The IRS recently released proposed regulations (REG-120080-22) providing key preliminary information on the new critical mineral and battery sourcing requirements for the Section 30D clean vehicle credit.
The regulations clarify the critical mineral and battery components sourcing rules, but many questions on the credit remain—including the interpretation of “foreign entities of concern” under Section 30D(d)(7).
The proposed regulations are effective beginning April 17, 2023, and will immediately restrict the number of electrical vehicles that qualify for credits.
The Inflation Reduction Act (IRA) significantly modified the existing clean vehicle tax credit under Section 30D, providing a $3,750 tax credit for “clean motor vehicles” that meet a critical minerals requirement and another $3,750 tax credit for vehicles that meet a battery components requirement.
To satisfy the critical minerals requirement, a certain percentage of the critical mineral components of the electric vehicle battery must be either:
- Extracted or processed in the U.S. or a country with which the United States has a qualifying free trade agreement
- Recycled in North America
To satisfy the battery components requirement, a certain percentage of the value of components contained in the battery must be manufactured or assembled in North America. The proposed regulations follow a string of guidance on Section 30D, including:
- Initial information posted on the IRS website in August 2022
- Revenue Procedure 2022-42, outlining reporting requirements for manufacturers and sellers of new or previously owned clean vehicles
- A white paper in December 2022 on the anticipated direction of forthcoming proposed guidance on the critical mineral and battery component requirements (the “White Paper”)
- Notice 2023-1, which contained certain definitions of terms in Section 30D
While the proposed regulations closely track the White Paper, they also contain several new rules. Most notably, the proposed regulations provide a three-step approach to determining the percentage of the value of the critical minerals in a specific battery.
To calculate the critical minerals requirement, a taxpayer must first document the supply chain—or “procurement chain”—for each individual critical mineral. The regulations state that when determining the share of the value of the critical mineral being considered, the entire value of the critical mineral will be considered to have met the criteria if 50% or more of the value of the mining, extraction or processing takes place in the United States or in an FTA partner country.
Alternatively, the entire value of the critical mineral will be considered to have met the criteria if 50% or more of the value added to the critical mineral via processing takes place in the United States or in an FTA partner country. This alternative is described as a transition rule that will be in effect for 2023 and 2024. Beginning in 2025, Treasury will require more stringent documentation. The regulations request public feedback on this rule and how Treasury should implement a more stringent rule in the future.
Consistent with the framework that Treasury previously released in the White Paper, the proposed guidance sets forth a four-step process for determining the percentage of the value of the applicable battery components in a battery.
First, manufacturers must determine whether each battery component in a battery was manufactured or assembled in North America. Under the proposed regulations, this means a “battery component for which substantially all of the manufacturing or assembly of which occurs in North America, without regard to the location of the manufacturing or assembly activities of the components that make up the particular battery component.” Then manufacturers must determine the incremental value for each battery component, and the total incremental value of battery components to calculate the percentage of qualifying components.
The proposed regulations interpret the free trade agreement language broadly, including an expansive list of countries in the initial list:
- Costa Rica
- Dominican Republic
- El Salvador
- South Korea
The regulations also propose that Japan should be included in this list due to the U.S.-Japan critical minerals agreement signed on March 28, 2023—however this agreement it has not yet been enacted into statute.
The proposed regulations further provide that Treasury will identify additional countries in the future based on an expansive set of criteria.
The proposed regulations are notably silent on certain key issues, including the interpretation of “foreign entities of concern” under Section 30D(d)(7).
Beginning in 2024, the Section 30D credit will be unavailable to vehicles that contain any battery components that were manufactured or assembled by a foreign entity of concern. In addition, beginning in 2025, a vehicle’s battery may not contain any critical minerals sourced from a foreign entity of concern. Further guidance on what qualifies as a “foreign entity of concern” will be critical in determining the eligibility of vehicles for the Section 30D credit.
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