Executive summary:
Proposed regulations released by the Department of the Treasury on March 31, 2023, give auto manufacturers a clearer picture of requirements to qualify for and maximize the value of the clean vehicle tax credit under Internal Revenue Code section 30D.
Effective April 18, 2023, the credit allowable for clean vehicles placed in service will be determined by its ability to satisfy new critical minerals and battery components requirements. The guidance also highlights certain resources, such as the Department of Energy’s VIN Decoder tool, that individual taxpayers can use to determine whether their electrical vehicle purchase will yield tax savings. The IRS provided an updated Fact Sheet for buyers of clean vehicles to help them navigate questions on credit eligibility, vehicle eligibility, etc.
Overview
The Inflation Reduction Act modified the clean vehicle credit through requirements placed on vehicle manufacturers and buyers. The clean vehicle credit under section 30D allows for an income tax credit for the purchase of a qualifying vehicle of up to $7,500 for individual taxpayers whose modified adjusted gross income falls under certain thresholds. For individuals, this is treated as a nonrefundable personal credit. Taxpayers may claim the section 30D credit with respect to depreciable vehicles. In this case, a credit would be treated as a component of the general business credit.
The proposed regulations provide some new information for buyers of clean vehicles, but they primarily focus on new requirements important to manufacturers of clean vehicles. For a vehicle to be eligible for the credit, new critical mineral and battery component requirements must be satisfied. These requirements will apply to vehicles placed in service after the publication of the proposed regulations in the Federal Register on April 17, 2023.
Definitions
The proposed regulations define many terms. Several terms defined in the proposed regulations are consistent with definitions provided in previous guidance, such as Notice 2023-1, Notice 2023-16 and the Treasury white paper released in December 2022.
With respect to the critical mineral and battery component requirements, some of the key terms defined in the proposed regulations include:
- Constituent materials
- Country with which the United States has a free trade agreement in effect
- Procurement chain
- Qualifying battery component
- Qualifying critical mineral content
Many terms defined in the proposed regulations will be useful to vehicle manufacturers and to and manufacturers up the supply chain for electric vehicle batteries. Vehicle manufacturers must distinguish, categorize and value various components from the supply chain, and added definitional guidance should provide clarity.
Notably, excluded entities—a reference to foreign entities of concern whose involvement in a procurement chain could taint the credit eligibility of otherwise clean vehicles placed in service after Dec. 31, 2023—is not a defined term in these proposed regulations.
The critical mineral and battery component requirements framework is generally consistent with what was described in the Treasury white paper. Satisfaction of the critical mineral or battery component requirement results in a $3,750 credit for the vehicle’s buyer. Thus, the maximum credit per clean vehicle of $7,500 would be available if both the critical mineral and battery component requirements are met.
Critical mineral requirement
To meet the critical mineral requirement, an applicable percentage of the value of certain critical minerals contained in a clean vehicle’s battery at the time it is placed in service must have been extracted or processed in a country with which the United States has a free trade agreement in effect or have been recycled in North America. The applicable percentage is:
- For calendar years prior to 2024, 40%
- For calendar year 2024, 50%
- For calendar year 2025, 60%
- For calendar year 2026, 70%
- For calendar years after 2026, 80%
The proposed regulations present a three-step process for determining the percentage of the value of the applicable critical minerals in a battery that contribute toward the critical mineral requirement.
- Determine procurement chains
- Identify qualifying critical minerals
- Calculate the qualifying critical mineral content
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. A single applicable critical mineral may have multiple procurement chains if the source of the applicable critical mineral undergoes these processes in different locations. Each procurement chain identified is evaluated separately.
Next, for each procurement chain, the critical minerals that were extracted or processed in the United States or a country with which the United States has a free trade agreement in effect or that were recycled in North America (qualifying critical minerals) must be distinguished from those that were not.
For the applicable critical minerals in a procurement chain to be treated as qualifying critical minerals, 50% or more of the value added to the applicable minerals in such procurement chain must be derived from the processing or extracting activities that occurred in the United States or a country with which the United States has a free trade agreement in effect or the recycling activities that occurred in North America.
Finally, the qualifying critical mineral content is calculated as the value of the qualifying critical minerals in the battery divided by the total value of critical mineral minerals included in the battery. The resulting percentage is compared against the applicable percentage for the year in which the clean vehicle is placed in service to determine whether the critical mineral requirement is satisfied.
Battery component requirement
To meet the battery component requirement, the applicable percentage of the components contained in a clean vehicle’s battery at the time it is placed in service must have been manufactured or assembled in North America. The applicable percentage is:
- For calendar years prior to 2024, 50%
- For calendar years 2024 and 2025, 60%
- For the calendar year 2026, 70%
- For the calendar year 2027, 80%
- For the calendar year 2028, 90%
- For calendar years after 2028, 100%
The proposed regulations present a four-step process for determining the percentage of the value of the battery components in a battery that contribute toward meeting the battery component requirement.
- Identify components that are manufactured or assembled in North America (i.e., North American battery components)
- Determine the incremental value of each battery component and North American battery components
- Determine the total incremental value of the battery components
- Calculate the qualifying battery component content
To be considered a North American battery component, substantially all of the manufacturing or assembly activities of such battery component must take place in North America. Then, the total incremental value of the North American battery components, as well as the total incremental value of all battery components, must be determined.
The qualifying battery component content, a percentage, is the total value of the North American battery components divided by the total incremental value of the battery components in the vehicle. The resulting percentage is compared against the applicable percentage for the year in which the vehicle is placed in service to determine whether the battery component requirement is met.
Calculation considerations
For purposes of calculating the qualifying critical mineral content and the qualifying battery component content, clean vehicle manufacturers may conduct the three- and four-step processes with respect to a specific vehicle or for a group of vehicles using averages over a period of time. Average calculations may be used with respect to vehicles from the same model line, plant, class or some combination thereof, with final assembly taking place in North America. Treasury and the IRS have requested comments on specific conditions or limitations on the ability to use average calculations, indicating the final regulations may include changes to the calculation rules.
Washington National Tax takeaways
The proposed regulations have given buyers and clean vehicle manufacturers some clarity on the requirements a vehicle must meet to be eligible for the clean vehicle credit. The critical mineral and battery component requirements affect vehicles placed in service after April 17, 2023, creating a new key date in the transition from the old section 30D credit rules to new rules.
As a result of these proposed regulations, it is likely that fewer vehicle models will qualify for the tax credit after April 17 than currently qualify. However, as more auto manufacturers develop supply chains and manufacturing infrastructure to meet the credit requirements, more vehicles may qualify. Buyers interested in clean vehicles may consider the possibility of placing such vehicle in service on or before this date to secure a credit before the new rules take effect, potentially decreasing the value of the credit for such vehicle.
Auto manufacturers planning to manufacture cars eligible for the credit should consult with their tax advisors to gain a deeper understanding of the nuances related to these rules. Additionally, businesses involved in the supply chain of critical minerals and battery components should consider these requirements if they must make alterations to their operations or provide new information to their customers. Analysis of supply chain and procurement procedures will be necessary to support the vehicle OEM customers.
Fortunately, buyers are not responsible for the critical minerals or the battery components calculations. This information, validating the maximum credit allowable for a vehicle, is to be certified by the manufacturer and included on a seller’s report furnished to the buyer. Revenue Procedure 2022-42 imposes reporting requirements on manufacturers and sellers of clean vehicles to simplify the credit calculation process for buyers.
