor?

That question sat unresolved for the better part of two years. The final regulations released by Treasury and the IRS in October 2024 finally gave the industry a working answer. It is not the answer everyone expected.

The Default Rule: Whoever Actually Produces the Component

Under the Section 45X credit, the credit belongs to the taxpayer that produces an eligible component. Straightforward on paper. Messy in practice.

Production, in the statute’s language, means the party performing the manufacturing activities that give the component its essential character. If a contract manufacturer runs the line, calibrates the equipment, sources the raw inputs, and physically transforms materials into a finished cell or module, that manufacturer is the presumptive claimant. The brand owner sitting a thousand miles away, writing specifications and taking delivery, is not.

That default caught a lot of businesses off guard. Companies that had built their entire manufacturing strategy around outsourcing suddenly realized the credit they had been modeling into their financials might belong to their supplier.

The Contractual Election: A Quiet Game Changer

Here is where the final regulations opened a door. Treasury acknowledged that rigid application of the default rule would distort commercial arrangements the industry had already built.

So they allowed flexibility. When two parties are involved in producing an eligible component under a contract manufacturing arrangement, they can agree in writing which one claims the 45x credit. The election has to be documented, signed by both parties, and made before the credit is claimed on a return.

That written agreement now sits at the center of every serious contract manufacturing deal in the clean energy space. It is not a boilerplate exhibit anymore. It shifts real economic value.

You cannot make the election retroactively to grab credits already claimed by the other party. And both sides need to be eligible taxpayers in the first place. A tax-exempt entity or a foreign manufacturer without US operations cannot receive the credit through a paper election.

What This Means for Buyers and Sellers

For businesses evaluating supply chain restructuring or buying and selling 45x advanced manufacturing production credits, the contractual layer now matters as much as the production layer.

A brand owner outsourcing to a domestic contract manufacturer can negotiate to retain the 45x credit, typically in exchange for a higher unit price or shared economics. A contract manufacturer can keep the credit and monetize it separately, either through direct pay if eligible or through the transferability market that has grown around IRA credits.

Neither approach is inherently better. The right structure depends on which party has the tax capacity to actually use the credit, which party carries the capital risk, and which party is closer to the buyer relationship.

The Substantial Transformation Test Still Applies

One thing the election does not do. It does not create a credit where none exists.

The underlying activity still has to qualify. Substantial transformation of materials must occur in the United States. Simple assembly, repackaging, or minor finishing operations do not clear the bar. The IRS made this point aggressively in the final regulations, particularly for battery components and critical minerals where value-added processing steps get scrutinized.

If your contract manufacturer is really just doing kit assembly on imported subcomponents, no election language saves the credit. The activity itself has to be genuine domestic production.

Conclusion

Written contracts sound like a lawyer’s problem. In the 45x context, they are a finance problem.

The election document, the specification of who claims the 45x credit, the definition of what counts as an eligible component in that specific arrangement, the treatment of related-party sales, the recordkeeping obligations. All of it needs to be nailed down before the first invoice, not renegotiated after.

Businesses that treat the 45x credit as a spreadsheet input without addressing the contractual reality underneath usually discover the gap during an audit or a credit transfer diligence process. By then, the fix is expensive.

The 45x credit rewards American manufacturing. Who gets to keep that reward, though, is now a matter of what you agreed to in writing.