US Electric Vehicle Tax Credits Get Tougher to Navigate

A Hyundai Ioniq battery electric vehicle being charged, in a file photo. Christopher Furlong/Getty Images

Claiming a tax credit for your electric vehicle may soon get more complicated.

The Treasury Department and the Internal Revenue Service (IRS) issued the proposed guidance on March 31. It’s a result of provisions in last year’s Schumer-Manchin bill, which some call the “Inflation Reduction Act” (IRA).

The original electric vehicle tax credit, which ranged from $2,500 to $7,500, took effect for cars in 2009, with $7,500 in 2009 being equivalent to $10,230.75 as of 2022.

“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,” Treasury Secretary Janet Yellen said in an announcement on the guidelines.

Yet, Sen. Joe Manchin (D-W.Va.), whose support was key to taking the IRA across the finish line, has publicly worried that the guidance stacks the deck against fossil energy.

In a statement after the guidance was released, Manchin said it “completely ignores the intent of the Inflation Reduction Act.”

“It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process. The guidance includes a 60-day comment period and I ask for every American to comment,” he added.

Sen. Joe Manchin (D-W.Va.), chairman of the Senate Energy and Natural Resources Committee, presides over a hearing in Washington on Feb. 16, 2023. Kevin Dietsch/Getty Images

The proposed rule is scheduled for publication on April 17.

Notably, the “lease loophole“ for foreign-made vehicles remains intact. Lessees may be able to benefit from it if the company from which they’re leasing the vehicle secures a commercial tax credit under the IRA.

The IRA’s commercial tax credit has a cap of $40,000 for vehicles with a gross vehicle weight rating of 14,000 pounds or above. That’s in the range of a firetruck or similar medium-duty truck.

More Details

The March 31 proposal outlines the criteria a “new clean vehicle” must meet for taxpayers to claim a $7,500 credit or a partial $3,750 credit.

“New clean vehicles” can include plug-in electric vehicles, hybrids, and some fuel cell vehicles.

The proposal specifies that qualifying vehicles “must be propelled to a significant extent by an electric motor.”

To qualify, pickup trucks, vans, and sport utility vehicles can’t have a list price above $80,000. The ceiling for other vehicles is $55,000.

Ford E-Transit electric vans are displayed at a Gus Machado Ford dealership in Hialeah, Fla., on Jan. 23, 2023. Marta Lavandier/AP Photo

In addition, vehicles must undergo final assembly in North America to qualify.

“In general, North America includes the United States and Puerto Rico, Canada, and Mexico for purposes of determining the location of final assembly,” Department of Energy guidance on the clean vehicle credit states.

Critical Minerals

The guidance outlines complex requirements for critical mineral sourcing and battery components production.

That reflects a new approach to calculating vehicle tax credits with the IRA, after a decade and a half when credits were a function of battery capacity and a base rate of $2,500.

Critical mineral sourcing annually increases the percentage of critical minerals that have to meet certain criteria until 2027. It rises from 40 percent in 2023 to 80 percent that year.

To qualify for that $3,750 partial credit, vehicles have one of two broad options.

One option is that the minerals have to be recycled in North America.

Rod Colwell, CEO of Controlled Thermal Resources (R), and Tracy Sizemore, the company's Global Director of Battery Materials, walk along geothermal mud pots near the shore of the Salton Sea, where the company is mining for lithium, in Niland, Calif., on July 15, 2021. Marcio Jose Sanchez/AP Photo

The other is that they have to be mined or processed in the United States or a country that has a free trade agreement (FTA) with the United States.

Those countries include Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.

“This term could include newly negotiated critical minerals agreements,” the announcement on the guidance notes.

Extraction and processing in the United States or an FTA country is defined expansively.

As long as half or more of the value added through either extraction or processing occurs in one of those countries, it counts.

Battery Components

The guidance on battery components is a little more straightforward.

For a vehicle to be eligible for that $3,750 partial credit, an annually increasing percentage of its battery components’ value must stem from manufacturing or assembly in North America.

Battery components and critical minerals tied to a “foreign entity of concern” can also be disqualifying.

“Treasury and IRS will issue subsequent guidance on this provision,” the announcement states.