Background

On March 31, 2023, the Treasury Department released proposed guidance on the battery component and critical mineral sourcing requirements for the 30D tax credit under the Inflation Reduction Act (IRA).

The guidance only references 45W to the extent that 30D and 45W tax credits cannot be claimed on the same vehicle. Today’s guidance document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 30D of the Code. To date, no regulations have been proposed pursuant to section 30D.

The IRA provided tax credits for qualified clean vehicles, previously owned clean vehicles, and qualified commercial clean vehicles. Specifically, the IRA provided a maximum $7,500 tax credit for qualified clean vehicles that are assembled in North America, source 40 percent of its critical minerals from the United States or a country with a free trade agreement with the United States and have half of its battery components built within the North America. Taxpayers may receive half of the tax credit for meeting the two critical mineral or battery component requirements. The North America assembly requirement was effective upon enactment of the bill, August 2022; however, battery component and critical mineral sourcing requirements awaited guidance from Treasury. The newly proposed guidance is set to take effect April 17, 2023. Below is an overview of the proposed guidance.

North America Final Assembly Requirement

The proposed guidance defines “final assembly” as the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, from which the vehicle is delivered to a dealer or importer with all component parts necessary for the vehicle’s operation. To establish where final assembly occurred the taxpayer should consider the vehicle’s plant of manufacture as reported in the vehicle identification number or the final assembly point reported on the label affixed to the vehicle. For multistage vehicles, the final assembly point is the location where the first stage vehicle is assembled. North America is defined as United States, Mexico, Canada, and territories of the aforementioned countries, including Puerto Rico.

Critical Mineral Requirement

The IRA requires that a certain percentage of the critical minerals contained in a battery be extracted or processed in the United States or a country which has a free trade agreement with the United States or be recycled in North America. The IRA increases the percentage year-over-year as follows: 2023: 40 percent; 2024: 50 percent; 2025: 60 percent; 2026: 70 percent; and 2027 and every year after: 80 percent.
The proposed guidance provides a three-step process for determining the percentage of the value of the applicable critical minerals in a battery. The three-step process is as follows:

1. Determine Procurement Chains: The manufacturer would need to determine the procurement chain or chains for each applicable critical mineral. Procurement chain is defined as a common sequence of extraction, processing, or recycling activities that occur in a common set of locations.
2. Identify Qualifying Materials: Each applicable critical mineral procurement chain must be evaluated to determine if it has been extracted or processed in the United States or a free trade partner. An applicable critical mineral will be treated or extracted from the United States or a free trade country if 50 percent or more of the value added to the applicable critical mineral by extraction is derived from those locations.
3. Calculate Qualifying Critical Mineral Content: The third step includes determining the calculation of the percentage of the value of qualifying critical minerals in a battery. The guidance requires qualified manufacturers to select a date for determining the values associated with the total value of qualifying critical minerals and total value of the critical minerals.

The proposed guidance outlined a criterion for determining qualifying free trade agreement countries. This criterion includes whether an agreement between the United States and another country: (1) reduces or eliminates trade barriers on a preferential basis; (2) commits the parties to refrain from imposing new trade barriers; (3) establishes high-standard disciplines in jey areas affecting trade; and/or (4) reduces or eliminates restrictions on exports. These countries include Australia, Bahrain, , Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. The Treasury Secretary may include additional countries as they see fit.

The guidance states that beginning after December 31, 2024, eligible clean vehicles may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.

Battery Component Requirement

The IRA requires that an applicable percentage of the battery components must be completed in North America. The applicable percentage requirement is as follows: 2023: 50 percent; 2024: 60 percent; 2026: 70 percent; 2028: 90 percent; and 2029 and every year after: 100 percent.
The proposed guidance outlines a four-step process for determining the percentage of the value of the battery components in a battery that contribute toward meeting the requirements. The four-step process is as follows:

1. Identifying Components that are Manufactured or Assembled in North America: Battery components include, per the guidance, a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module. Assembly is defined as the process of combining battery components into battery cells and modules.
2. Determine the Incremental Value of each Battery Component and North American Battery Components: Manufacturers need to determine the incremental value of each battery component to comply. “Incremental value,” is determined by subtracting from the value of that battery component the value of the manufactured or assembled battery components, if any, that are contained in that battery component.
3. Determine the Total Incremental Value of Battery Components: In the third step for determining compliance with the Battery Components Requirement, qualified manufacturers would need to total the incremental value of battery components. The total incremental value of battery components could also be calculated by totaling the value of each battery module in the battery.
4. Calculate the Qualifying Battery Component Content: Qualified manufacturers need to determine the qualifying battery component content. Guidance defines “qualifying battery component content” as the percentage of the value of the battery components contained in the battery from which the electric motor of a new clean vehicle draws electricity that were manufactured or assembled in North America.

The guidance states that beginning after December 31, 2023, eligible clean vehicles may not contain any battery components that manufactured by a foreign entity of concern.

Eligible Clean Vehicles

The proposed guidance provides that on April 18, 2023, fueleconomy.gov will contain a list of eligible clean vehicles that qualified manufacturers have indicated to the IRS meet the requirements to claim the new EV tax credits. The list will be updated monthly as manufacturers provide information on which of their vehicles qualify for the tax credit based on the guidance.

Public Comment Period

The Treasury Department plans to publish the proposed guidance on April 17, 2023, which then triggers the 60-day public comment period before final guidance is issued. Guidance on other IRA EV-related provisions is expected in the coming months.