The percentage of critical minerals extracted or processed in the United States directly affects the amount of tax credit available under certain U.S. clean energy and manufacturing incentives, such as those in the Inflation Reduction Act (IRA).
Impact on Clean Vehicle Tax Credits
For clean vehicles to qualify for a $3,750 tax credit related to critical minerals contained in their batteries, a specified applicable percentage of the value of those critical minerals must be either extracted or processed in the U.S. or in countries with which the U.S. has a free trade agreement, or recycled in North America. This applicable percentage increases over time as follows:
- 2023: 40%
- 2024: 50%
- 2025: 60%
- 2026: 70%
- 2027 and onwards: 80%
If the percentage of critical minerals sourced domestically (or from eligible countries) meets or exceeds these thresholds in the given year, the vehicle is eligible for the related portion of the tax credit. If the threshold is not met, the tax credit amount is reduced accordingly or may be disqualified.
Impact on Critical Minerals Production Credit (Section 45X)
Section 45X of the Inflation Reduction Act provides a production tax credit (PTC) equal to 10% of the costs associated with producing certain critical minerals domestically. However, there are key rules on how this credit applies:
- The credit is based on production of critical minerals refined to a specified purity (“eligible components”), not just raw extraction. Mining operations alone do not qualify unless paired with processing/refining to purity standards.
- The credit incentivizes expanding domestic production and processing to reduce reliance on foreign sources, particularly China, which dominates global critical mineral production and processing.
- The credit amount is calculated as 10% of production costs, including materials and extraction costs, but only for minerals meeting the eligibility criteria after refinement.
In summary, the higher the proportion of critical minerals extracted and processed in the U.S., the more of the tax credit (both for clean vehicles and mineral production) can be claimed. Increasing domestic extraction and processing directly increases the tax credit amount by meeting or exceeding the applicable sourcing percentages and qualifying as eligible production under Section 45X.
Key takeaway: The tax credit amount depends on meeting escalating domestic sourcing thresholds for critical minerals for clean vehicles, and on producing refined minerals domestically to qualify for the 10% production tax credit. The closer the U.S. can get to meeting or exceeding these production percentages, the greater the value of the tax credits that can be claimed.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-does-the-percentage-of-critical-minerals-extracted-in-the-us-affect-the-tax-credit-amount/
