Many people spent the last week of 2022 celebrating holidays or seeking travel adventures both far and near. However, a select group of personnel at the US Internal Revenue Service (IRS) and Department of the Treasury opted for a different path. On December 29, the IRS and Treasury issued a number of documents providing information and clarification on issues concerning tax credit eligibility for purchases of clean vehicles beginning in January 2023.
Under the Inflation Reduction Act (IRA), Congress significantly revised the tax credit incentive mechanism of the Internal Revenue Code (Code) that relates to electric vehicles (EVs). The IRA overhauled Section 30D of the Code for qualified plug-in electric drive motor vehicles, including adding fuel cell vehicles to the Section 30D tax credit, removing a previously existing sales cap, and basing credit eligibility on MSRP recommendations, purchaser income thresholds, final assembly locations, and critical mineral and battery component sourcing and manufacturing. The IRA also added a new credit for previously owned clean vehicles under Section 25E of the Code and a new credit for qualified commercial clean vehicles under Section 45W of the Code.
In preparation for many of those new revisions taking effect in 2023, the IRS and Treasury issued four documents that provide numerous clarifications and explanations for consumers and manufacturers in how EV tax credit eligibility provisions will be applied.
First, the IRS and Treasury issued FAQs for consumers discussing the clean vehicle tax credit provisions and addressing some of the most widely discussed topics of interest since the IRA’s enactment in August 2022. Although this document is not legally binding, it is instructive on numerous fronts—particularly on questions concerning how purchase vs. delivery dates will factor into credit eligibility, how the commercial vehicle credit will operate, and how and when MSRP, income, and sourcing requirements will take effect.
Second, the IRS and Treasury issued a notice providing a safe harbor concerning the computation of “incremental cost” for purposes of determining credit eligibility amounts under Section 45W’s commercial clean vehicle credit. Under the safe harbor, the IRS and Treasury will accept a taxpayer’s use of $7,500 as the incremental cost for all street vehicles (other than compact car PHEVs) with a gross vehicle weight rating of less than 14,000 pounds.
Third, the IRS and Treasury issued a notice of intent to issue regulations concerning the final assembly requirement, MSRP threshold requirement, and vehicle classification terms used in the revised Section 30D of the Code.
Finally, the IRS and Treasury released a white paper on one of the most widely discussed issues arising in the overhauled Section 30D: the critical mineral and battery component sourcing mandates. That white paper is designed to provide a look into the anticipated direction of the IRS and Treasury’s upcoming proposed guidance on the critical minerals and battery components requirements and the process for determining whether vehicles qualify under those requirements. The white paper itself does not amount to proposed guidance or otherwise carry legally binding authority. However, it is the first look into how the IRS and Treasury are thinking of applying some provisions that have created concern among many, including whether or how compliance can be achieved given the current—albeit rapidly evolving—landscape of mineral and component processing and manufacturing capability in the United States.
The IRS and Treasury intend to issue proposed guidance regarding the critical mineral and battery component requirements in March 2023. Those requirements and certification obligations by qualified manufacturers take effect only after the IRS and Treasury issue proposed guidance, and the IRS and Treasury will expressly identify when such proposed guidance is issued.