IRS Releases Proposed Guidance for Clean Vehicles in IRA

Over a year after the Inflation Reduction Act (IRA) was passed into law, the Department of the Treasury and the Internal Revenue Service (IRS) have issued a Notice of Proposed Rule Making for commentary on a key portion of the IRA. The “Foreign Entity of Concern” (FEOC) is a designation that disqualifies some imported parts and supplies related to the tax credits involved in the IRA’s credits and discounts for electric vehicles.

The Notice provides proposed rules to determine whether applicable critical minerals (and their associated constituent materials) and battery components are manufactured or assembled by a FEOC for battery components, and extracted, processed, or recycled by a FEOC for critical minerals. The proposed rules would require manufacturers to conduct due diligence that complies with industry standards of tracing for battery materials.

Under the proposal, FEOC compliance for battery components would be determined at the time of manufacture or assembly. And FEOC compliance for critical minerals would be determined by reviewing all phases of applicable critical mineral extraction, processing, and recycling. Thus, for example, a mineral extracted by an entity that is not a FEOC but processed by an entity that is a FEOC would not be compliant.

Ultimately, compliant battery components would have to be tracked to FEOC compliant battery cells and cells could not be manufactured or assembled by a FEOC. The same happens with critical minerals, which would also have to be traced to a FEOC compliant source.

One key provision of the Notice for discussion is on that latter tracing. Not every critical mineral may have a traceable source or be attached to specific battery cells. The Notice asks for commentary on a temporary transition rule that allows materials of unclear origin to be used, but traced via serial number to their final use point. And an additional proposed transitional rule to allow ambiguity in supply chain sourcing to the original source until 2026 to give the automotive industry time to develop tracing standards.

It only took the Treasury a little over a year to come up with a proposal for commentary. Surely the industry can come up with a solution for them in two years.

The Notice gives a transition of 30 days from the point of finalization of the rules. Automakers are expected to begin FEOC tracking as soon as possible. Vehicles manufactured after the January 1, 2024 begin date for the IRA requirements that have FEOC compliance will receive expedited certification of compliance.

The Notice also provides for an “upfront review system” to open in 2025 wherein an IRS “battery ledger” will be created to track FEOC compliance for battery cell serial numbers. Automakers will be required to submit an estimate of the number of FEOC-compliant batteries they expect to produce the next year, to include supporting documentation. The Department of Energy will review these submissions. This is to track compliance and credit eligibility under the IRA.

The IRA provides up to $3,750 per qualifying vehicle as a tax credit to the buyer if the battery sources are not completely FEOC compliant. Battery component compliance percentages in the Notice begin at 50 percent for 2023 and rise by 10 percent per year until 100 percent compliance is required in 2029. Similarly, critical mineral requirements start at 40 percent for 2023 and rise by 10 percent until 80 percent compliance in 2027.

For the full $7,500 credit, clean vehicle tax rebates are more stringent, with FEOC battery components and critical minerals being prohibited from 2024-2025 with some exemptions at up to 40 percent of total.

If all of this is clear as mud, you’re probably an accountant. If not, you can look at the proposed guidance here and get even more confused.

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