Battery Tax Credit Shake-Up: Bigger Bucks for Makers, But New 'Keep It Local (or Friendly)' Rules from 2026

Alright, so there's a bill called the 'Critical Minerals and Manufacturing Support Act' on the table, and it's looking to seriously tweak the tax credits for companies making batteries here in the U.S. Specifically, it's tinkering with Section 45X of the tax code. Starting for components produced and sold after December 31, 2025, the credit for making 'electrode active materials' – think the crucial stuff inside batteries – jumps from 10% to a hefty 25% of production costs. But there's a catch: new rules about where those materials and battery parts come from, and a clear 'no-go' for anything tied to what the bill calls 'foreign entities of concern'.

More Juice for Your Buck: What's Changing with the Credits?

This bill pumps up the financial incentives for battery producers in a few key ways. First off, that jump to a 25% tax credit for electrode active materials is a big deal. The bill also clarifies that production costs for these materials now officially include the cost of raw materials, whether they're freshly extracted or sourced from recycled goods. So, if you're digging up lithium or breaking down old batteries to get those vital ingredients, those costs count towards calculating your credit.

The definition of 'electrode active material' itself, as per Section 45X(c)(5)(B)(i) of the tax code, is also getting an update. It will now include 'electrode active precursor materials.' Think things like cobalt sulfate, lithium hydroxide, or synthetic graphite pitch – basically, the ingredients that go into making the final active materials for cathodes and anodes. As long as these precursors meet the purity specs for the battery market, making them could qualify for the credit. And in a specific nod to next-gen tech, certain silicon used in battery anodes is now treated as an 'applicable critical material,' potentially giving a boost to companies working on those advanced battery designs.

The 'Where From?' Clause: New Rules on Sourcing

Here's where things get interesting and potentially tricky. To get these tax credits after 2025, battery components will need to meet some strict sourcing requirements. For the critical minerals inside them – your lithium, cobalt, nickel, and the like – there's a phased-in minimum. For components sold in 2026, at least 70% of the value of these minerals must be extracted or processed in the U.S., or in a country that has a free trade agreement with the U.S., or recycled somewhere in North America. This threshold climbs to 80% for components sold after 2026.

Then there are rules for the battery components themselves – the cells, modules, and other bits. For components sold in 2026, 70% of the value of their constituent elements, materials, and subcomponents must be produced, manufactured, or assembled in North America. This percentage ramps up quickly: to 80% in 2027, 90% in 2028, and a full 100% for components sold after 2028. The Secretary of the Treasury is tasked with drawing up regulations to implement these sourcing rules, looking to existing rules like those under Section 30D(e) for electric vehicle credits as a model. For a U.S. battery plant, this means if they're currently getting key materials or subcomponents from outside this 'approved' zone, they'll need to find new suppliers or risk losing that tax credit.

The No-Fly Zone: 'Foreign Entities of Concern' Get Sidelined

This is a major provision: the bill explicitly blocks companies from claiming the credit if their battery components have ties to a 'foreign entity of concern' (FEOC). This applies if any of the applicable critical minerals in a component were extracted, processed, or recycled by an FEOC, or if any of the constituent elements, materials, or subcomponents were produced, manufactured, or assembled by an FEOC.

So, what's an FEOC? The bill points to the definition in Section 40207(a)(5) of the Infrastructure Investment and Jobs Act (also found at 42 USC 18741(a)(5)). Generally, this includes entities owned by, controlled by, or subject to the jurisdiction or direction of governments of 'covered nations' – currently China, Russia, North Korea, and Iran. The bill further clarifies that an FEOC includes any entity directly or indirectly owned by such a foreign entity of concern. This could significantly impact current supply chains, as many companies might have direct or indirect links that could fall under this definition. Businesses will need to carefully vet their entire supply chain to ensure compliance if they want to access these tax credits.

What's the Bottom Line Here?

The overall aim of the 'Critical Minerals and Manufacturing Support Act' seems clear: to encourage the growth of a robust battery manufacturing industry within the United States and among its close trading partners, while actively trying to reduce reliance on supply chains linked to potential geopolitical rivals. This could translate into more American jobs in manufacturing, mining, and recycling, and a more resilient domestic supply of a technology that's critical for everything from electric vehicles to grid storage.

However, shifting global supply chains is a complex and often costly endeavor. Manufacturers will likely face challenges in meeting these stringent, escalating sourcing requirements by the post-December 31, 2025 deadline. Finding or developing new, compliant sources for minerals and components could take time and investment, potentially leading to increased production costs, at least in the short term. How strictly the FEOC rules are interpreted and enforced will also be a critical factor for businesses. While the bill gives companies some lead time, the clock is ticking for them to adapt to these new rules of the game.