The Treasury Department issued proposed new rules Friday on electric vehicle tax credits.
The rules, effective from April 18, 2023, determine which EVs will be eligible for tax credits under the new “critical mineral” and battery component requirements included in last year’s Inflation Reduction Act (IRA). Both automakers and consumers have anxiously awaited these rules.
While these rules were initially intended to be released in January, the IRS needed more time to sort out the details, hence the delay.
Details on the EV tax credit
The Electric Vehicle Tax Credit is a tax credit available to individuals and businesses that purchase or lease an electric vehicle. The credit is up to $7,500, depending on several factors, including the vehicle type. The EVTC was first introduced in 2009, has been extended several times since then, and the latest extension was included in the IRA.
Requirements to claim the EVTC
Vehicles have to meet several requirements to qualify for any portion of the EVTC. As outlined in the Treasury guidance, these include:
- A certain percentage of an EV’s battery components must be manufactured or assembled in North America to claim any portion of the EVTC. In 2023, this percentage is 50% and will increase by 10% each year until it reaches 90% in 2028.
- At least one of the critical mineral and battery component requirements must be met for EVs to be eligible for any portion of the credit (see more details below).
- All EVs must undergo final assembly in North America.
- All EVs must cost less than $55,000, or $80,000 for SUVs.
- All EVs must be purchased by an individual with an annual income of less than $150,000 or a family with an annual income of $300,000.
Notable commercial vehicle exception: Commercial vehicles leased or rented by businesses aren’t subject to these North America-assembly or battery-sourcing requirements for EV tax credit purposes, significantly broadening the number of eligible vehicles.
Details about mineral and battery component requirements
As noted, at least one of the critical mineral and battery component requirements must be met for EVs to be eligible for any portion of the credit. The Treasury and IRS proposed rules, issued on Friday, 03/31, break down the requirements in more detail to claim any portion of the EVTC.
At least 40% of the battery minerals must be extracted or processed in the U.S. or countries that have free-trade agreements with the U.S. or recycled in North America.
At least 50% of the battery components must be manufactured or assembled in North America.
Electric vehicles that meet both the critical mineral and battery component requirements are eligible for the full $7,500 credit. Vehicles that meet one of the requirements are eligible for a $3,750 credit.
Some debate about how many EVs will qualify for the credit
Both the Biden administration and Treasury Secretary Janet Yellen have repeatedly said they expect the number of vehicles for which consumers can claim the full tax credit to decline temporarily with the introduction of the new criteria. In the long term, they have said they believe new domestic vehicle and battery plants being built by U.S. and foreign companies will mean more cars will be eligible. Currently, over 20 models are listed as eligible on the FuelEconomy.gov website.
Meanwhile, industry officials such as John Bozzella, president of the Alliance for Automotive Innovation trade group, believe that most EVs in the market won’t qualify for the credit.
The Treasury will issue an updated list of eligible vehicles – as defined by the new criteria and determined by automakers – on April 18, 2023, at FuelEconomy.gov.
Goals of the new guidance
Most of the world’s batteries and critical minerals used by EVs are manufactured in China. One of the goals of this new guidance is to reduce reliance on China and other adversaries while increasing the move to EVs.
According to Treasury Secretary Yellen, “The Inflation Reduction Act is a once-in-a-generation piece of legislation that is lowering costs for American consumers, building a strong U.S. industrial base, and bolstering supply chains. Today, Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security.”
In line with these objectives, the Treasury will soon issue guidance on the so-called rule on “foreign entities of concern.” The intent is to make vehicles ineligible for the tax credits in 2024 and beyond if they use batteries containing components or critical minerals sourced from China or “other adversaries.”
Many U.S. allies unhappy with “North American” focus
To alleviate concern expressed by many U.S. allies, the Treasury has listed more than 20 countries as free-trade agreement countries that qualify under the critical-minerals rule. However, many key allies, such as the EU nations and the U.K., remain ineligible.