EV Tax Credit Rules Completed

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Battery content now key determiner of eligibility

Automakers to self-report starting April 18

EV tax credit
The content of batteries used in EVs, plug-in hybrids and fuel-cell electric vehicles will now determine which North American assembled clean vehicles are eligible for a federal tax credit.

The IRS has finally issued all of its implementation rules for the new clean vehicle tax credit – commonly referred to as the EV tax credit.

As expected, the agency has told automakers they will be responsible for tracking and reporting battery content, which will determine which EV, plug-in hybrids and fuel-cell electric vehicles will qualify for either a $3,750 credit or a $7,500 credit.

It probably won’t be very many, at least initially,

The carmakers have to start reporting battery content on April 18. Until then, about 40% of the clean vehicles on the market in the US today are eligible for a federal tax credit of up to $7,500. After that…who knows?

The best bet is that once automakers parse their clean vehicles’ battery makeup per the guidance laid down by the IRS, it will be less than the current count. But precisely which makes and models will – and won’t – qualify will have to wait until the automaker reports are filed.

The battery rules will apply to all otherwise-eligible vehicles placed in the purchaser’s possession on or after April 18, regardless of when the actual purchase was made. Vehicles delivered before April 18 can qualify under current rules that don’t include the battery requirements and don’t split the tax credit into two pieces.

The new EV tax credit rules were set down in the Inflation Reduction Act of 2022. Because they deal with an income tax credit, the IRS was charged with developing the implementation guidelines.

Here’s a rundown:

  • Only vehicles assembled in North America are eligible for any federal tax credit for their purchasers. That took effect last August, when the IRA was signed into law.
  • Clean vehicles that are leased fall under commercial vehicle rules are exempt from the place-of-assembly requirement. That means owners of those vehicles – typically the automakers’ and dealers’ leasing arms – can claim the tax credit and, if they choose to, can pass it on to consumers who lease the vehicles from them. So EVs, fuel-cell vehicles and PHEVs built in places such as Germany, Japan and South Korea are eligible if they are leased to consumers, but not if the consumer chooses to purchase them.
  • There are price caps on eligible vehicles. Passenger car MSRPs cannot exceed $55,000. MSRPs for trucks, vans and SUVs are capped at $80,000.
  • Clean vehicle purchasers also will have to meet buyer income caps – $300,000 annual gross adjusted for joint filers, $150,00 for single filers and $225,000 for head-of-household filers. Those who lease are not subject to the income cap.
  • The clean vehicle, except for fuel cell vehicles, which are exempt from this requirement, also must be made by a “qualified” manufacturer – one which has agreed to file regular reports with the IRS. The IRS maintains an on-line list of qualified manufacturers that identified clean vehicles made in North America and the price caps (car-truck classification) to which they are subject.

The rest of the EV tax credit eligibility rules – dealing with the origin of battery materials, were laid aside until the IRA finalized its implementing regulations, which it did this morning, setting the April 18 date for putting it all into effect.

  • So starting April 18, only clean vehicles built in North America (or leased, regardless of place of assembly) are eligible for the federal tax credit, but only if their battery composition meets the rules set down in the IRA.
  • Those rules split the $7,500 tax credit in two two equal pieces and say that otherwise eligible vehicles can get a $3,750 tax credit by meeting either the critical minerals requirements or the other components requirements, or $7,500 by meeting both.
  • The “critical minerals” requirement says that starting this year, 40% of the critical minerals (such as lithium, cobalt and nickel) in the vehicle’s battery must be extracted or processed in the U.S. or in a country which which the U.S. has a free trade agreement. The percentage escalates each year until it hits 80% in 2027.
  • The “other components” requirement says that, starting this year, 50% of the remaining components in the vehicle’s battery pack must be manufactured or assembled in North America. The percentage increases to 60% in 2024 and 2025, then goes up annually until it hits 100% in 2029.
  • Finally, a “countries of concern” clause kicks in next year and says that if a clean vehicle battery has any components or minerals sourced from a country, like China and Russia, identified by the State Department as a country of concern, that vehicle won’t qualify for a federal tax credit even if it meets all the other requirements. The components exclusion begins in 2024, the critical minerals exclusion in 2025.

There, it should all be very clear now!

But not to worry, TheGreenCarGuy will keep updating things as automakers start identifying just which of their clean vehicles can qualify, and for how much.

So keep coming back.