New EV tax credit rules are on their way

The new "critical mineral" and battery component standards included in the Inflation Reduction Act of last year will be used to determine which electric vehicles are qualified for tax credits, according to new guidelines that were proposed by the Treasury Department on Friday.

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Although the Treasury Department hasn't yet announced which cars qualify for the credits, it will on April 18; nonetheless, we now know how the administration intends to determine which EVs do and don't.

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The Treasury Department on Friday put up new regulations that spell out how to identify EVs that satisfy the criteria for essential minerals and battery parts, each of which qualifies for a $3,750 tax credit. The entire $7,500 credit will be given to an EV that satisfies the other conditions and falls under both categories.

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Keep in mind that it is up to the automakers to choose which of their vehicles qualify and to inform the Internal Revenue Service of this.  

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President Joe Biden signed the Inflation Reduction Act into law last August, and it offers owners of EVs who adhere to a new set of standards federal tax credits of up to $7,500:

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• Price limits on vehicles. The tax credit does not apply to vehicles exceeding the $55,000 level for cars and the $80,000 mark for trucks, vans, and SUVs.
• North American-made. The credit is only available for electric vehicles that "undergo final assembly" in the United States, Canada, or Mexico.
• Limitations on buyer income. You are ineligible for the credit if you are a single person with a modified adjusted gross income of at least $150,000, a head of household with more than $225,000 in income, or a married couple filing jointly with more than $300,000.
• Critical minerals. For a vehicle's batteries to qualify for the credit in 2023, at least 40% of the essential minerals, such as lithium, nickel, manganese, graphite, and cobalt, must have been mined, processed, or recycled in the United States or in a nation with which the United States has a free trade agreement. In 2024, that percentage will rise to 50%, followed by increases of 60%, 70%, in 2025, and 80% in 2026.
• Battery components. To qualify for the credit in 2023, the battery of an EV must have at least 50% of its value in parts manufactured or assembled in North America. Between 2024 and 2025, the percentage will be 60%, followed by 2026 at 70%, 2027 at 80%, and 2028 at 90%.

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Initially, it was anticipated that all of these regulations would take effect at the start of 2023. Nevertheless, the Treasury Department stated in December that it would take until March to determine how to execute the final two regulations and that they would not take effect until that time. (In the interim, the IRS has chosen which vehicles are eligible for the tax credits based on the other regulations.)

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Critical minerals rule

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The Treasury Department suggested a three-step procedure for establishing eligibility for critical minerals:

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• Find out where the essential minerals for the batteries originated from.
• List the minerals that the IRA considers to be essential minerals.
• Determine the proportion of key minerals that make up the EV battery.

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Also, after 2025, an EV won't be eligible if it contains any key minerals that were obtained from a "foreign entity of concern." (The Treasury Department stated that it would clarify what that means in the future.)

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Although the list of nations with eligible free trade agreements is expected to evolve, according to the Treasury Department's proposed regulations, at the moment those that do include Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore, and Japan.

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Battery components rule

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For battery parts, the Treasury Department suggested the following four steps:

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• Which battery parts were produced or put together in North America?
• Determine each component's incremental value.
• Find out the total cost of all the battery parts.
• Calculate the proportion of the battery's constituent parts that, based on value, qualify.

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Also, starting in 2024, an EV won't be eligible for the credit if it has any battery components from a foreign business of concern.

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When will we learn which EVs are eligible?

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According to the Treasury Department, the restrictions for essential minerals and battery components will apply to EVs that enter operation on or after April 18. On or after that date, FuelEconomy.gov will post a list of vehicles that are eligible, as determined by the OEMs.

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Yet given that China now imports a significant portion of battery materials and components, it is likely to be a short list, at least initially.