IRS issues proposed regulations on EV battery requirements
On March 31, 2023, the Treasury Department issued a long-anticipated set of proposed regulations covering various requirements that must be met by automakers for a vehicle to qualify as a clean vehicle (CV) under the Inflation Reduction Act (IRA). Certain taxpayers can claim tax credits of up to $7,500 for purchases of CVs within set price points.
Key takeaways
- The regulations clarify how manufacturers can satisfy the requirements that, broadly speaking, 1) a CV battery’s critical minerals (i.e., aluminum, lithium, zinc, etc.) be extracted or processed in the U.S. or a country with which the U.S. has a free trade agreement, and 2) the battery’s critical components be manufactured in North America.
- The Treasury Department acknowledges the restrictive nature of these clarifications will at least temporarily reduce the number of vehicles that will qualify for the full or partial CV credit. This is principally the result of the U.S. and its trade partners presently accounting for a minority of the production of electric vehicle batteries and their components.
- The regulations apply to CVs placed in service after April 17, 2023.
- The IRS CV credit fact sheet has been updated accordingly.
Background
The IRA overhauled the preexisting electric vehicle tax credit regime, resulting in new Internal Revenue Code (IRC) section 30D which provides a credit of up to $7,500 for certain taxpayers who purchase a CV. Among several other requirements, the vehicle’s final assembly must occur in North America and have a suggested retail price that does not exceed certain thresholds ($80,000 for vans, SUVs and pickup trucks; $55,000 for any other vehicle). Additionally, the taxpayer’s modified adjusted gross income (MAGI) must not be greater than $300,000 if a joint filer, $225,000 for head of household, and $150,000 for all other filers.
The maximum $7,500 credit is the sum of two separate $3,750 components; the first of which is dependent on the percentage of the CV’s battery that is made up of critical minerals that were either: processed or extracted in the U.S. or a country with which it has a free trade agreement or recycled in North America. The second $3,750 is contingent upon the percentage of the battery’s remaining components that are manufactured or assembled in North America. (For additional details, please see our Tax Alert, electric vehicle tax credit update.)
Critical mineral requirement
The regulations outline a three-step process for manufacturers to determine whether the makeup of a vehicle battery’s critical minerals satisfy the percentage requirements:
- Determine procurement chains
- Identify qualifying critical minerals
- Calculate qualifying critical mineral content
The resulting percentage would be compared to the threshold for the applicable tax year (40% for 2023, increasing annually by 10% to a maximum of 80% for tax years beginning in 2027) to determine whether the critical mineral requirement has been met. The regulations also note that the countries with which the U.S. has a free trade agreement are not identified by the IRC, but provide parameters for determining whether the U.S.’ economic relationship with another country qualifies as such.
Battery component requirement
The regulations similarly provide a process for manufacturers to use in assessing the percentage of a battery’s components (examples provided by the regulations include but are not limited to various electrodes, battery cells and battery modules) that are manufactured or assembled in North America:
- Identify components that are manufactured or assembled in North America
- Determine the incremental value of each battery component and North American battery components
- Determine the total incremental value of battery components
- Calculate the qualifying battery component content
For a vehicle purchased and placed in service before 2024, the battery component percentage threshold is 50% and increases annually by 10% up to 100% for vehicles placed in service after 2028.
Foreign entities of concern
Beginning in tax year 2024, no credits will be available for vehicles whose batteries include components manufactured or assembled by a “foreign entity of concern”; beginning with the 2025 tax year, no credits will be available for vehicles whose batteries include critical minerals that were extracted, processed or recycled by such foreign entities. The regulations do not provide specific guidance on what countries are included among these entities, but it is widely anticipated that China will be among them. While the policy goal of fostering the growth of American production is clear, it presents a significant obstacle to vehicles being credit eligible as China is the currently the leading manufacturer of EV batteries and processor of critical minerals by a significant margin.
Additional clarifications
The regulations additionally provide rules that prohibit the IRA’s credit for qualified commercial clean vehicles from being claimed for a vehicle for which the CV credit has been claimed, rules for determining a CV purchaser’s MAGI and how the credit is claimed in instances where a CV is owned by multiple taxpayers (i.e., married taxpayers filing separately, partners in a partnership and shareholders in an S corporation).
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
