May 7 2024

US, IRS and Treasury Issue Final Regulations on Clean Vehicle Credits

The US Treasury Department and the Internal Revenue Service (IRS) have finalized regulations for clean vehicle credits under the Inflation Reduction Act of 2022 providing taxpayers with long-awaited guidance. The final regulations will come into effect on 5 July 2024.

While closely aligned with previously proposed drafts, the final regulations provide key clarifications on the rules for taxpayers intending to transfer the new and previously owned clean vehicle credits to dealers who are eligible to receive advance payments, as well as provide rules regarding the process for dealers to become eligible entities to receive advance payments of the transferred credits. The final regulations also provide guidance regarding the IRS compliance process in case of a taxpayer's omission of a correct vehicle identification number. In addition to this guidance, taxpayers will now be able to avail themselves of the credit at point of sale rather than waiting for the refund on their federal income tax return.

The regulations also finalize the rules for qualified manufacturers of new clean vehicles to determine if the battery components and applicable critical minerals contained in a vehicle battery are foreign-entity-of-concern (FEOC) compliant with the newly created "traced qualifying value add test."

The test will require manufacturers to account for the value added at each step of the supply chain — extraction, processing and recycling — to assess the amount of minerals in the battery that meet the domestic content requirements for the critical minerals portion of the credit. The test is a departure from an earlier draft proposing the 50% Value Added Test which critics held to lack precision.

The new test will become mandatory in 2027 and manufacturers may continue to use the 50% Value Added Test until then with the caveat that they must submit a report demonstrating how they will comply with the FEOC restrictions once the transition rule is no longer in effect. Taxpayers will be able to rely on vehicle eligibility information provided by manufacturers so that taxpayers are not penalized for manufacturers mistakes.

In the interim period, and until 2027, small amounts of graphite and other minerals used in batteries would be exempt from FEOC restrictions. Officials state that the carve-out for graphite and similar minerals used in batteries was intentional as "their country of origin is nearly impossible to trace." Furthermore, according to the Treasury official, "without the exemption, some vehicles that met nearly all of the requirements could get knocked out of tax credit eligibility due to tiny amounts that couldn't be traced."

The final regulations provide for a program to review compliance with both critical mineral and battery component requirements and the FEOC restrictions starting this summer. The IRS, with assistance from Department of Energy (DOE), will conduct upfront review of documentation and certifications addressing materials sourcing requirements to ensure that qualified manufacturers are accurately representing their battery contents.

Source: IBFD Tax Research Platform News