The Treasury Department and the Internal Revenue Service released long awaited
The Treasury noted that since the Inflation Reduction Act was enacted last August, at least $45 billion in private-sector investment has been announced across the U.S. clean vehicle and battery supply chain. The new guidance aims to ensure that American workers, companies and consumers will continue to benefit.
"The Inflation Reduction Act is a once-in-a-generation piece of legislation that is lowering costs for American consumers, building a strong U.S. industrial base, and bolstering supply chains," said Treasury Secretary Janet L. Yellen in a statement. "Today, Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security."
The new proposed guidance was widely expected to be released Friday, but is already provoking opposition from some lawmakers, including Sen. Joe Manchin, D-West Virginia, who negotiated many provisions of the Inflation Reduction Act with President Biden last year. This week, he threatened to fight the Treasury Department over some of the proposed rules, contending that they would open the program too much to foreign suppliers rather than the U.S. manufacturers the law is supposed to favor (
The guidance effectively narrows the list of models available for the tax credits for now, as most of the available electric vehicles don't meet the proposed requirements for battery components and critical minerals, at least until U.S. production ramps up thanks to the incentives in the new law (
The notice of proposed rulemaking from the Treasury provides clarity and certainty to manufacturers on the Inflation Reduction Act requirements that vehicles eligible for the clean vehicle credit undergo final assembly in North America and don't exceed a manufacturer's suggested retail price of $80,000 for a van, pickup truck or sport utility vehicle, or $55,000 for any other vehicle.
In keeping with an anticipated approach laid out in a white paper released in December, the notice also explains how manufacturers can satisfy the critical mineral and battery component requirements under the Inflation Reduction Act.
To be eligible for a $7,500 credit, clean vehicles need to meet sourcing requirements for both the critical minerals and battery components contained in the vehicle. Vehicles that meet one of the two requirements are eligible for a $3,750 credit.
IRS guidance
In accordance with the new proposed guidance from the Treasury, the IRS updated its fact sheet answering frequently asked questions about the clean vehicle credits.
The FAQs revisions are as follows:
- Topic A: Eligibility Rules for the New Clean Vehicle Credit: Questions 2, 3, 4, 5, 6, and 7, added question 11;
- Topic B: Income and Price Limitations for the New Clean Vehicle Credit: added question 2, renumbering questions 2 through 10 to 3 through 11, respectively, updated questions 1, 3, 7, 8, and 9;
- Topic C: When the New Requirements Apply to the New Clean Vehicle Credit: Questions 2, 4, 5, and 6, added question 8, renumbered prior question 8 to question 9;
- Topic F: Claiming the Previously Owned Clean Vehicles Credit: Question 2; and
- Topic G: Qualified Commercial Clean Vehicles Credit: Added question 10.
The FAQs were issued to provide general information to taxpayers and tax pros as quickly as possible.
Critical mineral requirement
To meet the critical mineral requirement and be eligible for a $3,750 credit, the Treasury said the applicable percentage of the value of the critical minerals contained in the battery has to be extracted or processed in the U.S. or a country with which the U.S. has a free trade agreement, or be recycled in North America—as mandated by the Inflation Reduction Act.
- For 2023, the applicable percentage is 40%.
- For 2024, the applicable percentage is 50%.
- For 2025, the applicable percentage is 60%.
- For 2026, the applicable percentage is 70%.
- Beginning in 2027, the applicable percentage is 80%.
The notice proposes a three-step process for determining the percentage of the value of the critical minerals in a battery that contribute toward meeting critical minerals requirement: 1) determine procurement chains, 2) identify qualifying critical minerals, and 3) calculate qualifying critical mineral content.
The notice of proposed rulemaking also details a proposed set of principles for identifying the set of countries with which the United States has a free trade agreement in effect, since this term is not defined in statute. This term could include newly negotiated critical minerals agreements.
Agreements would be considered based on whether they reduce or eliminate trade barriers on a preferential basis, commit the parties to refrain from imposing new trade barriers, establish high-standard disciplines in key areas affecting trade, and reduce or eliminate restrictions on exports or commit the parties to refrain from imposing such restrictions on exports, including for trade in the critical minerals contained in electric vehicle batteries.
Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore are included in the notice of proposed rulemaking.
Battery component requirement
To meet the battery component requirement and be eligible for a $3,750 credit, the applicable percentage of the value of the battery components must be manufactured or assembled in North America—as mandated by the Inflation Reduction Act.
- For 2023, the applicable percentage is 50%.
- For 2024 and 2025, the applicable percentage is 60%.
- For 2026, the applicable percentage is 70%.
- For 2027, the applicable percentage is 80%.
- For 2028, the applicable percentage is 90%.
- Beginning in 2029, the applicable percentage is 100%.
The notice proposes a four-step process for determining the value: 1) identify battery components that are manufactured or assembled in North America, 2) determine the incremental value of each battery component, including North American battery components, 3) determine the total incremental value of battery components, and 4) calculate the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.
Starting in 2024, an eligible clean vehicle can't contain any battery components that are manufactured by a foreign entity of concern and beginning in 2025 an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern. The notice says the Treasury and the IRS plan to issue subsequent guidance on this provision.
The NPRM is filed for public inspection and will be published in the Federal Register on April 17, 2023. Vehicles placed-in-service on or after April 18, 2023 will be subject to the critical mineral and battery component requirements laid out in the rule. On that date,
This list will continue to be updated promptly, as manufacturers provide information on which of their vehicles qualify for the tax credit based on the NPRM. The Treasury and the IRS said they would carefully consider public comments and feedback before issuing the final rules.
The guidance is already provoking opposition from Senator Manchin. "Yet again — the guidance released by the Department of the Treasury completely ignores the intent of the Inflation Reduction Act," he said in a statement. "It is horrific that the administration continues to ignore the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains. American tax dollars should not be used to support manufacturing jobs overseas. It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process. The guidance includes a 60-day comment period and I ask for every American to comment. My comment is simple: stop this now — just follow the law."
However, another influential Democrat in the Senate expressed support.
"Today's announcement on electric vehicles represents major progress on some of the key energy and climate goals of the Inflation Reduction Act," said Senate Finance Committee chairman Ron Wyden, D-Oregon, in a statement. "Americans want lower carbon emissions, more choices for affordable electric vehicles, and more auto manufacturing and good-paying jobs here in this country. Those priorities are not mutually exclusive. Since the IRA became law, there's been a tidal wave of new announcements of private investments in auto manufacturing and the auto supply chain here in the United States, and I'm going to look for every opportunity to build on that progress. I also expect the administration to keep in close contact with Congress as it continues to implement the law."
Republicans were less pleased with the guidance. "The Biden administration is sacrificing America's economic and national security for the sake of writing as many green corporate welfare checks as quickly as possible, leaving America's key supply chains in the control of the Chinese Communist Party," said House Ways and Means Committee chairman Jason Smith, R-Minnesota, in a statement. "While the Biden Administration is putting taxpayers on the hook to send money to foreign countries —in violation of a law President Biden championed and signed himself — it is also throwing up roadblocks to bringing more of our critical mineral supply chain to the United States. To add insult to injury, the administration is using this rule to justify their 'go-it-alone' approach that negotiates fake trade agreements in secret without approval by Congress or consideration for the interests of American workers and taxpayers."
"The ever-changing, and late, Treasury guidance on electric vehicle tax credits has once again failed to follow through on promises that minerals and components sourced from China would be barred from electric vehicles qualifying for the tax credit," said Senate Finance Committee ranking member Mike Crapo, R-Idaho, in a statement.
Some Democrats besides Manchin also objected. "Congress and the executive branch must work together on trade policy," said Rep. Suzan DelBene, D-Washington, a member of the House Ways and Means Trade Subcommittee. "Congress and the executive branch must work together on trade policy. The administration's guidance bypasses the intent of Congress when we passed the Inflation Reduction Act by redefining our understanding of a free trade agreement. The administration's recent deal with Japan on critical minerals, no matter its merits, undermines Congress' constitutional authority to regulate foreign commerce. While perhaps more challenging, trade agreements that are negotiated and ratified in partnership with Congress are ultimately more effective, durable and trusted by the American people."
Tax experts at KPMG also weighed in with their thoughts on the guidance.
"Today, the administration released the eagerly awaited proposed guidance detailing how electric vehicles may qualify for certain clean energy incentives within the Inflation Reduction Act," said Steven Schmoll, a director and Washington national tax principal at KPMG, in a statement. Of note, while the guidance issued today intends to increase the manufacturing of clean energy technologies in the United States, it also confirmed that it will be harder for some electric vehicles to qualify for federal tax breaks. We also learned that the critical mineral and battery component requirements become effective for vehicles that are placed in service after April 17, 2023."
"It remains to be seen whether there will indeed be a surge in electric vehicle purchases between now and April 17, when the critical mineral and battery component requirements become effective," said Steven Schmoll, director and Washington national tax principal at KPMG, in a statement. "However, anyone in the market for an EV ought to consider whether the critical mineral and battery component requirements apply to their EV of choice. There could be a $7,500 difference between taking possession of an EV on April 17 versus April 18."
