The IRS and the Treasury Department have released proposed regulations for the new tax credits for electric vehicles under the Inflation Reduction Act.

The proposed guidance “will lower costs for consumers, build a resilient industrial base and spur manufacturing in the U.S., and strengthen supply chains with like-minded partners that are vital for energy security,” the Treasury announcement states, noting that “at least $45 billion in private-sector investment has been announced across the U.S. clean vehicle and battery supply chain” since the Inflation Reduction Act was enacted in August 2022.

"The Inflation Reduction Act is a once-in-a-generation piece of legislation that is lowering costs for American consumers, building a strong U.S. industrial base, and bolstering supply chains," said Treasury Secretary Janet L. Yellen in the statement. "Today, Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security."

To be eligible for a $7,500 credit, clean vehicles must meet sourcing requirements for both the critical minerals and battery components contained in the vehicle, according to the announcement. Vehicles that meet one of the two requirements are eligible for a $3,750 credit.

To meet the critical mineral requirement and be eligible for a $3,750 credit, the Treasury said the applicable percentage of the value of the critical minerals contained in the battery has to be extracted or processed in the United States or a country with which the U.S. has a free trade agreement, or be recycled in North America—as mandated by the Inflation Reduction Act.

● For 2023, the applicable percentage is 40 percent.
● For 2024, the applicable percentage is 50 percent.
● For 2025, the applicable percentage is 60 percent.
● For 2026, the applicable percentage is 70 percent.
● Beginning in 2027, the applicable percentage is 80 percent.

The notice proposes a three-step process for determining the percentage of the value of the critical minerals in a battery that contribute toward meeting critical minerals requirement: 1) determine procurement chains, 2) identify qualifying critical minerals, and 3) calculate qualifying critical mineral content.

The notice of proposed rulemaking also details a proposed set of principles for identifying the set of countries with which the United States has a free trade agreement in effect, since this term is not defined in statute. This term could include newly negotiated critical minerals agreements.

Agreements would be considered based on whether they reduce or eliminate trade barriers on a preferential basis, commit the parties to refrain from imposing new trade barriers, establish high-standard disciplines in key areas affecting trade, and reduce or eliminate restrictions on exports or commit the parties to refrain from imposing such restrictions on exports, including for trade in the critical minerals contained in electric vehicle batteries.

Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and Singapore are included in the notice of proposed rulemaking.

To meet the battery component requirement and be eligible for a $3,750 credit, the applicable percentage of the value of the battery components must be manufactured or assembled in North America—as mandated by the Inflation Reduction Act.

● For 2023, the applicable percentage is 50 percent.
● For 2024 and 2025, the applicable percentage is 60 percent.
● For 2026, the applicable percentage is 70 percent.
● For 2027, the applicable percentage is 80percent.
● For 2028, the applicable percentage is 90 percent.
● Beginning in 2029, the applicable percentage is 100 percent.

The notice proposes a four-step process for determining the value: 1) identify battery components that are manufactured or assembled in North America, 2) determine the incremental value of each battery component, including North American battery components, 3) determine the total incremental value of battery components, and 4) calculate the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.

Starting in 2024, an eligible clean vehicle can't contain any battery components that are manufactured by a foreign entity of concern, and beginning in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed or recycled by a foreign entity of concern. The notice says the Treasury and the IRS plan to issue subsequent guidance on this provision.

The proposed regulations are scheduled to be published in the Federal Register on April 17, and written or electronic comments and requests for a public hearing must be received by 60 days after the date of publication in the Federal Register.

The IRS has also updated its frequently asked questions related to new, previously owned and qualified commercial clean vehicle credits.

The FAQs revisions are as follows:

● Topic A: Eligibility Rules for the New Clean Vehicle Credit: Questions 2, 3, 4, 5, 6, and 7, added question 11;
● Topic B: Income and Price Limitations for the New Clean Vehicle Credit: added question 2, renumbering questions 2 through 10 to 3 through 11, respectively, updated questions 1, 3, 7, 8, and 9;
● Topic C: When the New Requirements Apply to the New Clean Vehicle Credit: Questions 2, 4, 5, and 6, added question 8, renumbered prior question 8 to question 9;
● Topic F: Claiming the Previously Owned Clean Vehicles Credit: Question 2; and
● Topic G: Qualified Commercial Clean Vehicles Credit: Added question 10.