Final Rule on EV Battery Tax Credit

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May 3, 2024
By: Lawrence M. Friedman

The IRS has released its final rule (246 pages) for determining whether an electric vehicle qualifies for the up to $7,500 tax credit. The rule requires producers to implement the “traced qualifying value test.” Under this test, the producer must “fully trace any value added in each procurement chain that it applies toward the Critical Minerals Requirement.” The test is harder to satisfy than the previously published proposal in that it gives more weight to extraction and processing in the U.S. and its free-trade partners. The test looks to the highest relative value-added percentage of extraction between extraction, processing, and recycling to determine whether critical minerals production occurred in a qualifying place.

The proposed rule allowed producers to average qualifying critical minerals content over vehicles from the same model line, plant, class, or a combination of those categories. Initially, the proposed averaging periods were a year, quarter, or month. Responding to comments, the IRS modified the averaging methodology by limiting the averaging categories to “vehicles that may share the same procurement chains,” which is defined according to the same groupings of model line, plant, class, or a combination thereof. The final rule allows the producer to choose a different period for averaging.

The final rule includes an “upfront review process” for the review of Critical Minerals and Battery Components Requirements. That process is intended to allow the government to “assess” the manufacturer’s “conformance” with the critical minerals requirements by reviewing producer due diligence and methodologies. Specifically, the Notice states, “the qualified manufacturer must provide attestations, certifications, and documentation demonstrating compliance with the requirements of section 30D(e), at the time and in the manner provided in the Internal Revenue Bulletin (see §601.601 of this chapter). The IRS, with analytical assistance from the DOE, will review the attestations, certifications, and documentation.”  Averaging, for example, should be done in a manner consistent with rules and procedures established by the upfront review. This is intended to prevent manufacturers from “gaming” the system.

Regarding Foreign Entities of Concern, the rule continues to define “new clean vehicle” as one that does not include a vehicle placed into service after December 31, 2023 with respect to which any of the battery components in the clean vehicle battery were manufactured or assembled by a FEOC, or any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the clean vehicle battery were extracted, processed, or recycled by a FEOC. Producers are required under the rule to conduct due diligence with respect to all battery components and critical minerals that are relevant to determine whether the components and minerals comply with the FEOC rule. “Reasonable reliance on a supplier attestation or certification will be considered due diligence if the qualified manufacturer, or any third-party manufacturer or supplier, does not know or have reason to know that such supplier attestation or certification is incorrect.” During a transition period to January 1, 2027, producers may exclude “impracticable-to-trace battery materials,” which are low-value materials that have multiple sources and are commingled during refining. Current FEOC include the People’s Republic of China, Russia, North Korea, and Iran.
 
The final rule becomes effective 60 days after publication, which is anticipated to happen on May 8. If publication occurs as scheduled, the effective date will be July 7, 2024.