New Proposed Regulations for Clean Vehicle Credit: What You Need To Know

On December 1, 2023, the Treasury Department and Internal Revenue Service (IRS) issued proposed regulations regarding the clean vehicle credit under §30D of the Internal Revenue Code (IRC). The proposed regulations, published in the Federal Register on December 4, 2023, impact qualified manufacturers of new clean vehicles and taxpayers who purchase and place in service new clean vehicles.

Simultaneously with the release of the proposed regulations, the IRS released Rev. Proc. 2023-38, which provides updated procedural rules applicable to qualified manufacturers. Additionally, the Department of Energy (DOE) issued proposed guidance setting forth interpretations of certain terms used in the definition of “foreign entity of concern” (FEOC) relevant to qualified manufacturers.

This article provides a high-level summary of the detailed, but impactful guidance under the proposed regulations, Rev. Proc. 2023-38 and applicable provisions of the DOE Guidance.

What is the Clean Vehicle Credit under Section 30D?

Under IRC §30D, which was amended by the Inflation Reduction Act of 2022 (IRA), taxpayers may claim a credit in the maximum amount of $7,500 for purchasing and placing into service a “new clean vehicle” after January 1, 2023. For purposes of IRC §30D, a new clean vehicle is a vehicle that has a gross vehicle weight rating of less than 14,000 pounds and is powered by an electric motor drawing electricity from a battery, including either a “plug-in” electric vehicle powered by a chargeable battery or a “fuel cell” electric vehicle powered by hydrogen.

To qualify for the credit, the vehicle must, among other things, be used in the United States and made by a “qualified manufacturer.” The vehicle's final assembly must also occur within North America.¹ Credit eligibility is also subject to suggested retail price limitations and taxpayer limitations as to modified adjusted gross income. Under IRC §30D, in order to be a “qualified manufacturer,” a manufacturer must enter into a written agreement with the IRS requiring it to make periodic written reports to the IRS providing vehicle identification numbers and other information related to each vehicle manufactured by the manufacturer that is eligible for a clean vehicle credit.

The $7,500 credit is divided into two components. First, a taxpayer is eligible for a $3,750 credit if certain “critical mineral” requirements are satisfied. Second, a taxpayer is eligible for an additional $3,750 credit if certain battery component requirements are satisfied.

Critical Minerals Requirement

To satisfy the critical minerals requirement, a minimum “applicable critical minerals percentage” of critical minerals in the battery must be extracted or processed in the United States or in a country with which the United States has a free trade agreement. The applicable critical minerals percentage is 40% for 2023, 50% for 2024 and gradually rises to 80% by 2028.

Battery Components Requirement

The battery components requirement is satisfied if the “qualifying battery component content” of the battery is equal to or greater than the “applicable battery components percentage,” as certified by the qualified manufacturer. The applicable battery components percentage is 50% for 2023, 60% for 2024 and 2025 and gradually rises to 100% by 2029.

Foreign Entity of Concern

No vehicle placed in service after December 31, 2023 may contain battery components that were manufactured or assembled by a foreign entity of concern (FEOC) and no vehicle placed in service after December 31, 2024 may contain critical minerals that were extracted, processed, or recycled by a FEOC.

Guidance Under Proposed Regulations, DOE Guidance and Rev. Proc. 2022-38

Defined Terms

The proposed regulations and DOE Guidance expand upon and provide additional clarity to a number of key definitions, including terms directly impacting FEOC compliance. The following guidance is included:

Applicable Critical Minerals: The proposed regulations clarify that for purposes of IRC §30D, “applicable critical minerals” has the meaning set forth in IRC §45X(c)(6) related to the advanced manufacturing production tax credit. On December 15, 2023, proposed regulations issued by the Treasury Department and IRS regarding the IRC §45X advanced manufacturing production tax credit were published in the Federal Register (§45X Regulations).² The Treasury and IRS have stated that certain defined terms within the §45X Regulations are intended to support the supply chain objectives under the IRA, which are set forth in IRC §30D. For example, recognizing that graphite that is at least 99.9 percent carbon by mass is used in electric vehicle batteries to facilitate the electrochemical processes necessary for energy storage, as well as in other energy sector applications, Prop. Reg. §1.45X-4(b)(14) clarifies that the term “99.9 percent graphitic carbon by mass” means graphite that is 99.9 percent carbon by mass.

FEOC: The proposed regulations clarify that “foreign entity of concern,” or FEOC, has the meaning provided in the Bipartisan Infrastructure Law (BIL) and applicable DOE guidance. Under the BIL, a foreign entity is defined as a FEOC if it is “owned by, controlled by, or ‘subject to the jurisdiction’ or direction of a government of a foreign country that is a covered nation.” For purposes of the new clean vehicle credit, a covered nation means China, Russia, Iran and North Korea. The DOE Guidance clarifies what “owned by, controlled by or subject to the direction of” and “subject to jurisdiction” mean. A foreign entity is “subject to the jurisdiction” of a covered nation government if (i) the foreign entity is incorporated or domiciled in, or has its principal place of business in, a covered nation, or (ii) with respect to the critical minerals, components, or materials of a given battery, the foreign entity engages in the extraction, processing, or recycling of such critical minerals, the manufacturing or assembly of such components, or the processing of such materials, in a covered nation The DOE Guidance interprets “owned by, controlled by or subject to the direction of” by taking into account both direct and indirect ownership. Specifically, if 25% or more of an entity’s board seats, voting rights or equity interests are held (either directly or indirectly) by the government of a covered nation, the entity will be classified as a FEOC, the rationale being that such ownership could result in meaningful influence over entity decision-making. This 25% threshold applies to joint ventures. In addition, if 50% or more of an entity’s board seats, voting rights or equity interests are directly held by a second (parent) entity, then the first entity (subsidiary) and the second entity (parent) are treated as the same entity and any holdings of the subsidiary are deemed to be held by the parent entity.

FEOC-Compliant: The proposed regulations provide definitions of FEOC-compliant with respect to a battery component (other than a battery cell), applicable critical mineral, battery cell and battery. These definitions treat battery cells separately from other battery components because battery cells contain applicable critical minerals (and associated constituent materials) as well as other battery components. Accordingly, the applicable excluded entity (i.e., FEOC) rules must be satisfied for such critical minerals and such components contained in the battery cell as well as the battery cell itself. In particular, Prop. Reg. 1.30D-6(a)(11) provides sets forth the following 5 definitions of FEOC-compliant:

1. A battery component (other than a battery cell), with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC compliant if it is not manufactured or assembled by a FEOC,
2. An applicable critical mineral, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC compliant if it is not extracted, processed, or recycled by a FEOC,
3. A battery cell, with respect to a new clean vehicle placed in service after December 31, 2023, and before January 1, 2025, is FEOC compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC compliant battery components,
4. A battery cell, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC compliant battery components and FEOC-compliant applicable critical minerals, and
5. A battery, with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it contains only FEOC-compliant battery components (other than battery cells) and FEOC-compliant battery cells.

Battery: Battery means a collection of one or more battery modules, each with two or more electrically configured battery cells in series or parallel, to create voltage or current. The proposed regulations clarify that the term battery does not include items such as thermal management systems or other parts of a battery cell or module that do not directly contribute to the electrochemical storage of energy within the battery, such as battery cell cases, cans, or pouches.

Battery Components and Constituent Materials: A battery component is a component that forms part of a battery and is manufactured or assembled from one or more components or constituent materials that are combined through industrial, chemical, and physical assembly steps. Constituent materials are materials that contain applicable critical minerals and are employed directly in the manufacturing of battery components. Constituent materials may include, but are not limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell. The proposed regulations provide that constituent materials are not a type of battery component, although constituent materials may be manufactured or assembled into battery components. 

Battery Cell: A battery cell is a combination of battery components (other than battery cells) capable of electrochemically storing energy from which the electric motor of a new clean vehicle draws electricity.

Non-traceable battery materials: Non-traceable battery materials mean specifically identified, low-value battery materials that originate from multiple sources and are commingled during refining, processing, or other production processes by suppliers to such a degree that the qualified manufacturer cannot, due to current industry practice, feasibly determine and attest to the origin of such battery materials. For this purpose, low-value battery materials are those that have low value compared to the total value of the battery.

Qualified Manufacturers

In addition to clarifying key definitions, the proposed regulations, as supplemented by Rev. Proc. 2023-38, provide rules and procedures for qualified manufacturers to (i) enter into a written agreement with the IRS, (ii) conduct appropriate due diligence as to battery components and critical minerals in order to determine whether batteries, including applicable critical minerals (and any associated constituent materials) and battery components, are FEOC-compliant, and (iii) satisfy periodic reporting requirements with respect to FEOC-compliant batteries, including maintenance of a “compliant battery ledger.”

Written Agreement

Beginning January 1, 2024, to qualify as a qualified manufacturer, manufacturers must have entered into a written agreement through the IRS Energy Credits Online Portal. Manufacturers who previously registered and filed written agreements under prior guidance must enter into new written agreements through the Portal.

Due Diligence and FEOC Compliance

Due Diligence Generally. The proposed regulations generally provide that the qualified manufacturer must conduct due diligence with respect to all battery components and applicable critical minerals (and associated constituent materials) that are relevant to determining whether such components or minerals are FEOC-compliant. This due diligence must comply with standards of tracing for battery materials available in the industry at the time of the attestation or certification that enable the qualified manufacturer to know with reasonable certainty the provenance of applicable critical minerals, constituent materials, and battery components. The regulations clarify that reasonable reliance on a supplier attestation or certification will be considered due diligence if the qualified manufacturer does not know or have reason to know after due diligence that such supplier attestation or certification is incorrect.

Steps for Determining FEOC Compliance. More specifically, the proposed regulations set forth the following three steps for determining that a battery is FEOC-compliant:

1. Step 1: The Qualified manufacturer must determine if battery components and critical minerals are FEOC-compliant. As to applicable critical minerals, the determination must take into account each step of extraction, processing, or recycling through the step in which such mineral is processed or recycled into a constituent material.
2. Step 2: FEOC-compliant battery components and applicable critical minerals must be physically tracked to specific battery cells. As an alternative, the regulations adopt a transition rule that temporarily allows qualified manufacturers to allocate FEOC-compliant applicable critical minerals and associated constituent materials (but not battery components) to battery cells without physical tracking. For new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the determination of whether a battery cell is FEOC-compliant may be satisfied (i) through an allocation of available mass of applicable critical minerals and associated constituent materials to specific battery cells manufactured or assembled in a battery cell production facility, without the physical tracking of the mass of applicable critical minerals (and associated constituent materials) to a specific battery cell, and (ii) excluding identified “non-traceable battery materials” (and associated constituent materials); provided that the manufacturer submit a report during the “up-front” review process related to establishing a compliant-battery ledger for a calendar year (described below) demonstrating how the qualified manufacturer will comply with the excluded entity restrictions once the transition rule is no longer in effect.
3. Step 3: The battery components, including battery cells, must be physically tracked to specific batteries. With respect to battery cells, a serial number or other identification system must be used to physically track FEOC-compliant battery cells to such batteries.

Periodic Reporting Requirements

Vehicle Reports: The IRS will not consider a vehicle to meet the requirements of IRC §30D unless a qualified manufacturer submits a written report containing the information required by section 6 of Rev. Proc. 2023-38 for such vehicle. The report must set forth the required information for any vehicle that the qualified manufacturer asserts is eligible for the IRC §30D credit. For each vehicle, the report sets forth the make, model, model year, and any other appropriate vehicle identifiers, together with various certifications as to criteria necessary to establish compliance with §30D, including FEOC compliance. Qualified manufacturers must file these reports with the IRS on a monthly basis by the fifteenth of the month. Each such report must include a declaration under penalties of perjury, applicable to the certification, statements, and any accompanying documents, signed by a person currently authorized to bind the qualified manufacturer.

Compliant Battery Ledger: The proposed regulations provide that, for calendar years beginning January 1, 2025, for vehicles to qualify for the clean vehicle credit under IRC §30D, the qualified manufacturer must provide detailed information to the IRS and DOE for an “upfront review,” including detailed compliance reports, to establish a compliant-battery ledger for each calendar year. Such compliant-battery ledger sets forth the qualified manufacturer’s anticipated supply of FEOC-compliant batteries for the calendar year. Rev. Proc. 2023-38 expressly provides that in order to establish a compliant-battery ledger for a calendar year, the qualified manufacturer must determine the projected number of FEOC-compliant batteries; submit an attestation with respect to the projected number, including supporting certifications and documentation; and receive approval of the projected number (in whole or in part) from the IRS. Additionally, the qualified manufacturer must later submit a year-end attestation with respect to the calendar year to the DOE as to the accuracy of the calendar year’s projected number of FEOC-compliant batteries. The IRS will also review such year-end attestation. The FEOC compliance report must contain items specified in Rev. Proc. 2023-38, Section 5.03, including (i) a description of measures taken to exercise due diligence and the approach to confirming FEOC compliance, (ii) a list of all battery component manufacturers or assemblers, including manufacturers or assemblers of battery cells, and documentation appropriately reliable to confirm FEOC compliance, (iii) a list of the battery cells used by the qualified manufacturer, including a serial number or other system used to track FEOC compliant battery cells to the batteries they are contained within, and (iv) a list of applicable critical mineral extractors, processors, or recyclers and reliable documentation to confirm FEOC compliance.

IRS/DOE Determination as to FEOC Compliant Batteries: Generally, if a qualified manufacturer submits the information to the DOE by July 1 of the year prior to the calendar year for which the compliant-battery ledger is being established, the DOE will review the submission and provide its analysis, and the IRS, in consultation with the DOE, will determine the projected number of FEOC compliant batteries for the qualified manufacturer prior to the beginning of the subject calendar year. This determination is subject to a right of the Qualified Manufacturer to request an administrative review.

2024 Information: The proposed regulations provide that, for new clean vehicles that are placed in service after December 31, 2023, and before January 1, 2025, the qualified manufacturer must determine whether the battery components contained in vehicles satisfy the FEOC compliance requirements and make an attestation with respect to such determinations at the time and in the manner provided in the Internal Revenue Bulletin. Rev. Proc. 2023-38 provides that when the qualified manufacturer submits the required information with respect to vehicles it intends to make available to be placed in service during 2025, it must also submit the information and attestations of vehicles that have been placed in service or are expected to be placed in service during 2024, but not including information related to applicable critical minerals and associated constituent materials.

Key Takeaways

The new clean vehicle credit under IRC §30D represents an important provision under the IRA intended to accelerate the transition to affordable green energy and, in so doing, incentivize clean manufacturing in the United States. It remains to be seen how quickly manufacturers will be in a position to source the necessary battery components and critical minerals from the United States or other non-FEOC jurisdictions, consistent with the guidance set forth in the proposed regulations, DOE Guidance and Rev. Proc. 2023-38. However, it seems that the number of electric vehicles eligible for the credit under IRC §30D will shrink in size as of January 1, 2024.

The attorneys at Buchanan Ingersoll & Rooney PC are uniquely positioned to assist manufacturers and others within the supply chain for new clean vehicles in complying with these detailed, but impactful, rules.