The Final Regulations provide relief with respect to “impracticable-to-trace” battery materials.
The new guidance provides additional detail for the transition rule applicable to qualified manufacturers, including as relates to the foreign entity of concern (FEOC) restrictions.
Further clarified is the transfer of electric vehicle credits to dealers or other eligible entities.

As modified by the Inflation Reduction Act of 2022, section 30D of the Internal Revenue Code of 1986, as amended (Code), provides for a tax credit of up to $7,500 for a new clean vehicle if certain requirements are met. The modified tax credit is divided between $3,750 in respect of battery components, and an additional $3,750 in respect of critical minerals. Eligibility for each part of the tax credit depends on the ability to satisfy domestic source requirements that have been met with some controversy due to difficulties in implementation and monitoring over time.

Treasury and the Internal Revenue Service (IRS) issued proposed and temporary regulations on April 17, 2023, and December 1, 2023, regarding the new clean vehicle credits (Prior Regulations). After considering comments to prior guidance submitted by industry members, Treasury and the IRS issued final regulations on the clean vehicle credit on May 3, 2024, which were published in the Federal Register on May 6, 2024 (Final Regulations). The Final Regulations largely adopt the Prior Regulations, but certain changes were made in response to the comments received by Treasury and the IRS.

High-Level Overview of the Final Regulations

  • The Prior Regulations allowed for a limited transition period during which manufacturers, under the broader rules, could exclude certain non-traceable battery materials and still satisfy applicable due diligence requirements. To do so, the manufacturer was required to submit a written report before January 1, 2027, providing various information with respect to its supply chain issues. Under the Prior Regulations, such identified non-traceable battery materials could be excluded when determining if a battery is foreign entity of concern (FEOC)-compliant. The Final Regulations retain the transition rule and, as requested by many commenters, specifically identify graphite, in certain circumstances, as a newly defined “impracticable-to-trace battery material.”
  • Similar to the Prior Regulations, qualified manufacturers that submit a written report before January 1, 2027, will be treated as satisfying the applicable due diligence requirements even while excluding impracticable-to-trace battery materials. Such qualified manufacturers also should file a report during the review process in which they detail their plans to comply with the FEOC restrictions after the transition period has ended. The Final Regulations also adopt the Prior Regulations rule under which impracticable-to-trace battery components will not be weighed in the determination if a battery cell is FEOC-compliant.
  • Several comments were submitted with respect to the allocation-based exception under the Prior Regulations, which allow qualified manufacturers to determine if a battery cell is FEOC-compliant without physically tracing the materials to specific battery cells during the transition period. The Final Regulations make this allocation-based determination a permanent rule, clarifying that it would be difficult to trace individual critical materials through the supply chain.
  • As noted above, eligibility for the full credit amount under Code section 30D requires satisfaction of a critical mineral requirement. More specifically, the vehicle’s battery must have a certain “applicable percentage” composed of critical minerals that were extracted or processed in the United States, in a country to which the United States has a free trade agreement in place (Free Trade Agreement Countries) or which were recycled in North America. Under the Prior Regulations, a temporary rule allowed manufacturers to treat an applicable critical mineral as being extracted or processed in the United States if (a) 50% or more of the value added to such applicable critical mineral by extraction occurred in the United States or in a Free Trade Agreement Country or (b) 50% or more of the value added to such applicable critical mineral by processing occurred in the United States or a Free Trade Agreement Country. The Final Regulations abandon this approach in favor of a more stringent “traced qualifying value add test,” under which a manufacturer is required to trace any value added for all applicable critical minerals for each step of the procurement chain. Nevertheless, taxpayers are permitted to apply the prior rule until the end of 2026.
  • The Final Regulations expand the guidance from the Prior Regulations for taxpayers who elect to transfer all or part of their clean vehicle credits to dealers under Code section 30D(g) by incorporating clarifying definitions. Additional guidance is provided as to whether dealers can become eligible entities who are able to accept the transfer of such credits.
  • New definitions to the list of mathematical or clerical errors in Code section 6213(g)(2) were adopted to include omission of a correct VIN.

Final Points
As described above, the Final Regulations provide limited but potentially significant changes to the Prior Regulations. In this regard, relief is afforded to taxpayers as relates to the burden of tracing the critical materials in the determination of whether a battery cell is FEOC-compliant. However, the Final Regulations also adopt a more stringent traced qualifying value test for purposes of determining if a vehicle meets the critical mineral requirement.

The Final Regulations are effective July 5, 2024, and generally apply to taxable years ending on or after December 4, 2023. Taxpayers are permitted to apply the Final Regulations to prior taxable years, however, provided the Final Regulations are applied in their entirety and in a consistent manner. For more information on the Prior Regulations, please refer to our prior alert.

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