What Manufacturers Need to Know Surrounding Critical Mineral and Battery Component Requirements

Learn about the new clean vehicle tax credit and explore the specific percentages of critical minerals and battery components that must be met for manufacturers to qualify.

While many buyers are excited to claim a maximum credit of $7,500 in relation to the new clean vehicle credit, their ability to do so highly depends on how the car is manufactured. Half of the credit depends on a specific percentage of critical minerals being extracted or processed in the United States, from a country with which the U.S. has a free trade agreement or recycled in North America. The remaining credit is based on a specific percentage of the battery component required to be manufactured or assembled in North America. The Department of Treasury is developing guidance in relation to the critical mineral and battery component requirements and previously communicated a release date of March 2023.

In addition, the new clean vehicle credit is only available for qualified car manufacturers after December 31, 2022, and requires the final assembly of the vehicle to occur in North America after August 16, 2022. The new manufacturer requirements for clean vehicles have forced manufacturers to adjust supply chains, as well as final assembly locations, to ensure individual taxpayers can benefit from the federal income tax credit.

It depends. To optimize the credit, a new clean vehicle must have a certain percentage of critical minerals extracted or processed from the United States, any country with which the United States has a free trade agreement or recycled in North America. The Treasury and IRS expect the following countries to be considered under free trade agreements: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. One of the largest producers of the world’s critical minerals, China, is not included.

The percentage of critical minerals that must be extruded, processed, or recycled in the designated area varies based on the year a vehicle is placed in service. For a vehicle to be placed in service, the taxpayer must have actual possession. Therefore, manufacturers should be aware of the following year’s percentage requirement if there is a reasonable expectation that a significant number of vehicles could not be in the taxpayer’s possession until the following taxable year. The critical mineral requirement must be certified by the qualified manufacturer.

Applicable critical minerals include any of the following materials, which may be converted to a concentrate, or purified to a specified minimum purity by mass: aluminum (99%), antimony (90%), barite (80%), beryllium (99 %), cerium (99.9%), cesium (99%), chromium (60%), cobalt (99.6%), dysprosium (99%), europium (99.9%), fluorspar (97%), gadolinium (99.9%), germanium (99.9%), graphite (99.9%), indium (99.9%), lithium (99.9%), manganese (99.7%), neodymium (99.5%), nickel (99%), niobium (99%), tellurium (99%), tin purified to low alpha emitting tin (99.99%), tungsten converted to ammonium paratungstate or ferrotungsten, vanadium converted to ferrovanadium or vanadium pentoxide, and yttrium (99.999%).

Applicable critical minerals also include the following minerals, purified to 99% purity by mass: arsenic, bismuth, erbium, gallium, hafnium, holmium, iridium, lanthanum, lutetium, magnesium, palladium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, terbium, thulium, titanium, ytterbium, zinc, zirconium

Treasury and the IRS currently anticipate proposing as a transition rule a three-step process for determining compliance with the critical mineral requirement for calendar years 2023 and 2024. This transition rule would be intended to provide manufacturers time to develop the necessary capability to certify compliance to the critical mineral requirement throughout their supply chains.

Step 1: The manufacturer would need to determine the procurement chain or chains for each critical mineral

Step 2: Each critical mineral procurement chain in the battery would need to be evaluated to determine whether critical minerals procured from the chain have been:

The critical minerals that pass this step are referred to as qualifying critical minerals.

Step 3: Calculate the percentage of the value of qualifying critical minerals contained in a battery.

If the percentage results are greater than 40 percent for a vehicle placed in service in 2023 (after the date on which Treasury and the IRS issue proposed guidance) or 50 percent in 2024, the vehicle would satisfy the critical mineral requirement for the new clean vehicle credit.

To meet the battery component requirement, a battery in a new clean vehicle must have a certain percentage of the value of the battery components manufactured or assembled in North America and certified by the qualified manufacturer.

The battery component percentage required to be manufactured or assembled in North America varies based on the year a vehicle is placed in service. For a vehicle to be placed in service, the taxpayer must have actual possession. Therefore, manufacturers should be aware of the following year’s percentage requirement if there is a reasonable expectation that a significant number of vehicles could not be in the taxpayer’s possession until the following taxable year.

Treasury and the IRS currently anticipate proposing that determining the percentage of the value of battery components that goes toward meeting the battery component requirement could be accomplished in the following four steps: