Treasury Issues IRA Guidance on Section 30D Electric Vehicle Tax Credit

As background, the Inflation Reduction Act of 2022 (the “IRA”),² effective January 1, 2023, amended section 30D of the Code to provide a tax credit (the “EV Credit”) of up to $7,500 for a new electric vehicle (“EV”), the “final assembly” of which occurs within North America and which is “placed in service” before 2033.³ Under the IRA, the EV Credit was essentially split into two credits — (i) a $3,750 credit available if the percentage of the value of the “critical minerals” contained in the EV battery that were extracted or processed in the U.S. (or a country with which the U.S. has a free trade agreement in effect) or recycled in North America (“Qualifying Critical Mineral”) is equal to or greater than the applicable critical minerals percentage (the “Critical Minerals Sourcing Requirement”)⁴ and (ii) another $3,750 credit available if the percentage of the value of the battery components that were manufactured or assembled in North America is equal to or greater than the applicable battery components percentage (the “Battery Components Sourcing Requirement” and, together with the Critical Minerals Sourcing Requirements, the “Sourcing Requirements”).⁵

EV manufacturers must certify to the Treasury and the Internal Revenue Service (“IRS”) compliance with the Sourcing Requirements. The Proposed Regulations apply to EVs placed in service after April 17, 2023, leaving EV manufacturers just two weeks to evaluate and adjust their supply chains to comply with the new Sourcing Requirements.

The Proposed Regulations also provide stricter Sourcing Requirements than the EV industry had hoped for, reducing the amount of EVs eligible for the EV Credit once the Proposed Regulations go into effect. However, Treasury officials noted that the Sourcing Requirements support the IRA policy objectives of spurring investment in and strengthening reliance on domestic manufacturing. The Biden administration expects an increase in the amount of EVs eligible for the EV Credit in coming years as EV manufacturers continue to build out and increase their reliance on U.S. supply chains.

With respect to the Critical Minerals Sourcing Requirements, under the Proposed Regulations, a critical mineral will qualify as a Qualifying Critical Mineral if (i) 50% or more of the value added to the critical mineral by extraction or processing is derived from extraction or processing that occurs in the U.S. (or in any country with which the U.S. has a free trade agreement in effect) or (ii) 50% or more of the value added to the critical mineral by recycling is derived from recycling that occurs in North America (the “Value Added Test”).⁶ As noted above, the percentage of the value of Qualifying Critical Minerals must exceed a threshold percentage — 40% for EVs placed in service in 2023, increasing by 10% annually until it reaches 80% in 2027 and beyond. Notably, the Value Added Test will be applied separately for each “procurement chain.”⁷ As such, EV manufacturers are required to identify and evaluate each procurement chain for each critical mineral included in an EV battery.⁸ The Proposed Regulations note that the Value Added Test will apply to EVs placed in service in 2023 and 2024 and that the Treasury expects to issue a more stringent test for EVs placed in service thereafter, potentially imposing stricter tracking requirements and/or increasing the value added percentage above 50%. The Treasury and the IRS request comment on the best approach for adopting a more stringent test for EVs placed in service after 2024.

With respect to the Battery Components Sourcing Requirement, under the Proposed Regulations, EV manufacturers must identify all battery components for which substantially all of the manufacturing or assembly work occurred in North America (“North American Battery Components”) and determine the “incremental value” attributable to manufacturing or assembly work with respect to each battery component.⁹ As noted above, the percentage of the incremental value of North American Battery Components must exceed a threshold percentage — 50% for EVs placed in service in 2023, 60% for EVs placed in service in 2024 or 2025, and increasing by 10% annually thereafter until it reaches 100% in 2029 and beyond . Notably, the Battery Components Sourcing Requirement does not require analysis of the subcomponents comprising any battery component.¹⁰

Manufacturers are required to select a date after final processing or recycling (with respect to the Critical Minerals Sourcing Requirement) or manufacturing or assembly (with respect to the Battery Components Sourcing Requirement) for determining the values associated with critical minerals or battery components, as applicable. Such date needs to be uniformly applied for all applicable critical minerals or battery components contained in a battery. Manufacturers may calculate the applicable value based on a battery of a specific vehicle or may average the calculation over a limited period of time with respect to vehicles from the same model line, plant, class, or some combination of thereof.¹¹

¹ The Proposed Regulations include a request for comments by the Treasury and the IRS (defined herein) on several points mentioned in the Proposed Regulations, including (i) the impact the Proposed Regulations will have on small businesses; (ii) the implementation of the Sourcing Requirements (defined herein) and the distinction between processing of critical minerals and manufacturing/assembly of battery components; and (iii) whether the modified adjusted gross income limitation should be expanded to more business entities. Comments must be submitted within sixty (60) days after the date the Proposed Regulations become effective (April 18, 2023).

² Our prior coverage of the IRA can be found [here] and [here] and further coverage and details can be found [here].

³ Final assembly is defined in new Code section 30D as the process by which a manufacturer produces a new EV at, or through the use of, a plant, factory, or other place from which the EV is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the EV included with the EV, whether or not the component parts are permanently installed in or on the EV.  Pursuant to the Proposed Regulations, to establish where final assembly occurs, a taxpayer may rely on the EV’s plant of manufacture as reported in the vehicle identification number or the final assembly point reported on the label affixed to the EV. 

Additionally, under the Proposed Regulations, a new EV is “placed in service” on the date the taxpayer takes possession of the EV. 

⁴ The applicable critical minerals percentage is 40% for EVs placed in service in 2023 and increases by 10% annually until it reaches 80% in 2027 and beyond.

The Proposed Regulations provide an initial list of countries with which the United States has a free trade agreement in effect, but specifies that other countries may be added.

⁵ The applicable battery components percentage is 50% for EVs placed in service in 2023, 60% for EVs placed in service in 2024 or 2025, and increases by 10% annually thereafter until it reaches 100% in 2029 and beyond.

⁶ Under the Proposed Regulations, (i) “extraction” includes activities performed to extract or harvest minerals or natural resources from the ground or a body of water and concludes when activities are performed to convert raw mined or harvested products to substances that can be readily transported or stored for direct use in critical mineral processing; (ii) “processing” begins when chemical or thermal processes are used on extracted minerals or natural resources or manmade minerals or resources to create a new product that will be processed into a material that will be employed directly in the manufacturing of battery components; and (iii) “recycling” includes activities during which recyclable materials containing applicable critical minerals are transformed into specification-grade commodities and consumed in lieu of virgin materials to create new materials that will be employed directly in the manufacturing of battery components. 

⁷ “Procurement chain” means the common sequence of extraction, processing, or recycling activities that occur in a common set of locations.

⁸ Given the complexity of battery supply chains and the detailed tracking required for EV manufacturers to comply with the Sourcing Requirements, this requirement may be overly burdensome.

⁹ Under the Proposed Regulations, (i) “battery components” include a battery cell and battery modules, as well as a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte and solid state electrolyte; (ii) “manufacturing” means the industrial and chemical steps taken to produce a battery component; (iii) “assembly” means the process of combining battery components into battery cells or battery modules; and (iv) “incremental value,” with respect to a battery component, is determined by subtracting from the value of the applicable battery component the value of the manufactured or assembled battery components contained that battery component.

“Substantially all” for purposes of the Battery Components Sourcing Requirement is not defined.

¹⁰ The Proposed Regulations also clarified that (i) in the case of an EV placed in service by a partnership or an S corporation, when the EV Credit is claimed by individuals who are direct or indirect partners of that partnership or shareholders of that S corporation, the modified adjusted gross income limitation on the EV Credit applies to those partners or shareholders, and (ii) in the case of an EV placed in service by a corporation, the modified gross income limitation does not apply.

Additionally, (i) in the case of an EV placed in service by a partnership or S corporation, when the partnership or S corporation is the vehicle owner, the EV Credit must be allocated among the partners of the partnership consistent with the allocation rules under Treasury Regulations 1.704-1(b)(4)(ii) or the shareholders of the S corporation consistent with the allocation rules under Code sections 1366(a) and 1377(a), and (ii) in the case of an EV placed in service by multiple owners, the EV Credit may be claimed by only one owner.

¹¹ Treasury and the IRS request comments on how averaging may be applied for this purpose.