April 4, 2023
IRS gives manufacturers tight deadline for complying with critical mineral and battery component requirements for the IRC Section 30D credit
In proposed rules (REG-120080-22), the IRS offers much-anticipated guidance on critical minerals, battery components and other requirements for clean vehicles to qualify for the federal income tax credit under IRC Section 30D.
The new requirements apply to vehicles placed in service (defined as the day the taxpayer takes delivery of the vehicle) on or after April 18, 2023, even if the vehicle was ordered or purchased before that date.
The IRS invites comments and requests for a public hearing to be submitted by June 16, 2023.
The Inflation Reduction Act modified the IRC Section 30D "new qualified plug-in electric drive motor vehicles credit" to a "clean vehicle credit." The non-refundable clean vehicle credit is a dollar-for-dollar reduction of federal income taxes by up to $7,500 for new clean vehicles acquired and placed in service by a taxpayer during the tax year before January 1, 2033.
To be eligible for a credit under IRC Section 30D, the clean vehicle must satisfy the following requirements: (1) the original use of the clean vehicle must commence with the taxpayer, (2) the clean vehicle cannot be acquired resale, (3) the clean vehicle must be made by a qualified manufacturer, and (4) the final assembly of the clean vehicle must occur in North America.
The IRC Section 30D credit can reach $7,500, so long as the sourcing requirements are satisfied for both the critical minerals and battery components contained in the clean vehicle's battery. The credit consists of two parts. For vehicles placed into service after April 17, 2023, taxpayers' eligibility for the first $3,750 of the credit depends on the percentage of the critical minerals that were either extracted or processed in the US (or extracted or processed in any country with which the US has a free trade agreement in effect) or recycled in North America. The applicable percentage is 40% for vehicles placed in service before 2024, with the percentage increasing to 80% for vehicles placed into service after December 31, 2026. Taxpayers' eligibility for the remaining $3,750 of the credit depends on the applicable percentage of the value of the battery components that were manufactured or assembled in the US. The applicable percentage is 50% for clean vehicles placed in service before 2024, with the applicable percentage increasing to 100% for vehicles placed in service after December 31, 2028.
For the credit to apply, the manufacturer's suggested retail price (i.e., sticker price) for a vehicle may not exceed a specified threshold (e.g., $80,000 for vans, SUVs and pickup trucks, $55,000 for sedans and others). Limitations on taxpayer's adjusted gross income also apply.
For vehicles placed in service after December 31, 2023, the credit will not apply for battery components sourced from "foreign entities of concern." A similar limitation for critical minerals takes effect on January 1, 2025.
Taxpayers may elect to transfer credits to an eligible dealer subject to certain requirements. Additionally, certain recapture rules apply.
The IRS and Treasury previously issued guidance on the IRC Section 30D credit (see Tax Alerts 2022-1262, 2023-0076 and 2023-0251). These proposed rules clarify some of the terms used in the earlier guidance and address the requirements for critical minerals and battery components. The IRS also released an updated Fact Sheet (FS-2023-08) about qualifying for the new IRC Section 30D credit.
The proposed rules do not address how to determine whether a vehicle sources battery components or critical minerals from "foreign entities of concern" but indicate that the IRS and Treasury will issue guidance on that issue at a later date.
Critical mineral requirements
The proposed rules use a three-step approach to determine the amount of critical minerals in a battery.
First, a manufacturer must determine separately the procurement chain for each portion of an applicable critical mineral that is a qualifying critical mineral. A procurement chain is defined as a "common sequence of extraction, processing, or recycling activities that occur in a common set of locations, concluding in the production of constituent materials."
Second, the manufacturer must determine whether the minerals were (1) extracted or processed in the US, or in any country with which the US has a free trade agreement in effect or (2) recycled in North America. The proposed rules use a "50% of value added test" to make this determination, meaning that 50% or more of the value added by any of these processes occurred in the eligible location. This test applies for vehicles placed in service in 2023 and 2024; for later years, the IRS anticipates a more "stringent test," according to the Preamble of the proposed rules.
The proposed rules list the countries with which the US currently has comprehensive free trade agreements: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. According to the rules' Preamble, the Treasury Department and IRS may propose adding countries, such as Japan (which recently entered into an agreement with the US), whose trade agreement with the US meets the following factors in Prop. Treas. Reg. Section 1.30D-3(c)(7)(i):
Third, a manufacturer must calculate the percentage of the value of qualifying critical minerals contained in a battery against the total value of all critical minerals contained in the battery. The proposed rules give details on what to consider as part of this calculation.
Battery component requirements
The proposed rules take a four-step approach to determine if manufacturers comply with the battery components' requirement. Qualified manufacturers need to:
The proposed rules define "battery" as a collection of one or more battery modules, each of which has two or more cells, that create a voltage or current. The proposed rules do not consider the parts of the cell and module that do not directly contribute to the storage of energy to be part of the battery for purposes of the calculation. When calculating the value of battery components, the end point is the battery module, so additional components that may be part of the battery pack itself are not taken into consideration.
The proposed rules also address other relevant issues. For example, the rules do not apply the limitation on modified adjusted gross income (AGI) to corporations and other taxpayers that do not have to compute AGI under IRC Section 62. Corporations eligible for a credit under IRC Section 45W, which does not contain the multitude of eligibility requirements under IRC Section 30D, may choose between the two credits for a new clean vehicle.
Multiple owners and passthrough entities looking to claim a credit under IRC Section 30D may only do so on one tax return. Only partnerships or S corporations may allocate a credit among multiple owners in line with the applicable rules under IRC Sections 704 and 1366/1377 (respectively). In a multiple-owner situation, the seller's report must correctly identify the taxpayer claiming the credit or the partnership or S corporation as the purchaser.
Finally, the proposed rules clarify additional terms used in IRC Section 30D. For example, the proposed rules define "assembly" as the process of combining battery components into battery cells and modules. This definition is important and has implications for manufacturers determining whether battery cells, modules or related components were assembled or manufactured in North America. Similarly, "manufacturing" is defined as the industrial or chemical steps taken to produce a battery component.
The proposed rules largely adopt the methodology for determining eligible vehicles that was described in the white paper released by Treasury on December 29, 2022. As such, only a few new items must be taken into consideration as manufacturers work to determine which vehicles will be eligible for a credit starting on April 18, 2023.
Manufacturers must review their supply chains and complete the required calculations, as discussed previously, to determine if their vehicles qualify for a credit under IRC Section 30D. Manufacturer's will need to certify their qualifying vehicles to Treasury before April 18,18, 2023, the date the proposed rules take effect. Taxpayers can rely on manufacturers' compliance with the proposed rules when purchasing qualifying vehicles.
Manufacturers and those suppliers throughout the battery supply chain should also take a close look at the various definitions in the proposed rules to determine which apply to their fact pattern and may affect their eligibility calculations for vehicles under IRC Section 30D. In particular, manufacturers must consider the additional flexibility around battery components given the definitions of assembly and manufacturing, as well as the calculation end point of the battery module as described in the proposed rules.
While fewer vehicles are expected to be eligible starting on April 18, the number of eligible vehicles is expected to increase as manufacturers realign their supply chains to qualify vehicles under the proposed rules. Consumers looking to capture the full $7,500 credit for a vehicle that may not be eligible as of April 18 should note that simply placing an order for a vehicle is not sufficient to meet the placed-in-service definition. Those consumers should carefully consider whether a particular vehicle can be delivered to the purchaser by this date.
Finally, a few areas will need to be addressed in future guidance. Having a definition of "foreign entity of concern" well before January 1, 2024, will be important for manufacturers given the implications of purchasing components from these entities after the limitation takes effect. Similarly, Treasury has made clear that it expects to implement more stringent traceability/tracking standards for battery components and critical minerals in the future, so closely monitoring activity around these standards will be important to maintain ongoing eligibility of current and future EVs.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor