EV Credit Proposed Regs Implement Vehicle Component Requirements; Include Special Rules for Multiple Owners and Passthroughs

(Parker Tax Publishing April 2023)

The IRS issued proposed regulations and updated frequently asked questions (FAQs) regarding the credit under Code Sec. 30D for the purchase of qualifying new clean vehicles. The proposed regulations implement the critical minerals and battery components requirements enacted by the Inflation Reduction Act of 2022 and provide that these new requirements apply to vehicles placed in service on or after April 18, 2023. The proposed regulations also include special rules for vehicles owned by multiple individuals or passthrough entities. REG-120080-22; FS-2023-08.

Background

Code Sec. 30D(a) provides a credit (i.e., the Section 30D credit) with respect to each new clean vehicle that a taxpayer purchases and places in service during the tax year. Code Sec. 30D was amended by Section 13401 of the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169).

The IRA amended the rules for determining the amount of the Section 30D credit. Section 13401(a) of the IRA amended Code Sec. 30D(b) to provide a maximum credit of $7,500 per vehicle, consisting of (1) $3,750 in the case of a vehicle that meets certain requirements relating to critical minerals and (2) $3,750 in the case of a vehicle that meets certain requirements relating to battery components. These critical minerals and battery components requirements are provided in Code Sec. 30D(e).

Generally, the IRA amendments to Code Sec. 30D apply to vehicles placed in service after December 31, 2022. However, under Section 13401(k)(3) of the IRA, the critical minerals and battery components requirements apply to vehicles placed in service after the date on which the IRS issues proposed guidance relating to these requirements.

On March 31, the IRS issued the proposed regulations relating to the new critical minerals and battery components requirements. The proposed regulations will be published in the Federal Register on April 17, 2023. Thus, pursuant to Section 13401(k)(3) of the IRA, the proposed rules for the critical mineral and battery components requirements apply to vehicles placed in service on or after April 18, 2023.

Observation: The Department of Energy (DOE) provides a list of eligible clean vehicles that qualified manufacturers have indicated to the IRS meet the requirements to claim the Section 30D credit. This list is available at: fueleconomy.gov/feg/tax2023.shtml. According to the DOE's website, this list will be updated on April 17, 2023. Industry experts expect that the list of eligible vehicles will be significantly shortened because of the implementation of the critical minerals and battery components requirements. Of the four best selling EVs in the United States, only the Tesla Model Y is expected to continue to be eligible for the full $7,500 credit. The Tesla Model 3, the Chevy Bolt EV/EUV, and the Ford Mustang Mach-E are expected to qualify for a $3,750 credit under the new rules.

In addition, as a result of the proposed regulations, the IRS updated the frequently asked questions (FAQs) for the clean vehicle credits in Fact Sheet 2023-8.

Proposed Regulations

Prop. Reg. Sec. 1.30D-1 provides the general rules for the Section 30D credit. Prop. Reg. Sec. 1.30D-2 clarifies the definitions of certain terms related to the statutory requirements of the Section 30D credit. The definitions contained in Prop. Reg. Sec. 1.30D-2 were substantially described in Notice 2023-1, as modified by Notice 2023-16.

Prop. Reg. Sec. 1.30D-3(a) provides the rules for determining compliance with the critical minerals requirement. Prop. Reg. Sec. 1.30D-3(b) provides the rules for determining compliance with the battery components requirement. Prop. Reg. Sec. 1.30D-4 provides special rules with respect to the Section 30D credit, including rules for ownership of new clean vehicles by multiple owners and passthrough entities.

Critical Minerals Requirement

Prop. Reg. Sec. 1.30D-3(a) provides a three-step process for determining the percentage of the value of the applicable critical minerals in a battery that contribute toward meeting the critical minerals requirement. The three steps are: (1) determine procurement chains, (2) identify qualifying critical minerals, and (3) calculate qualifying critical mineral content.

In the first step, the manufacturer must determine the procurement chain or chains for each applicable critical mineral. Prop. Reg. Sec. 1.30D-3(c)(14) defines a "procurement chain" as a common sequence of extraction, processing, or recycling activities that occur in a common set of locations, concluding in the production of constituent materials. Each applicable critical mineral procurement chain must be evaluated separately under Prop. Reg. Sec. 1.30D-3(a)(3)(ii).

In the second step, each applicable critical mineral procurement chain in the battery must be evaluated to determine whether critical minerals procured from the chain have been (1) extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or (2) recycled in North America. Applicable critical minerals that satisfy this requirement are considered qualifying critical minerals. Prop. Reg. Sec. 1.30D-3(c)(17) defines "qualifying critical mineral" as an applicable critical mineral that is extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or recycled in North America.

The proposed regulations use a "50 percent of value added test" to determine whether the definition of "qualifying critical mineral" is satisfied. Thus, under Prop. Reg. Sec. 1.30D-3(c)(17), an applicable critical mineral is treated as extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, if: (1) 50 percent or more of the value added to the applicable critical mineral by extraction is derived from extraction that occurred in the United States or in any country with which the United States has a free trade agreement in effect; or (2) 50 percent or more of the value added to the applicable critical mineral by processing is derived from processing that occurred in the United States or in any country with which the United States has a free trade agreement in effect.

Observation: The 50 percent of value added test is a transition rule for vehicles placed in service in 2023 and 2024. According to the IRS, this transition rule is necessary in order to provide manufacturers time to develop the necessary capability to certify compliance with the critical minerals requirement through their supply chains. For later years, a more stringent test will apply for determining if an applicable critical mineral was extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect, or whether an applicable critical mineral was recycled in North America. The IRS requested comments on the best approach for adopting a more stringent test for vehicles placed in service in 2025 and later years.

The third step for determining compliance with the critical minerals requirement involves the calculation of the percentage of the value of qualifying critical minerals contained in a battery. The proposed regulations refer to this percentage as the "qualifying critical mineral content" and define that term as the percentage of the value of the applicable critical minerals contained in the battery from which the electric motor of a new clean vehicle draws electricity that were extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or were recycled in North America.

Battery Components Requirement

Prop. Reg. Sec. 1.30D-3(b) provides a four-step process for qualified manufacturers to determine the percentage of the value of the battery components in a battery that contribute toward meeting the battery components requirement. The four steps are: (1) identify components that are manufactured or assembled in North America, (2) determine the incremental value of each battery component and North American battery components, (3) determine the total incremental value of battery components, and (4) calculate the qualifying battery component content.

In the first step, qualified manufacturers must determine whether each battery component in a battery was manufactured or assembled in North America. Under the proposed regulations, a "battery component" is a component that forms part of a battery and which is manufactured or assembled from one or more components or constituent materials that are combined through industrial, chemical, and physical assembly steps. In the second step, qualified manufacturers must determine the incremental value for each battery component. The resulting incremental value for a battery component is attributable to North America if the battery component is a "North American battery component" as defined in Prop. Reg. Sec. 1.30D-3(c)(12). In the third step, qualified manufacturers must determine the sum of the incremental values of each battery component contained in a battery. Finally, in the fourth step, qualified manufacturers must determine the qualifying battery component content, which is defined as the percentage of the value of the battery components contained in the battery from which the electric motor of a new clean vehicle draws electricity that were manufactured or assembled in North America.

Special Rules for Multiple Owners and Passthrough Entities

Multiple taxpayers may purchase, place in service, and be titled as owners of a single vehicle. For example, a married couple that files separate tax returns may jointly purchase and take possession of a new clean vehicle that qualifies for the Section 30D credit and both spouses may be titled as owners of the vehicle. However, the structure of Code Sec. 30D provides for one taxpayer to claim the Section 30D credit per vehicle placed in service. Code Sec. 30D does not contain rules for allocation or proration of the Section 30D credit with respect to a single vehicle to multiple taxpayers placing that vehicle in service.

Prop. Reg. Sec. 1.30D-4(c)(1) provides that, generally, the amount of the Section 30D credit attributable to a new clean vehicle may be claimed on only one tax return. In the event multiple owners place in service a new clean vehicle, no allocation or proration of the credit is available. Under Prop. Reg. Sec. 1.30D-4(c)(3)(i), the name and taxpayer identification number of the owner claiming the credit must be listed on the seller's report pursuant to Code Sec. 30D(d)(1)(H). Accordingly, multiple owners of a new clean vehicle must inform the seller which owner will claim the Section 30D credit so that the seller can identify that taxpayer on the seller's report. The credit would be allowed only on the tax return of the owner listed in the seller's report.

Prop. Reg. Sec. 1.30D-4(c)(2) provides that in the case of a new clean vehicle placed in service by a partnership or S corporation, while the partnership or S corporation is the vehicle owner, the Section 30D credit is allocated among the partners of the partnership under Reg. Sec. 1.704-1(b)(4)(ii) or among the shareholders of the S corporation under Code Sec. 1366(a) and Code Sec. 1377(a) and claimed on the tax returns of the partners or shareholders. Under Prop. Reg. Sec. 1.30D-4(c)(3)(i), in the case of a new clean vehicle placed in service by a partnership or S corporation, the name and tax identification number of the partnership or S corporation that placed the new clean vehicle in service should be listed on the seller's report pursuant to Code Sec. 30D(d)(1)(H).

For a discussion of the Section 30D 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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