The U.S. Department of the Treasury and IRS released final regulations on May 3, 2024, on Clean Vehicle Credits under Sections 25E and 30D of the Internal Revenue Code. Among other areas, the regulations provide final guidance on the transfer of these credits and the rules under Section 30D related to the sourcing of critical minerals and battery components, as well as the restrictions related to sourcing from foreign entities of concern (FEOC).
The final regulations largely adopt the proposed regulations issued, with some important changes, and remove the temporary regulations. The final regulations are effective July 5, 2024. Concurrent with the release of these final regulations, the U.S. Department of Energy (DOE) released its final rule under Section 40207(a)(5) of the Infrastructure Investment and Jobs Act (IIJA), providing guidance to determine an entity's status as an FEOC. (See Holland & Knight's previous alerts, "Treasury Department, IRS Release Clean Vehicle Tax Guidance," April 12, 2023, and "A Look at Foreign Entities of Concern and the Section 30D Clean Vehicle Tax Credit," Dec. 5, 2023.)
Notably, the final regulations under Section 30D provide transition relief – exempting "impracticable-to-trace battery materials" from the FEOC restrictions. To take advantage of this relief, manufacturers must demonstrate how they will comply with the FEOC restriction once the transition rules end and such a demonstration may require robust documentation of efforts made to secure FEOC-compliant battery supply, such as potential suppliers engaged, offtake agreements and contracts entered into with domestic or compliant suppliers.
Under Section 30D, the vehicle must meet the critical mineral requirement to be eligible for the full credit amount. Under the critical mineral requirement, a certain "applicable percentage" of the battery must comprise critical minerals that were 1) extracted or processed in the U.S. or in any country with which the U.S. has a free trade agreement or 2) recycled in North America. The final regulations modify the previously proposed 50 percent value-added test to a more precise "traced qualifying value add test." The final regulation provides that manufacturers may continue to use the 50 percent value-added test for a limited time.
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