IRS issues new clean vehicle credit guidance

Eversheds Sutherland (US) LLP
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Eversheds Sutherland (US) LLP

On March 31, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Proposed Regulations (REG-120080-22) under section 30D of the Internal Revenue Code (Code)1, the Clean Vehicle Credit, and updated FAQs related to new, previously owned and qualified commercial clean vehicle credits (Updated FAQs). The Proposed Regulations, eagerly anticipated by electric vehicle (EV) manufacturers, retailers and purchasers alike, provide guidance with respect to the EV critical minerals and battery components requirements of section 30D(b)(2) and (3), as enacted in the Inflation Reduction Act (IRA). The Proposed Regulations apply to vehicles placed in service on or after April 18, 2023, regardless as to when the vehicle was manufactured or purchased. 
 
I.      Background 
 
Section 13401 of the IRA modified section 30D to require qualifying vehicles to be assembled in North America and provided for a maximum credit of $7,500 per vehicle: $3,750 for vehicles meeting certain critical mineral requirements (Critical Minerals Requirement), and an additional $3,750 for vehicles meeting certain battery component requirements (Battery Component Requirement). The North America assembly requirement took effect as of the effective date of the IRA – August 16, 2022. The effective date of the Critical Minerals and Battery Components Requirements was delayed until April 18, 2023. 
 
Under section 30D(e)(1)(A), the Critical Minerals Requirement is satisfied if the percentage of the value of the critical minerals contained in the vehicle’s battery that were (i) extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect, or (ii) recycled in North America, is equal to or greater than the applicable percentage. For vehicles placed in service prior to 2024, the applicable percentage is 40%. This applicable percentage increases in subsequent years to: 50% for vehicles placed in service during calendar year 2024, 60% in 2025, and 70% for 2026. For vehicles placed in service after calendar year 2026, the applicable percentage is 80%.
 
Under section 30D(e)(1)(B), the Battery Components Requirement is satisfied if the percentage of the value of the components contained in the vehicle’s battery manufactured or assembled in North America is equal to or greater than the applicable percentage. For vehicles placed in service prior to 2024, the applicable percentage is 50%. As with the Critical Mineral Requirement, the applicable percentage increases in subsequent years to: 60% for vehicles placed in service during calendar years 2024 and 2025, 70% for 2026, 80% for 2027 and 90% 2028. For vehicles placed in service after calendar year 2028, the applicable percentage is 100%.
 

Year Placed in Service
(Calendar Year)

Critical Mineral Requirement Battery Component Requirement
After April 17, 2023 and Prior to 2024 40% 50%
2024 50% 605
2025 60% 60%
2026 70% 70%
2027 80% 80%
2028 80% 90%
After 2028 80% 100%

Under section 30D(d)(7), qualifying new clean vehicles expressly exclude, and no credit is available to, (i) vehicles placed in service after December 31, 2024 with batteries that contain critical minerals that were extracted, processed or recycled by a foreign entity of concern, or (ii) any vehicles placed in service after December 31, 2023 with any battery components that were manufactured or assembled by a foreign entity of concern. As defined in section 40207(a)(5) of the Infrastructure Investment and Jobs Act, “foreign entity of concern” includes a foreign entity that is owned by, controlled by, or subject to the jurisdiction of a government of a foreign country that is a covered nation namely China, Russia, North Korea, and Iran. 

Under section 30D(f):
• Only one credit may be claimed for each vehicle identification number (VIN);
• Taxpayers must include the VIN of the vehicle for which they are claiming the credit in their tax return;
• No credit is available for certain high-income taxpayers, defined as those with adjusted gross incomes exceeding:
o $300,000 in the case of -- Joint return/surviving spouse 
o $225,000 - Head of household
o $150,000 - All other taxpayers
• No credit is available for vehicles that exceed certain manufacturer’s suggested retail price thresholds:
o $80,000 – Van, sport utility vehicle, pickup truck
o $55,000 – All other vehicles
 
Prior to the issuance of the Proposed Regulations, Treasury and the IRS published several notices and requests for comments regarding the 30D clean vehicle credit, including: 
Notice 2022-46 – requesting comments on several IRA modifications, including definitions, critical minerals, and battery components, among others
Revenue Procedure 2022-42 – describing reporting procedures for manufacturers and sellers of clean vehicles
Notice 2023-1 and Notice 2023-16– providing definitions and terms in section 30D 
30D White Paper – addressing the anticipated direction of the forthcoming section 30D proposed regulations.
 
II.      Proposed Regulations
 
A.      Section 1.30D-1 - General Rules 
 
Prop. Reg. § 1.30D-1 provides general rules for taxpayers claiming the section 30D clean vehicle credit. 
• The 30D credit may be claimed as either a general business credit (for depreciable vehicles with more than 50% business use) or a personal credit based on tax liability. (Prop. Reg. § 1.30D-1(b)(1), (b)(3)).
 
• Taxpayers must apportion any section 30D credit for a depreciable vehicle which is not used at least 50% of the time for business during the taxable year in which the vehicle was placed in service. (Prop. Reg. § 1.30D-1(b)(2)).
 
B.      Section 1.30D – Definitions
 
The Proposed Regulations flesh out many undefined terms.
 

Eversheds Sutherland Observation: Many of the definitions in the 30D proposed regulations conform to statutes and regulations that are already generally applicable to vehicle manufacturers and dealers, which should simplify administration of the new rules.

a.      Final Assembly
 
“Final Assembly” under Prop. Reg. § 1.30D-2(b) means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. Per  49 C.F.R. § 583.4(b)(5), for multi-stage vehicles, final assembly occurs where the first stage vehicle is assembled.
 
The taxpayer may rely on the following information to determine where final assembly of a new clean vehicle occurred:
• the vehicle’s plant of manufacture as reported in the VIN pursuant to 49 C.F.R. § 565, i.e., the plant where the manufacturer affixes the VIN, as provided in 49 C.F.R. § 565.12,or 
 
• the final assembly point reported on the label affixed to the vehicle pursuant to 49 C.F.R. § 583.5(a)(3).
 
b.      Manufacturer’s Suggested Retail Price
 
“Manufacturer’s Suggested Retail Price” (MSRP) is defined based on the label that is affixed to the windshield or side window of the vehicle, as described in 15 USC 1232, as the sum of: (1) The retail price of the automobile suggested by the manufacturer as described in 15 USC 1232(f)(1) and (2) The retail delivered price suggested by the manufacturer for each accessory or item of optional equipment, physically attached to such automobile at the time of its delivery to the dealer, which is not included within the price of such automobile as stated pursuant to 15 USC 1232(f)(1), as described in 15 USC 1232(f)(2).
 
c.      North America
 
For purposes of the final assembly requirement, “North America” means the United States, Mexico and Canada. (Prop. Reg. § 1.30D-2(d)).
 
d.      Vehicle Classifications
 
For purposes of determining the MSRP limitations under section 30D, “vehicle classification” is to be determined consistent with the rules and definitions provided in 40 CFR 600.315-08. This allows discretion to assign “crossover” vehicles to a class (i.e., van, sport utility vehicle, pick up truck, or other) on a case-by-case basis, taking into account consumer perspectives and the marketing segment targeted by the manufacturer. (Prop. Reg. § 1.30D-2(g)).
 
e.      Placed in Service 
 
“Placed in Service” means the date the taxpayer takes possession of the vehicle. (Prop. Reg. § 1.30D-2(e)).
 
C.      Section 1.30D-3 – Critical Minerals and Battery Component Requirements
 
Prop. Reg. § 1.30D-3 provides rules for determining compliance with the Critical Minerals Requirement and the Battery Component Requirements.
 

Eversheds Sutherland Observation: While the proposed regulations are generally consistent with the White Paper, vehicle manufacturers were given less than three weeks to analyze the proposed regulations, query their supply chains regarding final updates to qualification under the critical minerals and battery component requirements, and operationalize their certification procedures.

a. Critical Minerals Requirement
 
The Critical Minerals Requirement rules generally follow the framework set forth in the 30D White Paper and provide that, with respect to the battery from which the electric motor of a new clean vehicle draws electricity, the requirement is satisfied if (i) the qualifying critical mineral content of the battery is equal to or greater than the applicable critical minerals percentage; and (ii) the percentage is certified by the qualified manufacturer. “Applicable critical mineral” is defined in section 45X(c)(6) of the Code for this purpose. (Prop. Reg. § 1.30D-3(c)). As noted above, the required critical minerals percentage is based on the year in which the vehicle is placed in service. Prop. Reg. § 1.30D-3(a) provides a three-step process to determine compliance with the Critical Minerals Requirement, which is consistent with the White Paper.
 
i.      Determine Procurement Chains
 
First, the manufacturer is required to determine the procurement chain for each applicable critical mineral. Prop. Reg. § 1.30D-3(c)(14) defines “procurement chain” 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. If a critical mineral has multiple procurement chains, each chain requires a separate evaluation. 
 
ii.      Identify Qualifying Critical Minerals
 
Second, the manufacturer must evaluate each applicable critical mineral procurement chain in the battery to determine if critical minerals from the chain were (i) extracted or processed (as defined in Prop. Reg. § 1.30D-3(c)(8) and (13)) in the United States, or in any country with which the United States has a free trade agreement in effect, or (ii) recycled in North America. Prop. Reg. § 1.30D-3(c)(17) would use a “50% of value added test” to determine if critical minerals meet this requirement.
 
The phrase “country with which the United States has a free trade agreement in effect” refers to Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore, in addition to other countries that the Secretary may identify after considering certain factors designed to promote commercial and economic relationships between the countries. By way of example, Japan will qualify based on the recent Critical Minerals Supply Chains Agreement it entered into with the United States. 
 
Eversheds Sutherland Observation: The list of countries with which the United States has a free trade agreement may be revised and updated through appropriate guidance published in the Federal Register or the Internal Revenue Bulletin. The European Union may join the list of countries with a free trade agreement for this purpose. The EU has agreed, in theory, to a bilateral agreement to provide the United States with European critical minerals. Certain members of Congress have objected to Treasury entering into agreements without Congressional input. 
iii.      Calculate Qualifying Critical Mineral Content
 
Third, the manufacturer must calculate the “qualifying critical mineral content,” defined as the percentage of the value of the applicable critical minerals contained in the battery that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America. The manufacturer would calculate this figure by dividing the total value of qualifying critical minerals identified under the second step by the total value of all critical minerals contained in the battery. This percentage would then be compared to the relevant applicable percentage in Prop. Reg. § 1.30D-3(a)(2) to determine if the vehicle meets the Critical Minerals Requirement.
 
Pursuant to Prop. Reg. § 1.30D-3(a)(iv), a qualified manufacturer may determine qualifying critical mineral content based on the value of the applicable critical minerals actually contained in the battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying critical mineral content for batteries in a group of vehicles, a qualified manufacturer may average the qualifying critical mineral content calculation over a period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination thereof, with final assembly (as defined in section 30D(d)(5) of the Code and Prop. Reg. § 1.30D-2(b)) within North America.
 
b.      Battery Components Requirement
 
The Battery Components Requirement rules also generally follow the framework in the 30D White Paper and, pursuant to Prop. Reg. § 1.30D-3(b), provide a four-step process to determine the percentage of the value of the battery components in a battery that contribute toward meeting the Battery Components Requirement. 
 
i.      Identify Components that are Manufactured or Assembled in North America
 
First, qualified manufacturers must determine whether each battery component was manufactured or assembled in North America - meaning that substantially all of the manufacturing or assembly 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. Battery components generally include a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module. 
 
ii.      Determine the Incremental Value of Each Battery Component and North America Battery Components
 
Second, qualified manufacturers would need to determine the incremental value for each battery component by subtracting from the value of that battery component the value of its manufactured or assembled battery components. The resulting incremental value for a battery component would be attributable to North America if the battery component satisfied the first step. 
 
iii.     Determine the Total Incremental Value of Battery Components
 
Third, qualified manufacturers would need to compile the total incremental value of the battery components by either (i) adding the sum of the incremental values of each battery component or (ii) calculating the total value of each battery module in the battery.
 
iv.    Calculate the Qualifying Battery Component Content
 
Fourth, qualified manufacturers will determine the qualifying battery component content, which is the percentage of the value of the battery components of the battery that were manufactured or assembled in North America. This percentage would then be compared with the relevant applicable percentage to determine if the vehicle meets the Battery Components Requirement. 
 
Pursuant to Prop. Reg. § 1.30D-3(b)(3)(iii), a qualified manufacturer may determine qualifying battery component content based on the incremental values of the battery components actually contained in the battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying battery component content for batteries in a group of vehicles, a qualified manufacturer may average the qualifying battery component content calculation over a period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination of thereof, with final assembly (as defined in section 30D(d)(5) of the Code and Prop. Reg. § 1.30D-2(a)) within North America.
 
D.      Prop. Reg. § 1.30D-4 – Special Rules
 
a.      No Double Benefit
 
Prop. Reg. § 1.30D-4(a) generally limits the application of the 30D credit:
• The 30D credit is subtracted from the amount of any deduction or credit allowed under Chapter 1 of the Code for a vehicle;
• A vehicle may be eligible for the 30D credit for one taxable year, and the 25E credit (Previously-Owned Clean Vehicles) for a subsequent taxable year.
• Taxpayers cannot claim a 45W credit (Credit for Qualified Commercial Clean Vehicle) and a 30D credit for the same vehicle. 
 
b.      Limitation Based on Modified Adjusted Gross Income 
 
In general, Prop. Reg. § 1.30D-4(b)(5) provides that the Modified Adjusted Gross Income limitations apply only to individuals (including individuals who are direct or indirect partners in a partnership or shareholders in an S corporation). For corporations or other non-individual taxpayers that compute their adjusted gross income under section 62, the limitation does not apply. 
 
c.      Multiple Owners and Passthrough Entity Ownership of a Single Vehicle
 
Under Prop. Reg. § 1.30D-4(c), when there are multiple titled owners to a new clean vehicle, only one owner may claim the 30D credit. In such cases, the purchasers must inform the seller which owner will claim the 30D credit so that the seller can identify the individual in the seller’s report. And while there is no proration or allocation among multiple owners, the 30D credit will be allocated among partners and shareholders of partnerships and S corporations placing a new clean vehicle in service. 
 
The Proposed Regulations provide that the name and taxpayer identification number of the taxpayer claiming the 30D credit must be listed on the seller’s report pursuant to section 30D(d)(1)(H), and no credit will be allowed for a taxpayer not listed in the seller’s report.
 
III.      Requests for Further Comments
 
It is certain that Treasury and the IRS will issue additional guidance regarding the 30D credit as the proposed regulations requested further comments for several topics, including:
 
• Criteria and potential approaches toward identifying countries with which the United States has free trade agreements in effect, and the list of countries set forth in Prop. Reg. § 1.30D-3(c)(7)(ii);
• The 50% of value added test, and the best approach for adopting a more stringent test for vehicles placed in service in 2025 and later years; 
• With regard to the allocation of the 30D credit among eligible partners and shareholders, whether a similar rule should be provided for trusts or other types of entities that place in service a new clean vehicle;
• Specific conditions or limitations on a qualified manufacturer’s calculation to determine qualifying critical mineral content based on the value of the applicable critical minerals actually contained in the battery of a specific vehicle or, alternatively, a group of vehicles; and
• The Critical Minerals and Battery Components Requirements as they would be implemented in Prop. Reg. § 1.30D-3, including the distinction between processing of applicable critical minerals and manufacturing and assembly of battery components, and related definitions.
 
Comments are due June 16, 2023, that is 60 days after April 17, 2023, the date the Proposed Regulations will be published in the Federal Register. 
 
IV.      Updated FAQs
 
In conjunction with the Proposed Regulations, the IRS released Updated FAQs related to new, previously owned and qualified commercial clean vehicle credits to provide detail to taxpayers on how the IRA revises the credit available under sections 30D, 25E (previously owned clean vehicle credit), and 45W (qualified commercial clean vehicles). Of particular note, the IRS added reference to a list of vehicles eligible for the new clean vehicle credit. The Updated FAQs modify previously issued guidance for the following topics:
 
• Topic A: Eligibility Rules for the New Clean Vehicle Credit;
• Topic B: Income and Price Limitations for the New Clean Vehicle Credit;
• Topic C: When the New Requirements Apply to the New Clean Vehicle Credit;
• Topic F: Claiming the Previously Owned Clean Vehicles Credit; and
• Topic G: Qualified Commercial Clean Vehicles Credit
 
The Updated FAQs indicate that, as they have not been published in the Internal Revenue Bulletin, the IRS may not rely on, or use them, to resolve cases. However, a taxpayer that reasonably and in good faith relies on the Updated FAQs will not be subject to a penalty to the extent that the reliance results in an underpayment of tax. 
_______________

1 All references are to the Code of 1986 as amended.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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