New Treasury Department Rules Limit Electric Vehicle (EV) Tax Credit

The Biden Administration has released new rules that will significantly shorten the list of electric vehicles that qualify for federal tax credits. The rules, issued by the Treasury Department, are a result of the Inflation Reduction Act and designed to encourage consumers to turn away from fossil fuels in favor of EVs. Automakers must meet strict requirements for where they assemble the cars and batteries and where they get the materials that go into batteries for their vehicles to qualify for the $7,500 credit. To be eligible, at least 50 percent of the components in an EV battery must be made in North America while 40 percent of the minerals used must be sourced domestically. The minerals quota will rise every year until it reaches 80 percent by 2027, and the component quota will climb to 100% in 2029. Carmakers must certify to the IRS whether their vehicles meet the components and minerals requirements.

Some vehicles may qualify for only half the credit if they meet the component quotas but not the minerals quotas and vice versa. Only a handful of vehicles are expected to qualify for the full credit when the rules go into effect April 18, down from 21 that currently qualify. Hyundai and Kia cars made in South Korea no longer qualify for the credit. Under the new rule only the Tesla Model 3 will qualify for the credit. Consumers are likely to wait until more vehicles become eligible for the credits in a few years before making the switch to EVs. However, a loophole in the law allows companies to collect the credits if they lease them even if the cars do not meet sourcing and manufacturing requirements. Senator Joe Manchin (D-WV) is threatening to sue the administration over the new rules. Manchin opposes the graduated percentages for domestically sourced components and minerals claiming it is contrary to the intent of the law and subsidizes foreign manufacturing. Click here for more information.