US Departments of Treasury and Energy issue final tax credit regulations for clean energy vehicles

The US Department of the Treasury has published Final Regulations regarding federal income tax credits for the purchase of qualifying new and previously owned clean vehicles. The Regulations, published on May 6, 2024, are scheduled to take effect on July 5, 2024. They provide eligibility requirements and limitations for federal tax credits under the Inflation Reduction Act (IRA) for “clean vehicles” (ie, qualified new and previously owned battery electric vehicles and fuel cell vehicles).

The same day, the US Department of Energy (DoE) published a Final Interpretive Rule (Final Rule) defining the term “foreign entity of concern” (FEOC), its scope and application for purposes of funding of battery manufacturing-related projects under the Infrastructure Investment and Jobs Act (also referred to as the Bipartisan Infrastructure Law, or "BIL"), and for Internal Revenue Code (IRC) Section 30D (new clean vehicle tax credits) eligibility under the IRA. The Treasury Final Regulations incorporate the DoE FEOC definitions and guidance for purposes of Section 30D.

Increased tariffs on electric vehicles and related materials imported to US from China

Days after finalizing clean vehicle credit exclusions that apply to vehicles containing battery critical minerals or battery components sourced from FEOCs (including China entities), the US imposed substantial tariff increases on electric vehicles and batteries imported from China.

On May 14, the White House announced a number of increases of tariffs on electric vehicles, batteries and related materials exported to the U.S. from China, including a quadrupling of tariffs on electric vehicles from 25 percent to 100 percent. Issued under the Trade Act of 1974 in response to what the Biden Administration described as “China’s unfair trade practices [and] resulting harms,” the targeted tariff increases apply to approximately $18 billion of imports from China to the US.

In addition to the large increase in EV tariffs, other new tariff increases on imports to the US from China set to take effect in 2024 include an increase from 7.5 percent to 25 percent on certain steel and aluminum products, lithium-ion EV batteries, and certain battery parts. Tariffs on imports of natural graphite and permanent magnets from China are scheduled to increase from zero to 25 percent in 2026, and by the same amount this year for other critical minerals. Tariffs on semiconductor imports to the US from China will increase from 25 percent to 50 percent by 2025.

Prior alerts regarding the IRA and implementing regulations have described the primary provisions and eligibility requirements of the clean vehicle tax credits, and proposed implementing regulations and guidance, in detail. See our alerts on Clean Vehicle Tax Credits Eligibility and FEOC Proposed Regulations for more information.

I. Affected Internal Revenue Code sections

This alert primarily discusses changes, clarifications, and refinements to the proposed regulations and their application. The Final Regulations relate mainly to IRC Sections 25E and 30D:

• Section 25E provides a tax credit to qualified purchasers of a previously owned clean vehicle, with a maximum credit equal to the lesser of (i) $4,000 or (ii) the amount equal to 30 percent of the sale price with respect to such vehicle. A “previously-owned clean vehicle" is defined as a motor vehicle that meets the following conditions: (i) it is a model year at least two years earlier than the year of acquisition, (ii) the original use commenced with a person other than the taxpayer, (iii) it is acquired in a qualified sale, and (iv) it meets other eligibility requirements of Section 30D.


• Section 30D provides a two-part tax credit for qualified purchasers of new clean vehicles having a gross vehicle weight of 14,000 pounds or less. The IRA amended section 30D to provide a maximum credit of $7,500 per vehicle, consisting of (i) $3,750 for a new clean vehicle that meets requirements relating to the geographic location of the extracting, processing, or recycling of critical battery minerals (Critical Minerals Requirement) and (ii) another $3,750 for a new clean vehicle whose battery contains a specified percentage (percentages increase annually) of components manufactured or assembled in North America (Battery Components Requirement).


• Section 45W provides a tax credit for purchasing and placing in service a qualified commercial clean vehicle, which includes electric vehicles with a plug-in battery. The credit amount equals the lesser of (i) 15 percent of basis in the vehicle (30 percent if the vehicle is not powered by gas or diesel as is possible with plug-in hybrid electric vehicles) and (ii) the incremental cost of the vehicle. The maximum credit is $7,500 for qualified vehicles with gross vehicle weight ratings of under 14,000 pounds and $40,000 for all other vehicles.

II. Selected highlights of Treasury Final Regulations

The Final Regulations are fairly lengthy and cover the topics and address comments received on three sets of previously proposed regulations (REG-120080-22, REG-113064-23, and REG-118492-23). Below we summarize some key provisions, clarifications, updates, and revisions included in the Final Regulations:

Definitions

• Previously owned clean vehicles and qualified sales: Under the Final Regulations, vehicles that may qualify as previously owned clean vehicles include battery electric vehicles, plug-in hybrid electric vehicles, fuel cell motor vehicles, and plug-in hybrid fuel cell motor vehicles. A "qualified sale" is defined as a sale of a motor vehicle by a dealer for a price that does not exceed $25,000 and is the “first transfer” of a previously owned clean vehicle to a qualified buyer (other than the original qualified purchaser). This means that a sale of a used clean vehicle can qualify for a previously owned clean vehicle tax credit only a single time.


• Eligibility limits: purchaser income, manufacturer’s suggested retail price


• Section 30D provides a credit for new clean vehicle purchasers whose modified adjusted gross income for that year or the previous year does not exceed a threshold amount. For Section 30D, the threshold amount is (i) $300,000 for a taxpayer filing a joint return, (ii) $225,000 for a taxpayer who is a head of household, and $150,000 for any other taxpayer. Vehicles whose MSRP is higher than the statutory maximum are not eligible for the Section 30D credit. The applicable maximum MSRPs for vehicle types are (i) for vans, sport utility vehicles, or pickup trucks, $80,000, and (ii) for any other clean vehicle, $55,000.


• Section 25E sets different limits on the purchaser’s modified AGI, disallowing a credit if the applicable modified AGI for either the current or preceding taxable year exceeds the maximum amount. The maximums are (i) $150,000 for taxpayers filing a joint return, (ii) $112,500 for a taxpayer who is a head of household, and $75,000 for any other taxpayer.


• Placed in service: The “placed in service date” is relevant for several provisions of Sections 25E and 30D, including the applicable percentages for the Critical Minerals, Battery Components, and FEOC exclusions. The Final Regulations provide that a vehicle is considered to be placed in service on the date the taxpayer takes possession of the vehicle.

Credit transfer rules

• Credit transfers to dealers allow immediate benefit to clean vehicle purchasers: The Final Regulations allow qualified clean vehicle purchasers to elect to transfer the credit to eligible entities (primarily qualified clean vehicle dealers) at the time of sale of the vehicle, which can effectively reduce the purchase price of the clean vehicle. The eligible entity may obtain an advance payment from the IRS in the amount of the applicable clean vehicle tax credit. In exchange, the eligible entity must pay the taxpayer an amount equal to the transferred credit (such payment may be made in cash, in the form of a payment for the purchase of the vehicle, or as a reduction of the vehicle purchase price). The credits may be "transferred" through this process even when the clean vehicle buyer's federal income tax liability is less than the applicable 30D credit amount. This tax credit transfer provision already has been popular and convenient for vehicle purchasers, as it allows them to effectively lower the purchase price of the vehicle and obtain immediate value for the tax credits rather than waiting until they file their income tax returns.

Critical minerals requirements

• US or Free Trade Agreement country sourcing: The Critical Minerals Requirement generally requires the battery of an eligible vehicle to contain a specified percentage of its critical minerals that are (i) extracted or processed in the US or in any country with which the US has a free trade agreement (FTA) or (ii) recycled in North America. The proposed regulations identified 20 countries with which the US has a comprehensive FTA, as well as Japan, which entered a critical minerals free trade agreement with the US in March 2023. Despite comments objecting to the inclusion of Japan or other nations that do not have a comprehensive FTA with the US, the Final Regulations retain the proposal’s application of the FTA requirement. Treasury indicated that it would continue to work with the US Trade Representative to determine if future additions to the FTA list are appropriate.


• Determination of critical minerals sources and percentages: The critical minerals eligibility determination requires manufacturers to take into account and document each step of those minerals’ extraction, processing, or recycling through the point at which each such mineral is processed or recycled into an associated “constituent material.” However, if an applicable critical mineral is fully consumed in the production of a constituent material or battery component and no longer remains in any form in the battery, then it is disregarded.


• Traced Qualifying Value Test: Treasury originally proposed a three-step process (50-percent Value Added Test) for determining the qualifying critical content of a clean vehicle battery. The Final Regulations reject that proposed test in favor of a more stringent and more precise "Traced Qualifying Value Test," which requires a manufacturer to fully trace any value added in each procurement chain that it applies toward the Critical Minerals Requirement. The Traced Qualifying Value Test uses the highest value-added percentage of the three specified activities (extraction, processing, or recycling) for each supply chain.


• 50-percent Value Added Test transition rule: The Final Regulations retain the 50-percent Value Added Test as a safe harbor alternative option, during a transition period that ends January 1, 2027. The 50-percent Value Added Test also is the mandatory method of determining critical minerals percentage in tax years ending on or before May 6, 2024.

Battery components requirements

• The Final Regulations reiterate that the list of battery components is non-exhaustive and illustrative to allow for future innovation and evolutions in battery technology.


• The Final Regulations adopt the proposed Battery Components Requirement and provide the same four-step process for determining the percentage of the value of the battery components in a battery that contribute toward meeting the Battery Components Requirement.

Fuel cell vehicles eligible

The Final Regulations provide that new qualified fuel cell motor vehicles are deemed to satisfy the Critical Minerals and Battery Component Requirements and thus are qualify for the full $7,500 new clean vehicle credit. The regulations note, however, that a fuel cell vehicle that has a “clean vehicle battery” (eg, a plug-in hybrid fuel cell vehicles) would be subject to the 30D critical minerals and battery component eligibility requirements.

FEOC exclusions, restrictions, tracing, and documentation

• Treasury’s Final Regulations reemphasize that common terms that apply to the Critical Minerals and Battery Components Requirements and to the FEOC Exclusions (the regulations refer to latter as "Restrictions") must be interpreted consistently for purposes of determining 30D tax credit eligibility.


• The FEOC Exclusions make vehicles whose battery components or critical minerals are sourced from, or manufactured or assembled by, an FEOC ineligible for the clean vehicle tax credit. The Final Regulations exclude from the term “new clean vehicle”:

(i) Any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle were manufactured or assembled by an FEOC, and

(ii) Any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle were extracted, processed, or recycled by an FEOC.

• Due diligence, tracing, and documentation: The Final Regulations generally adopt the proposed approach for determining and documenting FEOC compliance, which imposes extensive and demanding new supply chain tracing, tracking, and recordkeeping requirements. Initially, a qualified manufacturer initially must conduct due diligence with respect to battery components and critical minerals in its supply chain(s), to determine whether such components or minerals are sourced from or manufactured by an FEOC. Such due diligence must be conducted by the manufacturer “in accordance with standards of tracing available in the industry at the time,” and prior to the manufacturer's establishment and maintenance of a compliant-battery ledger (required for qualified new clean vehicles after December 31, 2024). Treasury declined to specify any particular tracing system or method, stating it would consider issuing guidance on the topic in the future.


• Battery component tracking: For any new clean vehicle placed in service starting January 1, 2024, clean vehicle batteries must be FEOC-compliant, and such batteries must be physically tracked to specific new clean vehicles. To determine that a clean vehicle battery is FEOC-compliant requires that the manufacturer complete multiple steps. First, it must determine whether battery components and applicable critical minerals are FEOC-compliant. Second, the FEOC-compliant battery components and applicable critical minerals are physically tracked to specific battery cells. Alternatively, FEOC-compliant applicable critical minerals and associated constituent materials (but not battery components) may be allocated to battery cells without physical tracking according to the allocation-based approach discussed below. Third, the battery components, including battery cells, must be physically tracked to specific clean vehicle batteries. Additionally, for new clean vehicles placed in service after December 31, 2024, the qualified manufacturer will be required to establish and maintain a “compliant-battery ledger” for each calendar year (providing information to the IRS).


• Allocation-based determination for battery cells made permanent: The proposed regulations suggested a transition rule providing for an allocation-based determination of critical minerals content of battery cells. The Final Regulations make the allocation-based determination a permanent option, recognizing that it may be difficult to “de-commingle” those supply chains. The allocation rule provides that battery cell FEOC compliance may be determined through an allocation of the 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 those critical minerals and materials to specific battery cells.


• Transition rule for impracticable-to-trace battery materials: Treasury had proposed transition rules allowing the due diligence requirement to be satisfied by allowing certain specified low value, frequently comingled “non-traceable” battery materials to be excluded from the determination of whether a battery cell is FEOC-compliant. Materials designated as non-traceable in the proposal were applicable critical minerals contained in electrolyte salts, electrode binders, and electrolyte additives.


• Graphite added. The Final Regulations changed the name of this transition rule to cover “impracticable-to-trace battery materials.” Significantly, the Final Regulations revised the list by adding graphite that is contained in anode materials. As most natural graphite used in EVs today is extracted or processed by an FEOC, the new exclusion provides significant relief for EV battery and vehicle manufacturers.


• The impracticable-to-trace transition rule applies to new clean vehicles for which the manufacturer provides a periodic written report before January 1, 2027. It is available only to qualified manufacturers that first submit a report during the up-front review process demonstrating how the manufacturer will comply with the FEOC restrictions once the transition period ends. In addition, the Final Regulations clarify that this manufacturer report must include information about its efforts made to date to secure a FEOC-compliant battery supply.

III. Highlights of “foreign entity of concern” Final Rule

Concurrent with the Treasury final regulations, the federal Department of Energy issued a final interpretive rule, defining the important term “foreign entity of concern” its elements, and application for purposes of Section 30D and for prioritization of funding of battery material processing, manufacturing, and recycling projects under the IIJA/BIL. As explained, vehicles containing battery components manufactured or assembled by an FEOC are excluded from the 30D credit beginning on January 1, 2024, and vehicles containing critical minerals extracted, processed, or recycled by an FEOC are excluded from the credit beginning January 1, 2025. The final rule largely adopts major provisions of the proposed guidance issued in December 2023, with some refinements, clarifications, and adjustments in response to public comments.

Key terms and elements for FEOC determination: Under the statute an entity is an FEOC if it is a “foreign entity” and is either “subject to the jurisdiction” of the “government of” a covered foreign country, or “owned by, controlled by, or subject to the direction” of the government of such a covered foreign country. The final rule unpacks and defines essential elements of the FEOC provision, including “foreign entity,” “government of a foreign country,” “subject to the jurisdiction,” and “owned by, controlled by, or subject to the direction,” explaining that each of the terms is to be interpreted separately. The meaning of each of those terms under the DoE rule, in summary form:

Foreign Entity: “Foreign Entity” includes three main categories of persons or entities: (1) the government of a foreign country or a foreign political entity; (2) a natural person who is not a citizen of the US, lawful permanent resident of the US, or other protected individual; or (3) a partnership, association, corporation, organization, or “other combination of persons organized under the laws or having its principal place of business in a foreign country.”

• “Government of a foreign country” is defined to include subnational and local governments and “instrumentalities,” of a covered foreign nation, such as separate legal entities that operate as organs of a state.


• The “covered nations” are currently the People's Republic of China, the Russian Federation, the Democratic People's Republic of Korea, and the Islamic Republic of Iran.


• “Government of a foreign country” also includes senior foreign political figures, senior government and party officials, former senior government and party officials, and family members of such current or former senior officials.

Subject to the jurisdiction: If an entity is subject to the jurisdiction of a government of a covered nation, that entity is an FEOC. Entities subject to the jurisdiction of a covered nation are defined to include organizations formed under the laws of a covered nation, and entities that are domiciled or have their principal place of business in a covered nation.

• A foreign entity is also considered to be subject to the jurisdiction of a covered nation government if – with respect to a particular battery – it engages in extraction, processing, or recycling of critical minerals, manufacturing or assembly of battery components, or processing of battery materials in a covered nation.


• Subsidiaries of an FEOC are deemed to be FEOCs if they are subject to the jurisdiction of a covered nation or controlled by a covered nation government (including direct and indirect control under the “owned by, controlled by, or subject to the direction of” the government of a covered nation, discussed below).

Owned by, controlled by, or subject to the direction: An entity that is “owned by, controlled by, or subject to the direction” of a government of a covered nation is an FEOC. Using the shorthand term “control,” to encompass owned by, controlled by, or subject to the direction, DoE’s rule defines control as holding 25 percent or more of an entity’s board seats, equity interest, or voting rights; or as holding a license or contract that confers rights “that amount to a conferral of control.”

• 25 percent or greater interest. This applies to corporations, partnerships, associations, joint ventures, and other covered entities. The 25-percent threshold applies broadly to cover any of the three identified mechanisms of control (board seats, equity, or voting rights).


• Equity interests cover “all ownership interests,” including capital interests, profit interests, and “contingent equity interests” as defined in CFIUS regulations.


• Control via licensing and contracting: DoE rule includes in its definition of control what it calls “effective control,” via “contracts or licenses with a FEOC as if it were the true entity responsible for any production.” The regulation also establishes a safe harbor from a determination of effective control by providing that an applicable agreement will be to not confer effective control if it expressly reserves to a non-FEOC certain specific rights listed in the final rule.

The Final Rule provides several illustrative examples of how the FEOC “control” rules would be applied to different business ventures, ownership and board structures, equity and voting interests, and various other scenarios.

IV. Going forward

The Treasury and Energy final regulations and guidance provide greater clarity and certainty regarding the Critical Minerals Requirement, Battery Components Requirement, and the FEOC restrictions and compliance. They also provide some temporary relief from some of the content restrictions and other requirements and limitations imposed by the IRA clean vehicle tax credits provisions for battery and vehicle manufacturers and suppliers (eg, the addition of graphite to the list of impracticable-to-trace battery materials). Even with the temporary relaxing of some requirements, however, it appears that only approximately 22 vehicles currently offered for sale in the US qualify for the 30D credit.

This summary provides only a high-level overview of some significant provisions of the rules and regulations regarding the federal income tax credits for the purchase of qualifying new and previously owned clean vehicles. Taxpayers, manufacturers, and other potentially affected persons and entities should carefully consider specific provisions and how they would apply to their own particular circumstances and interests when considering any tax credit.

DLA Piper guides our clients through the processes of evaluating tax credits, incentives, and government funding opportunities created by the IRA, BIL and other federal law and regulations. This includes complying with eligibility requirements and limitations; strategies for monetizing federal tax credits and incentives for clean vehicles and related manufacturing, and infrastructure; and assistance with clean energy projects, facilities, and other energy transition activities. For more information, reach out to one of the authors or your usual DLA Piper contact.

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