Guidance Issued on Foreign Entity of Concern Restrictions for New Clean Vehicles, NPRM REG-118492-23, Rev. Proc. 2023-38, IR-2023-228

The IRS issued two items of guidance on the excluded entity restriction of the Code Sec. 30D clean vehicle credit, proposed regulations and a revenue procedure. Under the excluded entity restriction, vehicles are not eligible for the clean vehicle credit if the battery contains components manufactured or assembled, or applicable critical minerals extracted, processed, or recycled by a foreign entity of concern (FEOC). Taxpayers may rely on the proposed regulations for vehicles placed in service prior to the date final regulations are published in the Federal Register, provided the taxpayer follows the proposed regulations in their entirety, and in a consistent manner.

Concurrently with the release of this guidance, the Department of Energy is releasing proposed guidance in the Federal Register, that provides proposed interpretations of certain terms used in the definition of “foreignentity of concern (FEOC).”

Background

Code Sec. 30D was enacted to provide a credit for purchasing and placing in service new qualified plug-in electric drive motor vehicles. It was amended most recently by the Inflation Reduction Act of 2022 (P.L. 117-169). Effective on April 18, 2023, section 30D(b) provides a maximum credit of $7,500 per new clean vehicle, consisting of $3,750 if certain critical minerals requirements are met and $3,750 if certain battery components requirements are met.

Proposed Regulations

The proposed regulation provide 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 for tracing of battery materials.

Under the proposed regulations, 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. 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. Compliant battery components would have to be tracked to FEOC-compliant battery cells, and cells could not be manufactured or assembled by a FEOC.

Critical minerals generally also must be traced. However, suppliers may not be able to physically track certain specific masses of minerals to specific battery cells or batteries. Therefore, the proposed regulations ask for comments on a temporary transition rule, under which critical minerals and associated constituent materials may be allocated to a particular set of battery cells. The battery cells would then have to be physically tracked to batteries and new clean vehicles using a serial number or other identification system.

The proposed regulations also ask for comments on an additional transition rule that through 2026 would give the industry time to develop tracing standards for low-value materials.

To allow compliant vehicles already on dealer lots and currently being manufactured to qualify for the credit while the rulemaking process proceeds, the proposed regulations provide a transition rule to expedite certification for new clean vehicles that do not contain battery components manufactured or assembled by a FEOC and are placed in service from the beginning of 2024 until 30 days after the rules are finalized.

Under the proposed regulations, for new vehicles placed in service in 2025 or later, the IRS would track FEOC compliance via a compliant-battery ledger. Each year, automakers would be required to submit to the IRS an estimate of the number of FEOC-compliant batteries they expect to procure each year, along with supporting documentation. The Department of Energy would review these submissions. Automakers’ balances would be adjusted to account for changes in the number of anticipated FEOC-compliant batteries and would be reduced as new credit-eligible clean vehicles are reported to the IRS. Once the ledger reaches zero for a year, the automaker could no longer submit vehicles as qualifying for the Code Sec. 30D clean vehicle credit.

Under the proposed regulations, if the IRS determines that a qualified manufacturer provided inaccurate attestations, certifications, or documentation, the IRS may take certain actions against the qualified manufacturer. Inadvertent errors may be cured; otherwise, the vehicle related to the error will no longer be credit eligible. If that vehicle has already been sold, the error would instead cause a reduction to the ledger. In the case of fraud or intentional disregard for the rules, all the automaker’s unsold vehicles may no longer be eligible for the Code Sec. 30D credit. The IRS may also terminate the automaker’s ability to qualify additional vehicles for the credit.

Revenue Procedure

Rev. Proc. 2023-38 provides procedural rules for qualified manufacturers of new clean vehicles to comply with the reporting, certification, and attestation requirements regarding the excluded entity restriction, under which the IRS, with analytical assistance from the Department of Energy, will review compliance with the excluded entity restrictions, discussed above. In addition, this revenue procedure updates and consolidates the procedural rules for qualified manufacturers for the clean vehicle credit, the previously owned clean vehicle credit, and the qualified commercial clean vehicle credit.

Applicability dates

Proposed Reg. §§1.30D-2(a) through (h) are proposed to apply to new clean vehicles placed in service on or after January 1, 2023, for taxable years ending after April 17, 2023.

Proposed Reg. §§1.30D-2(j) through (m) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

Proposed Reg. §§1.30D-3(a) through (c) and (f) are proposed to apply to new clean vehicles placed in service after April 17, 2023, for taxable years ending after April 17, 2023.

Proposed Reg. §§1.30D-3(d) and (e) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

Proposed Reg. §1.30D-6 is proposed to apply to new clean vehicles placed in service after December 31, 2023.

Effect on other documents

This notice of proposed rulemaking modifies Proposed Reg. §§1.30D-2 and 1.30D-3 of the April 2023 proposed regulations.

Rev. Proc. 2023-38 updates and supersedes Rev. Proc. 2022-42 in part.

Proposed Regulations, NPRM REG-118492-23

Rev. Proc. 2023-38

IR-2023-228