Proposed Regs Issued on the New Clean Vehicle Credit

The Internal Revenue Service issued proposed regulations on April 17, 2023 for IRC Section 30D that detail the mandatory mineral and battery component requirements of the new clean vehicle credit and provide guidance on a few other critical areas for the credit. For the most part, the proposed regulations agree with previous IRS guidance. The majority of the regulations are proposed to affect new clean vehicles placed in service after April 17, 2023.

The proposed regulations provide guidance on the following:

• Income and price limits on the credit,

• Restriction of more than one taxpayer from dividing the credit for a single vehicle, and

• Coordinate the credit with other credits.

Critical Minerals Requirements: For purposes of the $3,750 credit for a qualified vehicle that satisfies the critical minerals requirement, the proposed regulations provide a three-step process for determining the percentage of the value of the applicable critical minerals in a battery:

• Determine the procurement chain or chains for each applicable critical mineral.

• Identify the qualifying critical minerals.

• Calculate the qualifying critical mineral content.

The proposed regulations define relevant terms, including "procurement chain," "critical minerals," "critical mineral content," "extraction," "processing," "constituent materials," "recycling," and "value added."

Vehicles placed in service in 2023 and 2024 will pass the critical mineral test if at least 50 percent of the value added is derived from extraction, processing or recycling the mineral in the U.S. or a country with which the U.S. has a free trade agreement. The proposed regulations note the following countries as ones with a free trade agreement in effect with the U.S.: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. The regulations also propose criteria for identifying additional countries, such as the factors that are part of the Critical Minerals Agreement (CMA) the U.S. recently entered into with Japan.

Battery Component Requirement: The proposed regulations provide a four-step process for determining the percentage of the value of the battery components in a battery that qualifies for the $3,750 credit:

• Identify components that are manufactured or assembled in North America.

• Determine the incremental value of each battery component and North American battery component.

• Determine the total incremental value of battery components.

• Calculate the qualifying battery component.

MAGI Limit: The credit does not apply if the taxpayer's modified adjusted gross income (MAGI) for the credit year or, if less, the previous year exceeds a limit based on filing status.  For 2023, that limit is $300,000 for married couples filing jointly and $150,000 for single taxpayers. The proposed regulations clarify that if the taxpayer's filing status changes during this two-year period, this test applies the MAGI limit for each year based on the taxpayer's filing status for that year.

The proposed regulations also clarify that the MAGI limit does not apply to a corporation or any other taxpayer that is not an individual.

MSRP Limits: A vehicle does not qualify for the credit if the manufacturer's suggested retail price (MSRP) exceeds $80,000 for a van, sport utility vehicle (SUV), or pickup truck; or $55,000 for any other vehicle. The proposed regulations adopt the vehicle classification system the IRS announced in Notice 2023-16. This is the vehicle classification that appears on the vehicle label and on the website FuelEconomy.gov. The regulations also provide a more detailed definition of "MSRP" using information reported on the label affixed to the vehicle's windshield or side window.

Vehicle with Multiple Owners: The proposed regulations generally prohibit any allocation or proration of the credit if multiple taxpayers place a vehicle in service. However, a partnership or S corporation that places a vehicle in service may allocate the credit among its partners or shareholders. The MAGI limits on the credit apply separately to each individual partner or shareholder. The seller's report for the vehicle lists the entity's name and TIN.

Final Assembly in North America: To qualify for the credit, the final assembly of a new clean vehicle must occur in North America. The proposed regulations reiterate earlier guidance on this requirement, but they also provide more detailed definitions of "final assembly" and "North America." Taxpayers may rely on the vehicle's plant of manufacture as reported in the vehicle identification number (VIN), or the final assembly point reported on the label affixed to the vehicle. Taxpayers may also continue to rely on the information in the "VIN decoder sites."

Coordination with Other Credits: While the new vehicle credit is generally a nonrefundable personal credit, the credit for a depreciable vehicle is treated as part of the general business credit. If the taxpayer's business use of a qualified vehicle is less than 50 percent of its total use, the proposed regulations require the taxpayer to apportion the credit. Only the portion of the credit that corresponds to the percentage of the taxpayer's business use of the vehicle is part of the general business credit; the rest of the credit remains a nonrefundable personal credit.

The proposed regulations clarify that when the new clean vehicle credit is allowed for a particular vehicle, a subsequent buyer in a later tax year may still claim the used clean vehicle credit. However, a subsequent buyer cannot claim the commercial clean vehicle credit.

For additional information concerning this alert, please contact:

Melody C. Horton at (864) 502-8311.

The information contained herein is of a general nature and should not be construed as professional advice. The reader should also be cautioned that the alert may not be specific to the reader’s exact circumstances and needs and may require additional information.  You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.