The U.S. Treasury Department and the IRS, on December 29, 2022, released information on the clean vehicle provisions of the Inflation Reduction Act. The new guidance provides greater clarity to consumers and businesses that, beginning January 1, 2023, are able to access tax benefits from the law’s clean vehicle provisions.
The information took the form of a white paper, two notices, and a set of frequently asked questions, all of which are discussed below.
White Paper on Forthcoming Guidance on Critical Mineral and Battery Component Value Calculations for New Clean Vehicle Credit
On December 29, 2022, Treasury released a white paper detailing the anticipated direction of the IRS’s upcoming proposed guidance on the critical minerals and battery components requirements for qualified manufacturers to determine whether a vehicle is eligible for the clean vehicle credit allowed under Internal Revenue Code Section 30D.
While the white paper is not proposed guidance, its intent is to allow manufacturers to prepare to identify vehicles eligible for the tax credit when the new requirements go into effect. Treasury and the IRS expect proposed guidance to be issued in March 2023, after which time manufacturers will be required to certify whether vehicles meet the critical mineral and battery component requirements.
Background
Prior to the enactment of the Inflation Reduction Act in August 2022, the credit allowed under Section 30D was calculated based on battery capacity. Specifically, the credit allowed was a base amount of $2,500, an additional $417 for a battery with capacity of 5 kWh, and an additional $417 for each kilowatt hour of capacity over 5 kWh, up to a maximum credit of $7,500 per vehicle.
Under the Inflation Reduction Act, the credit will now depend on whether the vehicle battery meets the critical mineral and battery component requirements. If met, each requirement results in a credit of $3,750, for a maximum credit of $7,500 per vehicle. The new critical mineral and battery component requirements will be in effect after Treasury and the IRS issue proposed guidance on the requirements. The Inflation Reduction Act also imposes new restrictions on the Section 30D credit based on a vehicle’s MSRP and for high-income purchasers.
Critical Mineral Requirement
The critical mineral requirement is met if 40% or more of the value of critical minerals (as defined in Section 45X(c)(6)) in the vehicle’s battery is extracted or processed in the U.S. (or any country with which the U.S. has a free trade agreement in effect) or recycled in North America for vehicles placed in service in 2023. The required percentage increases 10% in each subsequent year through 2027 (that is, to 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026).
Although the term “free trade agreement” is not defined by statute, Treasury and the IRS are expected to seek comment in the proposed guidance on what criteria should be used to identify free trade agreements. At a minimum, the term is likely to encompasses the U.S. trade agreements with Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.
Other key terms related to the critical mineral requirement are defined in the white paper, including extraction, processing, recycling, constituent materials, value, and value-added.
To determine the applicable percentage of critical minerals, Treasury and the IRS outline the following three-step process, which is expected to be accepted for 2023 and 2024 to allow manufacturers time to develop processes and capabilities to certify compliance with the critical mineral requirement throughout the supply chains:
- Step 1: Determine the procurement chain(s) for each critical mineral. A procurement chain is the sequence of extraction, processing, or recycling activities that conclude in the production of constituent materials. A single critical mineral may have multiple procurement chains.
- Step 2: Evaluate each critical mineral procurement chain to determine whether critical minerals procured from the chain have been extracted or processed in the U.S. (or any country with which the U.S. has a free trade agreement in effect) or recycled in North America. If yes, the critical minerals are “qualifying critical minerals.”
- If the procurement chain involved extraction or processing, the critical mineral is qualifying if one of these two criteria is met:
- 50% or more of the value added of critical mineral extraction steps occurred in the U.S. or any country with which the U.S. has a free trade agreement in effect; or
- 50% or more of the value added of critical mineral processing steps occurred in the U.S. or a free trade country a country with which the U.S. has a free trade agreement.
- If the procurement chain involves recycling, the critical mineral is qualifying if 50% or more of the value added to the critical mineral by recycling is derived from recycling that occurred in North America.
- This test needs to be applied separately for each procurement chain of a critical mineral.
- Step 3: Calculate the percentage of value of qualifying critical minerals contained in the battery. This is equal to the sum of the values of all qualifying critical minerals divided by the sum of the values of all critical minerals contained in the battery.
If the resulting percentage from this process is 40% or more, the vehicle would meet the critical mineral requirement for 2023.
Battery Component Requirement
The battery component requirement is met if 50% or more of the value of components of the vehicle’s battery are manufactured or assembled in North America. The required percentage increases 10% in subsequent years through 2028 (specifically, to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% after 2028).
Key terms related to the battery component requirement are defined in the white paper, including battery cell, battery component, constituent materials, manufacturing, assembly, value, and incremental value.
To determine the applicable percentage of battery components, Treasury and the IRS anticipate proposing the following four-step process.
- Step 1: Determine whether each battery component was manufactured or assembled in North America. A battery component is considered to be manufactured or assembled in North America if substantially all of the manufacturing or assembly activities for components occur in North America.
- Step 2: Determine the incremental value for each battery component. The incremental value is the value of that battery component minus the value of the manufactured or assembled battery components, if any, that are contained in that battery component.
- Step 3: Determine the total value of the battery components by totaling the incremental values of each component in step 2. This may also be calculated by totaling the value of each battery module.
- Step 4: Calculate the percentage by dividing the sum of the total incremental value for battery components manufactured or assembled in North America by the total value of the battery components.
If the percentage calculated in step 4 is 50% or greater, the vehicle would meet the battery component requirement for 2023.
Summary
Treasury and the IRS intend to issue proposed guidance for the critical mineral and battery component requirements in March 2023. These requirements and corresponding certification obligations by qualified manufacturers will take effect after the proposed guidance is released. Taxpayers may rely on proposed guidance during the period between its issuance and the issuance of final rules.
Notice 2023-1 Certain Definitions of Terms in Section 30D Clean Vehicle Credit
Notice 2023-1 informs taxpayers that Treasury and the IRS intend to propose regulations addressing the definitions of certain terms in respect of the new clean vehicle credit available under Section 30D.
Background
The Inflation Reduction Act amended several key requirements to the existing credit allowed under Section 30D. For example, after August 17, 2022, a vehicle must have undergone final assembly in North America to be eligible for the credit. Other amendments to the credit placed limitations on both the taxpayer’s adjusted gross income as well as the vehicle manufacturer’s suggested retail price.
The notice informs taxpayers that the proposed regulations will include definitions of the following terms, which are relevant for new clean vehicles placed in service after December 31, 2022: final assembly, North America, manufacturer’s suggested retail price, vehicle classification (for vans, sports utility vehicles (SUVs), pickup trucks, other vehicles), and placed in service for purposes of the Section 30D credit.
Definitions
The notice provides the following guidance:
- Final assembly means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for mechanical operation of the vehicle.
- North America means the United States, Canada, and Mexico, as defined in 19 CFR part 182, Appendix A, Section 1(1).
- Manufacturer’s suggested retail price means the sum of the automobile’s retail price suggested by the manufacturer and the retail delivered price suggested by the manufacturer for each accessory or item of optional equipment.
- Vehicle classification is to be determined consistent with the rules and definitions provided in 40 CFR 600.002 for vans, SUVs, and pickup trucks.
- Placed in service is defined as the date the taxpayer takes possession of the vehicle.
Critical Mineral and Battery Component Requirements
The IRS specifies that its publication of Notice 2023-1 is not the publication of proposed guidance for the critical mineral and battery component requirements and does not trigger the applicability of those requirements.
Notice 2023-9 Section 45W Commercial Clean Vehicles and Incremental Cost for 2023
Notice 2023-9 provides a safe harbor for the incremental cost of certain qualified commercial clean vehicles for purposes of the credit allowed under Section 45W for calendar year 2023.
Background
The qualified commercial clean vehicle credit allowed under section 45W is equal to the lesser of 30% of the taxpayer’s basis in the vehicle (or 15% in the case of vehicles powered by gasoline or diesel), or the incremental cost of the vehicle, up to a maximum credit of $7,500 for vehicles weighing less than 14,000 pounds or $40,000 for all other vehicles. The incremental cost is defined as the excess of the purchase price as compared to the price of a comparable vehicle, which is a vehicle that is powered solely by gasoline or diesel and is comparable in size and use to the qualified commercial clean vehicle.
On December 28, 2022, the Department of Energy published an incremental cost analysis that models the cost of representative commercial clean vehicles and comparable gasoline/diesel-powered vehicles. The DOE analysis found that vehicles weighing less than 14,000 pounds, other than compact plug-in hybrid electric vehicles (PHEVs), have an incremental cost greater than $7,500.
Safe Harbor for Calendar Year 2023
For compact PHEVs and vehicles weighing 14,000 pounds or more, Treasury and the IRS will accept taxpayers’ use of incremental cost published in the DOE analysis for the appropriate vehicle class to calculate the Section 45W credit amount.
For all vehicles weighing less than 14,000 pounds, the DOE analysis provides that incremental cost will not limit the Section 45W credit amount. Therefore, Treasury and the IRS will accept taxpayers’ use of $7,500 as the incremental cost for all street vehicles under 14,000 pounds, other than compact PHEVs.
Frequently asked questions related to new, previously owned and qualified commercial clean vehicle credits
The IRS fact sheet answers frequently asked questions regarding the new, previously owned, and qualified commercial clean vehicle credits (under Sections 30D, 25E, and 45W, respectively).
In relation to the new and previously owned clean vehicle credits under Sections 30D and 25E, the FAQs address topics including eligibility rules, income and vehicle price limitations, timing of new requirements, and claiming the credits. Key terms are defined throughout the FAQs, such as new clean vehicle, original use, and qualified manufacturer.
The FAQs also provide a list of vehicles that are qualified for the Section 30D credit, and further clarify that the credit may be claimed in the year in which the vehicle is placed in service, regardless of whether the vehicle was ordered in a previous year. The FAQs provide specific limitations to eligibility for the credit related to taxpayer’s adjusted gross income, as well as the vehicle’s manufacturer’s suggested retail price. The FAQs clarify that the Section 30D and 25E credits are not refundable and may not be carried forward. The FAQs also reiterate that the critical mineral and battery component requirements will not be in effect until after the proposed guidance is released, which is expected in March 2023.
With regard to the Section 45W credit, in addition to details pertaining to taxpayers’ eligibility, the FAQs provide further clarification and definitions of qualified commercial clean vehicles and incremental cost. The FAQs also reiterate that the vehicle must be for business use to be eligible for the Section 45W credit. Finally, the FAQs clarify that in instances in which the vehicle is leased, and the lease is recharacterized as a sale for tax purposes, the lessee – not the lessor -- is eligible for the Section 45W credit.
For more information about the above article or other business tax services, contact Michael D. Machen, CPA, CVA, by calling (334) 887-7022 or leaving us a message below.
Written by Timothy Wong and Gabe Rubio. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com
