The IRS has issued proposed reliance regs that would provide guidance regarding the excluded entity provisions with respect to the Code Sec. 30D clean vehicle credit as amended by the Inflation Reduction Act of 2022 (the Act). The proposed regs would also provide clarity on definitions with respect to new clean vehicles eligible for the clean vehicle credit. (Preamble to Prop Reg REG-118492-23)
The proposed regs would provide clarity and certainty around the Act’s foreign entity of concern (FEOC) requirements. Beginning in 2024, an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC, and, beginning in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a FEOC.
In addition to the FEOC requirement, clean vehicles must also continue to meet additional statutory criteria, including additional sourcing requirements for both the critical minerals and battery components contained in the vehicle, a requirement that vehicles undergo final assembly in North America, and a requirement that vehicles do not exceed a Manufacturers Suggested Retail Price of $80,000 for a van, pickup truck, or sport utility vehicle, or $55,000 for any other vehicle.
Foreign Entity of Concern Requirement. The proposed regs provide rules to determine whether applicable critical minerals (and their associated constituent materials) and battery components are manufactured or assembled by a FEOC for battery components, and extracted, processed, or recycled by a FEOC for critical minerals. The proposed rules would require manufacturers to conduct due diligence that complies with industry standards of tracing for battery materials.
Under the proposal, FEOC-compliance for battery components would be determined at the time of manufacture or assembly, and FEOC-compliance for critical minerals would be determined by reviewing all phases of applicable critical mineral extraction, processing, and recycling. For example, a mineral extracted by an entity that is not a FEOC but processed by an entity that is a FEOC would not be compliant. Compliant battery components would have to be tracked to FEOC-compliant battery cells, and cells could not be manufactured or assembled by a FEOC.
Critical minerals generally also must be traced. However, given that there is commingling in the critical mineral supply chains and suppliers may not be able to physically track certain specific masses of minerals to specific battery cells or batteries, the proposed regs ask for comments on a temporary transition rule, under which critical minerals and associated constituent materials may be allocated to a particular set of battery cells. The battery cells would then have to be physically tracked to batteries and new clean vehicles using a serial number or other identification system.
The proposed regs also ask for comment on a proposed additional transition rule as the automotive industry develops the ability to trace certain low-value materials with precision. The IRS proposes a temporary transition rule through 2026 that would give the industry time to develop tracing standards for these low-value materials. The guidance asks for comment on the need for and design of such a rule, what materials should be included under this approach, and whether alternative approaches to such a transition rule would be more appropriate.
To allow compliant vehicles already on dealer lots and currently being manufactured to qualify for the credit while the rulemaking process proceeds, the proposed rules would provide a transition rule to expedite certification for new clean vehicles that do not contain battery components manufactured or assembled by a FEOC and are placed in service in 2024 between January 1 and 30 days after the rules are finalized.
The proposed rules would also create an upfront review system starting in 2025 that would provide additional oversight of FEOC compliance, as well as certainty to manufacturers. For new vehicles placed in service in 2025 or later, the IRS would track FEOC compliance via a compliant-battery ledger.
Finally, the proposed regs would create a regime to incentivize compliance by automakers. Inadvertent errors may be cured; otherwise, the vehicle related to the error will no longer be credit eligible. If that vehicle has already been sold, the error would instead cause a reduction to the ledger.
Applicability date. Prop Reg §1.30D-2(j) through Prop Reg §1.30D-2(j)(m), Prop Reg §1.30D-3(d), and Prop Reg §1.30D-3(d)(e) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for tax years ending after December 31, 2023. (Prop Reg §1.30D-2(i); Prop Reg §1.30D-3(g))
Prop Reg §1.30D-6 (related to the excluded entity provisions) is proposed to apply to new clean vehicles placed in service after December 31, 2023. (Prop Reg §1.30D-6(i))
Taxpayers may rely on the proposed regs for vehicles placed in service prior to the date final regulations are published, provided the taxpayer follows the proposed regs in their entirety, and in a consistent manner. (Preamble to Prop Reg REG-118492-23)
For more information regarding the foreign entity of concern requirement, see Checkpoint’s Federal Tax Coordinator ¶ L-18009.
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