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Proposed Regulations for 30D Clean Vehicle CreditApril 7, 2023
The Section 30D clean vehicle credit for purchasing a new, qualified plug-in EV or fuel cell electric vehicle (“EV Credit”) under the Internal Revenue Code of 1986, as amended (the “Code”)1 was most recently amended under the Inflation Reduction Act of 2022, which changed the rules for the EV Credit for vehicles purchased from 2023 to 2032. On March 31, 2023, the IRS issued proposed regulations (REG-120080-22) on EV Credits.
Section 30D of the Code provides for the EV Credit with respect to each new clean vehicle that a taxpayer purchases and places in service. Eligibility for the EV Credit is determined and allowable with respect to the tax year in which the taxpayer places the new clean vehicle in service.
EV Credit Amount
The maximum EV Credit amount per new clean vehicle is US$7,500, made up of US$3,750 for a vehicle meeting the “critical minerals requirement” which stipulates that a certain percentage of critical minerals in the vehicle’s battery must be extracted or processed within the United States or within a country with whom the United States has a free-trade agreement, and US$3,750 for a vehicle meeting the “battery component requirement” which requires that a certain percentage of the vehicle’s battery be assembled or manufactured within North America. These two requirements apply to vehicles placed in service on or after April 18, 2023, and a vehicle meeting only one of the requirements may be eligible for the applicable portion of the EV Credit. The new proposed regulations provide guidance on determining whether the “critical mineral” and “battery component” requirements are met. Under these new rules, many popular electric vehicle models that qualified under prior rules may not be eligible for the EV Credit without an exception, waiver or even an amendment to the EV Credit requirements.
Critical Minerals and Battery Component Requirements
As briefly discussed above, Section 30D(e)(1)(B) of the Code requires that the content of certain qualifying critical minerals, such as copper, lithium and manganese extracted or processed in the United States (or in countries that have free-trade agreements with the United States), used in the battery of an electric vehicle be equal to or greater than a certain prescribed percentage of all such minerals used in such battery for the applicable taxable year. The critical mineral requirement for vehicles placed in service before 2024 is 40% and rises to 80% for years following 2026. The new proposed regulations provide a three-step process for determining the percentage of qualifying critical minerals used in a vehicle’s battery in Section 30D(e)(1)(A) of the Code, consisting of: (1) determining the procurement chain of each critical mineral; (2) ensuring that the critical minerals were either extracted or processed in the United States or any country with which the United States has a free trade agreement in effect2, or else recycled in North America; and (3) determining the qualifying critical mineral content in the vehicle’s battery. The qualifying critical mineral content is determined by dividing the total value of qualifying critical minerals by the total value of critical minerals. The determination of the portion of qualifying critical minerals will be made on a procurement chain basis.3 The qualified manufacturer must select a date that is after the final processing or recycling step for the applicable critical minerals for purposes of determining the qualifying critical mineral content.
In addition, as briefly mentioned above, Section 30D(e)(2) places origin requirements on battery components used in clean vehicles. Manufacturers must ensure that at least a specific percentage of battery components are assembled or manufactured in North America in order to receive the EV Credit. The requirement is 50% for vehicles placed in service before January 2024, and increases up to 100% for vehicles placed in service after December 31, 2028. The proposed regulations provide a four-step process for determining the applicable percentage, including: (1) identifying components that are manufactured or assembled in North America; (2) determining the incremental value of each battery component and North American battery components; (3) determining the total incremental value of battery components; and (4) calculating the qualifying battery component content. The qualifying battery component content is determined by dividing the total incremental value of North American battery components by the total incremental value of battery components. The determination of the incremental values of the battery components is based on the actual battery components of a specific vehicle or based on an average of the qualifying battery component content calculation over a certain period of time with respect to vehicles from the same model line, plant, class or some combination thereof. For purposes of determining what is a “battery component,” the proposed regulations provide that a battery component is a component that forms part of a battery, is manufactured, or assembled from one or more components or constituent materials that are combined through certain assembly steps.4 Constituent materials are not treated as battery components.
In order to qualify for the EV Credit, a taxpayer’s modified adjusted gross income cannot exceed US$300,000 for married couples filing jointly, US$225,000 for heads of households and US$150,000 for all other filers. Taxpayers should use their modified adjusted gross income from the year they take delivery of the vehicle or the year before, whichever is less. Taxpayers can claim the EV Credit if their modified adjusted gross income is below the threshold in one of the two years.
In additional to the requirements detailed above, to qualify for the EV Credit, a new clean vehicle must:
- Be placed in service on or after January 1, 2023;
- Be acquired by a taxpayer for original use;
- Be acquired for use or lease by the taxpayer and not for resale;
- Be manufactured by a “qualified manufacturer”5;
- Be manufactured primarily for use on public streets, roads, and highways, and has at least four wheels, in order to be treated as a “motor vehicle” as provided under Title II of the Clean Air Act;
- Have a gross vehicle weight rating of less than 14,000 pounds;
- Have a manufacturer suggested retail price of US$80,000 or less for vans, sports utility vehicles and pickup trucks or US$55,000 or less for other vehicles;
- Be powered to a significant extent by an electric motor with a battery capacity of 7 kilowatt hours or more and must be capable of being recharged from an external electricity source; and
- Have final assembly in North America.
Further, EVs with batteries containing critical minerals or components from a “foreign entity of concern” are limited or ineligible to claim the EV Credit.
A seller of a new clean vehicle must provide a report to the taxpayer and to the Secretary of the Treasury, including the following information:
- The name and taxpayer identification number of the taxpayer;
- The VIN of the vehicle;
- The battery capacity of the vehicle;
- Verification that the original use of the vehicle commences with the taxpayer;
- The maximum credit allowable under Section 30D of the Code with respect to the vehicle; and
- Any amount described in Section 30D(g)(2)(C) of the Code in the case of a taxpayer who makes an election to transfer the credit to an eligible entity under Section 30D (g)(1) of the Code.
A list of eligible clean vehicles, including fuel cell vehicles, that qualified manufacturers have indicated to the IRS meet the requirements to claim the EV Credit can be found at Federal Tax Credits for Plug-in Electric and Fuel Cell Electric Vehicles Purchased in 2023 or After (fueleconomy.gov).
Claiming the EV Credit
To claim the EV Credit, taxpayers should file Form 8963, Qualified Plug-In Electric Drive Motor Vehicle Credit, with their U.S. federal income tax returns. Taxpayers will also need to provide their vehicle’s VIN. Generally, taxpayers can rely on the manufacturer’s certification to the IRS that a specific make, model and model year qualifies for the EV Credit, and the manufacturer should be able to provide taxpayers with a copy of the IRS letter acknowledging the certification of the vehicle.
The proposed regulations are not yet final and are subject to change. However, taxpayers may rely on them for guidance until final regulations are issued. We recommend that you consult with a tax advisor to determine how these proposed regulations may impact you.
1 Unless otherwise indicated, all references to “Section” herein refer to the Code.
2 Currently, the United States has free trade agreements with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.
3 The proposed regulations specify that a procurement chain is “a common sequence of extraction, processing, or recycling activities that occur in a common set of locations, concluding in the production of constituent materials.”
4 The proposed regulations provide a non-exhaustive list of examples of battery components, including “a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module.”
5 Rev. Proc. 2022-42 provides guidance for manufacturers to be considered “qualified manufacturers,” including that the manufacturers enter into written agreements with the IRS to file periodic reports with VINs and other information for each vehicle they manufacture. A list of qualified manufacturers can be found at Clean Vehicle Qualified Manufacturer Requirements.
6 The proposed regulations are silent on what “foreign entities of concern” means for purposes of the EV Credit. Depending on the interpretation, manufacturers may face challenges in satisfying the requirements to be eligible for the EV Credit. The IRS intends to provide further guidance on the definition in the future.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York, Alexander Roberts, an O’Melveny partner licensed to practice law in New York, Dawn Lim, an O’Melveny counsel licensed to practice law in New York, Bo Chen, an O'Melveny associate licensed to practice law in the District of Columbia, and Eleanor Gilbert, an O'Melveny associate licensed to practice law in Texas, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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