IRS Issues Guidance on Clean Vehicle Credit Excluded Entity Provisions

(Parker Tax Publishing December 2023)

The IRS issued proposed regulations that provide guidance regarding the excluded entity provisions with respect to the Code Sec. 30D provide clarity on definitions with respect to new clean vehicles eligible for the clean vehicle credit. The IRS also updated the procedures under Code Sec. 30D(d)(3) for qualified manufacturers to enter into a written agreement with the IRS under which such manufacturer agrees to make periodic written reports to the Treasury Secretary providing vehicle identification numbers and other information regarding vehicles eligible for a clean vehicle credit. REG-118492-23; Rev. Proc. 2023-38.

Background

Code Sec. 30D provides a credit with respect to each new clean vehicle that a taxpayer purchases and places in service. Effective beginning on April 18, 2023, Code Sec. 30D(b) provides a maximum credit of $7,500 per new clean vehicle, consisting of $3,750 if certain critical minerals requirements are met and $3,750 if certain battery components requirements are met.

Under Code Sec. 30D(1), a "new clean vehicle" is a motor vehicle that satisfies the eight requirements set forth in Code Sec. 30D(d)(1)(A) through (H), one of which is the requirement that the vehicle must be made by a qualified manufacturer. Code Sec. 30D(d)(3) defines "qualified manufacturer" as any manufacturer that enters into a written agreement with the Treasury Secretary under which such manufacturer agrees to make periodic written reports to the Treasury Secretary (at such times and in such manner as the Treasury Secretary may provide) providing vehicle identification numbers and such other information related to each vehicle manufactured by such manufacturer as the Treasury Secretary may require.

Code Sec. 30D(d)(7) excludes from the definition of "new clean vehicle" 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 a foreign entity of concern, or 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 a foreign entity of concern.

Prior Guidance

On December 12, 2022, the IRS published Rev. Proc. 2022-42, providing guidance for qualified manufacturers to enter into written agreements with the IRS, as required in Code Secs. 30D, 25E, and 45W, and to report certain information regarding vehicles produced by such manufacturers that may be eligible for credits under these sections. In addition, Rev. Proc. 2022-42 provides the procedures for sellers of new clean vehicles or previously-owned clean vehicles to report certain information to the IRS and the purchasers of such clean vehicles.

On April 17, 2023, the IRS issued proposed regulations (REG-120080-22) (April 2023 proposed regulations) which provide definitions for certain terms related to Code Sec. 30D; rules regarding personal and business use and other special rules; and additional rules related to the critical mineral and battery component requirements.

On October 6, 2023, the IRS issued Rev. Proc. 2023-33 to provide guidance for taxpayers electing to transfer credits under Code Secs. 25E or 30D and for eligible entities receiving advance payments of credits under Code Secs. 30D and 25E. Rev. Proc. 2023-33 sets forth the procedures under Code Secs. 30D(g) and 25E(f) for the transfer of the previously-owned clean vehicle credit and the new clean vehicle credit from the taxpayer to an eligible entity, including the procedures for dealer registration with the IRS, the procedures for the revocation and suspension of that registration, and the establishment of an advance payment program to eligible entities.

On October 10, 2023, the IRS issued proposed regulations (REG-113064-23) (October 2023 proposed regulations) which provide guidance for elections to transfer clean vehicle credits under Code Secs. 30D(g) and 25E(f). The proposed regulations provide guidance for taxpayers intending to transfer the previously-owned clean vehicle credit and the new clean vehicle credit to dealers who are entities eligible to receive advance payments of either credit. The proposed regulations also provide guidance for dealers to become eligible entities to receive advance payments of previously-owned clean vehicle credits or clean vehicle credits. The proposed regulations also provide guidance for recapturing the credit under Code Secs. 30D and 25E. Finally, Prop. Reg. Sec. 1.6213-2 defines the term "omission of a correct vehicle identification number" (VIN) for purposes of Code Sec. 6213, under which, in part, the IRS is authorized to make a summary assessment when there has been an omission of a correct VIN on a taxpayer's return when claiming or electing to transfer a credit under Code Secs. 25E or 30D.

Department of Energy Guidance

Concurrently with the release of the proposed regulations in REG-118492-23, the Department of Energy (DOE) released proposed guidance which provides interpretations of certain terms used in the definition of "foreign entity of concern" (FEOC) set forth in Section 40207(a)(5) of the IIJA, 42 U.S.C. Section 18741(a)(5), and as cross-referenced in Code Sec. 30D(d)(7). Generally, Section 40207(a)(5) of the IIJA defines FEOC to include foreign entities covered by specific designations by federal agencies, as well as foreign entities owned by, controlled by, or subject to the jurisdiction or direction of a government of a "covered nation." Covered nations are currently defined in 10 U.S.C. 4872(d)(2) as China, Russia, North Korea, and Iran. The DOE proposed guidance generally provides that an entity incorporated in, headquartered in, or performing the relevant activities in a covered nation is classified as a FEOC.

Proposed Regulations

The proposed regulations issued in REG-118492-23 supplement the April 2023 proposed regulations and the October 2023 proposed regulations. The proposed regulations provide additional clarity on definitions with respect to new clean vehicles eligible for the Code Sec. 30D clean vehicle credit. The proposed regulations also provide rules for qualified manufacturers of vehicles to determine whether applicable critical minerals (and their associated constituent materials) and battery components are FEOC compliant, meaning such materials do not violate the excluded entity provision in Code Sec. 30D(7).

The proposed regulations incorporate the statutory definition of FEOC from the IIJA, as well as implement the guidance promulgated by the DOE. In addition, the proposed regulations provide due diligence requirements for qualified manufacturers; specific rules for the determination of when applicable critical minerals (and associated constituent materials), battery components, battery cells, and batteries are compliant with the FEOC rules; a regime for review of FEOC-compliance determinations; and penalty rules.

Rev. Proc. 2023-38

Concurrently with the proposed regulations, the IRS issued Rev. Proc 2023-38 to provide updated procedures under Code Sec. 30D(d)(3) for qualified manufacturers to enter into a written agreement with the IRS under which such manufacturer agrees to make periodic written reports to the Treasury Secretary providing vehicle identification numbers (VINs) and other information regarding vehicles eligible for a clean vehicle credit. Rev. Proc. 2023-38 consolidates all of the procedural requirements for "qualified manufacturers" in one document and establishes the procedures for qualified manufacturers to submit information regarding vehicles for upfront review by the Department of Energy (DOE), to ensure the vehicles are eligible for the Code Sec. 30D credit for the calendar year at issue in accordance with the excluded entities provision of Code Sec. 30D(d)(7).

For a discussion of the clean vehicle credit, see Parker Tax ¶101,701.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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