What are the Foreign Entity of Concern restrictions on clean vehicle credits?

Beginning January 1, 2024, vehicles with battery components manufactured or assembled by a Foreign Entity of Concern are ineligible for the $3,750 battery component credit. Starting in 2025, vehicles containing critical minerals extracted or processed by an FEOC lose the $3,750 critical minerals portion of the credit.

Can the Section 30D clean vehicle credit be transferred to a dealer at the point of sale?

Yes, beginning in 2024, buyers can transfer the credit to a participating dealer at purchase, effectively receiving an immediate price reduction rather than waiting to claim the credit on their tax return. The dealer must be registered with the IRS and meet specific documentation and reporting requirements.

New IRS Guidance on Clean Vehicle Credits: What Qualifies in 2024 | Lynch Law

The Inflation Reduction Act's clean vehicle tax credit under IRC § 30D has been one of the most dynamic areas of tax guidance since its enactment in August 2022. For 2024, the IRS has issued a series of guidance documents that significantly narrow the universe of vehicles qualifying for the full $7,500 credit, particularly through the new Foreign Entity of Concern (FEOC) restrictions that took effect on January 1, 2024. This post summarizes the current rules and their practical impact on buyers and businesses.^[1]

The Basic Credit Structure

The Section 30D credit provides up to $7,500 for the purchase of a new qualifying clean vehicle. The credit is composed of two $3,750 components: one tied to the vehicle's critical mineral sourcing and one tied to battery component manufacturing. To qualify for each component, specified percentages of the critical minerals and battery components must be sourced from or manufactured in the United States or a country with which the U.S. has a free trade agreement.^[2]

The credit is subject to a manufacturer's suggested retail price (MSRP) limit — $55,000 for sedans and $80,000 for SUVs, vans, and trucks — and an income limit for the buyer: $150,000 modified AGI for single filers, $225,000 for heads of household, and $300,000 for married filing jointly. The vehicle must be assembled in North America.

The FEOC Restrictions

Beginning January 1, 2024, a vehicle is ineligible for the critical minerals component of the credit if any of the applicable critical minerals were extracted, processed, or recycled by a Foreign Entity of Concern. Similarly, a vehicle is ineligible for the battery component if any battery component was manufactured or assembled by a FEOC. The FEOC definition effectively targets China, Russia, North Korea, and Iran — and any entity in which the government of those countries holds a 25% or more interest.^[3]

The FEOC restriction has had a dramatic impact on the number of qualifying vehicles. Many electric vehicles use battery cells or critical minerals sourced from Chinese companies or their subsidiaries, even when the vehicles themselves are assembled in the United States. As of early 2024, the IRS's list of qualifying vehicles has contracted to fewer than two dozen models eligible for the full $7,500 credit, with several popular models qualifying for only the $3,750 battery component credit or no credit at all.

Point-of-Sale Credit Transfer

New for 2024, buyers can transfer the clean vehicle credit to the dealer at the point of sale, effectively reducing the purchase price by up to $7,500 at the time of the transaction. This eliminates the need for the buyer to wait until filing a tax return to claim the credit. The dealer registers with the IRS, verifies the buyer's eligibility, and advances the credit amount. The dealer then claims the credit from the IRS as a refundable tax credit.^[4]

The point-of-sale transfer is a significant practical improvement. Previously, a buyer needed sufficient tax liability to absorb the nonrefundable credit, and the credit was only realized months later when the return was filed. The transfer mechanism makes the credit accessible to a broader range of buyers, including those with lower tax liabilities.

Used Clean Vehicle Credit

The used clean vehicle credit under Section 25E provides up to $4,000 (or 30% of the sale price, whichever is less) for the purchase of a previously owned clean vehicle from a licensed dealer. The vehicle must be at least two model years old, the sale price must be $25,000 or less, and the buyer must meet income limits: $75,000 (single), $112,500 (head of household), or $150,000 (MFJ). The used vehicle credit is not subject to the FEOC restrictions or the critical minerals and battery component requirements.

Planning Considerations for Businesses

For businesses considering fleet electrification, the clean vehicle credit landscape requires careful analysis. The commercial clean vehicle credit under Section 45W provides a separate credit for vehicles used in a trade or business — up to $7,500 for vehicles under 14,000 pounds and up to $40,000 for heavier vehicles. Unlike the Section 30D consumer credit, the Section 45W credit is not subject to MSRP limits, buyer income limits, or the FEOC restrictions. However, it is limited to the lesser of 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or the incremental cost over a comparable internal combustion vehicle.^[5]

Business owners should evaluate whether the Section 30D consumer credit or the Section 45W commercial credit provides the greater benefit for vehicles used in the business. For expensive electric trucks and vans, the commercial credit may be substantially more favorable. The tax planning analysis should also consider the interaction with bonus depreciation (at 60% for 2024) and the Section 179 deduction for the vehicle's depreciable basis.

The clean vehicle credit rules continue to evolve rapidly. The IRS updates the list of qualifying vehicles regularly, and the FEOC rules will tighten further in coming years as the critical mineral and battery component percentage requirements increase. Buyers and businesses should check the IRS's online tool for the most current list of qualifying vehicles and consult their tax advisors before making purchasing decisions based on credit availability.

References

^[1] IRC § 30D, as amended by the Inflation Reduction Act, Pub. L. No. 117-169, § 13401 (2022). The IRS has issued multiple guidance documents implementing the credit, including proposed and final regulations on FEOC restrictions.
^[2] IRC § 30D(e). For 2024, at least 50% of the value of critical minerals must be extracted, processed, or recycled in the U.S. or an FTA country, and at least 60% of battery components must be manufactured or assembled in North America.
^[3] IRC § 30D(d)(7); Prop. Treas. Reg. (Dec. 1, 2023) (defining "foreign entity of concern" and establishing compliance and verification requirements).
^[4] IRC § 30D(g) (credit transfer election). Rev. Proc. 2023-33 (establishing the registration and verification procedures for dealers participating in the point-of-sale credit transfer program).
^[5] IRC § 45W (qualified commercial clean vehicles). The Section 45W credit is available for vehicles placed in service after December 31, 2022, and before January 1, 2033.