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Final regulations provide Section 30D clean vehicle battery rules
June 2024
In brief
What happened?
The IRS and Treasury on May 6 published final regulations on tax credits under Section 30D for new clean vehicles and under Section 25E for previously owned clean vehicles, and the Department of Energy published final regulations defining “foreign entity of concern.” For applicability dates, see the PwC insight Regulations on clean vehicle tax credits are finalized. Rev. Proc. 2024-26, issued on June 8, updates and expands qualified manufacturer and seller reporting requirements.
Why is it relevant?
The final regulations consolidated three separately issued sets of proposed regulations under Sections 30D and 25E. This insight discusses final rules relating to eligibility for the Section 30D credit and to foreign entities of concern that pertain to battery requirements. A later insight will discuss other Section 30D eligibility requirements, eligibility for the Section 25E credit, transfers of the Section 30D and 25E credits, and reporting procedures (including Rev. Proc. 2024-26) and credit recapture.
Action to consider
The final regulations provide a new test for determining a battery’s domestically produced applicable critical mineral content percentage, replacing the test in the proposed regulations. Taxpayers may use either test during a transition period and may wish to conduct modeling to determine the better outcome. Taxpayers planning to continue to use the original test will need to begin planning how they will meet the new test once the transition period ends.
For additional discussion of the proposed regulations, see the PwC Insights Proposed regulations on Section 30D clean vehicle credit address battery requirements, other issues and Proposed regulations address excluded foreign entities for clean vehicle tax credit.
In detail
Statutory background
For new clean vehicles placed in service after 2022, the Section 30D credit is:
(1) $3,750 if at least an applicable percentage of applicable critical minerals (defined in Section 45X(c)(6)) in the battery were extracted or processed in the United States or in a country with which the United States has a free trade agreement, or were recycled in North America, plus
(2) $3,750 if at least an applicable percentage of the battery components were manufactured or assembled in North America.
The applicable percentage is 40% for critical minerals and 50% for battery components if a vehicle is placed in service after April 17, 2023 but before 2024, and increases in 10% increments in later years.
A vehicle does not qualify for the credit if a foreign entity of concern (FEOC or excluded entity) extracted, processed, or recycled any of the battery’s applicable critical minerals (for vehicles placed in service after 2024) or manufactured or assembled any battery components (for vehicles placed in service after 2023). “Foreign entity of concern” is defined in 42 USC 18741(5), a provision under the jurisdiction of the Department of Energy (DOE), as a foreign entity that has been designated as a foreign terrorist organization; for which assets have been blocked; that engaged in espionage; or that is owned or controlled by or is subject to the jurisdiction or direction of certain foreign governments.
To qualify for the credit, a vehicle must be made by a manufacturer that has entered into a written agreement with Treasury and performs certain reporting (a qualified manufacturer).
Final regulations
Observation: The final regulations consolidate two sets of proposed regulations addressing the applicable critical mineral and battery component requirements, one set relating to eligibility for the credit and one set to the excluded entity restriction. The preamble to the final regulations advises that certain final rules, such as definitions, apply to both issues. Rules for determining credit eligibility and applying the excluded entity restrictions differ because eligibility requires computing percentages of minerals and battery components and relate to where an activity is conducted, whereas the excluded foreign restriction prohibits any non-compliant applicable critical mineral battery content or components and relates to the entity conducting the activity.
Critical minerals requirement
Determining applicable percentage for credit eligibility
The proposed and final regulations provide that the percentage of applicable critical minerals in a battery that were extracted or processed in the United States or in a country with a free trade agreement, or that were recycled in North America (qualifying critical minerals), is determined by comparing a battery’s qualifying critical mineral content to the total applicable critical mineral content.
Under the proposed regulations, an applicable critical mineral would be “qualifying” if at least 50% of the mineral’s value added was derived from the qualifying extraction, processing, or recycling. The final regulations replace the “50% value added test” with a “traced qualifying value test.” Under the final regulations, for tax years ending after May 6, 2024, a battery’s qualifying critical mineral content percentage is determined by dividing the total traced qualifying value by the total value of critical minerals.
The “traced qualifying value” of an applicable critical mineral that is extracted and processed is the value of the applicable critical mineral multiplied by the greater of (1) the value added to the applicable critical mineral by qualifying extraction divided by the total value added by all extraction or (2) the value added to the applicable critical mineral by qualifying processing divided by the total value added by all processing. The traced qualifying value for a recycled applicable critical mineral is the value of the applicable critical mineral and multiplied by the ratio of the value added to the applicable critical mineral by qualifying recycling divided by the total value added by all recycling.
The final regulations require taxpayers to use the 50% value added test to determine qualifying critical mineral content for vehicles for which a qualified manufacturer submitted the required written report in tax years ending before May 6, 2024. Taxpayers optionally may use that test for vehicles for which a qualified manufacturer submits the written report on or after May 6, 2024, and before 2027.
The proposed and final regulations require an applicable percentage of applicable critical minerals to be determined for each procurement chain of a battery. The final regulations add that, if multiple applicable critical mineral procurement chains are part of the same processing or recycling activity, value added should be allocated to each procurement chain based on relative mass. Taxpayers that use the 50% value added test must use that test for all procurement chains.
Definitions
The final regulations add to the definition of applicable critical minerals for both the eligibility and excluded entity rules that the requirements take into account each step of extraction, processing, or recycling until the mineral is processed or recycled into a constituent material, but do not apply to a critical mineral that is fully consumed in the production of constituent material or a battery component.
The final regulations define “constituent materials” as battery materials containing applicable critical minerals. The final regulations adopt from the proposed excluded entity regulations, for both credit eligibility and excluded entity purposes, a definition of “associated constituent materials,” which are constituent materials that were processed or recycled from an applicable critical mineral into the associated constituent material, including constituent materials that after processing or recycling are no longer in a form identified as an applicable critical mineral.
The final regulations also adopt rules from the excluded entity proposed regulations providing that (1) a determination of whether an applicable critical mineral is qualifying takes into account each step of extraction, processing, or recycling until the mineral is processed or recycled into a constituent material and (2) recycled applicable critical minerals and associated constituent materials are subject to the critical minerals content percentage requirement if the recyclable material contains an applicable critical mineral or material that was transformed from an applicable critical mineral, or if the recyclable material is used to produce an applicable critical mineral at any point during the recycling process.
The proposed regulations defined “extraction” as activities to extract or harvest minerals or natural resources from the ground or a body of water, including processes that allow the extracted material to be transportable and the physical (but not chemical or thermal) processes involved in refining. The final regulations clarify that extraction (1) also includes crude oil extraction to the extent processes applied to that crude oil yield an applicable critical mineral as a byproduct and (2) does not include activities that begin with a recyclable commodity, which is recycling.
Battery component requirement
Determining applicable percentage for credit eligibility
The proposed and final regulations provide that the percentage of a battery’s components that were manufactured or assembled in North America is determined by dividing the total incremental value of North American battery components by the total incremental value of all battery components. “Incremental value” is determined by subtracting from the value of a battery component the value of the manufactured or assembled subsidiary battery components contained in the major battery component. The final regulations add that the applicable percentage calculation takes into account the value of a battery module that contains battery cells and the value of the battery components contained in the module. The calculation for a battery that contains battery cells but no battery modules takes into account the value of the battery cells and the battery components contained in the battery cells.
Definitions
Under the proposed regulations, (1) a “battery” includes battery modules, (2) a “battery module” is two or more battery cells that create voltage or current, (3) a “battery cell” is a combination of components that can store, and (4) a “battery component” is a part of a battery manufactured or assembled from one or more subsidiary components or constituent materials that are combined through industrial, chemical, and physical assembly steps.
The final regulations add to these definitions that a battery component is assembled from one or more subsidiary components or battery materials and define “battery materials” as direct and indirect inputs to battery components produced through processing rather than manufacturing or assembly. Battery materials are applicable critical minerals, constituent materials, and battery materials without applicable critical minerals. A separator base film that is not manufactured or assembled and separator coating are examples of battery materials that may or may not contain applicable critical minerals; conductive additives, copper foils before graphite deposition, and electrolyte solvents are examples of battery materials without applicable critical minerals. Battery materials and constituent materials are not battery components but may be manufactured or assembled into components.
Observation: The preamble to the final regulations explained that a coated separator is a battery component and that, in general, the base film and coating are battery materials and not battery components because they are processed rather than manufactured or assembled. If these battery materials contain applicable critical minerals they are constituent materials.
Excluded entities
Definition of excluded entity
The DOE proposed regulations interpreting “foreign entity of concern” included definitions for the terms ‘‘government of a foreign country,’’ ‘‘foreign entity,” ‘‘subject to the jurisdiction,’’ and ‘‘owned by, controlled by, or subject to the direction of.” The DOE regulations were finalized with minor clarifying changes.
Determining compliance
The proposed and final regulations describe a vehicle for which an excluded entity did not extract, process, or recycle any applicable critical minerals and did not manufacture or assemble any battery components as “FEOC-compliant.” Qualified manufacturers must conduct due diligence to determine that minerals and components are FEOC-compliant, which requires a qualified manufacturer to comply with industry battery material tracing standards that provide the origin of applicable critical minerals, associated constituent materials, and battery components with reasonable certainty.
However, the proposed regulations included a transition rule that allowed a qualified manufacturer that submitted the required written report before 2027 to exclude non-traceable battery materials from tracing. “Non-traceable battery materials” were defined as specifically identified, low-value battery materials that originate from multiple sources and are so commingled during production processes that a qualified manufacturer cannot feasibly determine their origin. The final regulations adopt this rule but change its name to “impracticable-to-trace battery materials,” and include as examples graphite in anode materials and applicable critical minerals in electrolyte salts, electrolyte binders, or electrolyte additives. A qualified manufacturer using the transition rule must provide information regarding the plan to become FEOC-compliant, including actions taken, when the transition rule ends.
Qualified fuel cell vehicles
Under Section 30D, a qualified fuel cell vehicle may qualify for the credit. The final regulations clarify that the applicable critical minerals and battery component requirements for both eligibility and excluded entity purposes do not apply to a qualified fuel cell vehicle that does not also have a battery (other than a start-up battery).
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