The IRS and Department of Energy (DOE) have proposed new rules regarding sourcing requirements for critical minerals and batteries under the electric vehicle tax credit. The guidance also addresses DOE funding requirements.
The IRS issued proposed regulations on the rules for determining whether the sourcing of applicable critical minerals and battery components compliant with restrictions on sourcing from foreign entities of concern (FEOC). Additionally, a revenue procedure (Rev. Proc. 2023-38) with rules for qualified manufacturers to comply with reporting and certification requirements was introduced. The IRS guidance generally relies on separate proposed rules from the DOE defining FEOC.
An FEOC is generally defined under the applicable statutes as companies with ties to countries seen as U.S. competitors or geopolitical foes: China, Russia, Iran, and North Korea, with China by far being the most relevant country for the definition due to different restrictions on U.S. business activity with the other covered countries and due to its outsized role in the supply of battery materials and components.
Under the proposed rule, foreign entities are defined as:
- At least 25% controlled by a covered nation, either directly or through intermediaries, with equity, board seats, or voting rights as metrics used to determine control.
OR
- A provider of battery components, including critical minerals, who has entered into a sourcing agreement with a foreign entity, as defined above.
There are extensive rules for determining the percentage of control and whether a company is considered to have an applicable sourcing agreement and the determinations can be complex.
The proposed rules also have notable exceptions: facilities located in China or owned by Chinese companies believed to be independent of the Chinese government, could still be partners for companies from the U.S. and other countries who want their vehicles to qualify. Leased vehicles also count as commercial vehicles not covered by the proposed regulation.
The IRS and DOE also gave some time for auto companies to transition their supply chains. Vehicles with non-compliant batteries built before Jan. 1, 2024, will qualify for the EV tax credit, while the critical mineral restriction won’t go into effect until Jan. 1, 2025.
The DOE’s comment period for the proposed rule is open through Jan. 18.
Contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “§,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.