EV tax credit rules are more complex

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The Treasury Department on Friday proposed new rules for determining which EVs are eligible for tax breaks under new “critical minerals” and battery component requirements added in last year’s inflation-reduction law.

While the Treasury Department hasn’t yet said which vehicles qualify for the credits — that will happen on April 18 — we now know how the department plans to determine which EVs do and don’t make the cut.

New rules proposed by the Treasury Department on Friday explain how to determine which EVs meet requirements for critical minerals and battery components, each offering a $3,750 tax credit. An EV that qualifies under both — and meets other requirements — qualifies for the full $7,500 credit.

Note that automakers must do the math and tell the Internal Revenue Service which of their vehicles qualify.

The Inflation Reduction Act, signed into law by President Joe Biden last August, offers federal tax credits of up to $7,500 to buyers of EVs who meet a list of new requirements:

  • Vehicle price limits. Cars costing more than $55,000 and trucks, vans and SUVs costing more than $80,000 are not eligible for the tax credit.
  • Made in North America. Only EVs that “undergo final assembly” in the United States, Canada or Mexico are eligible for the credit.
  • BUYER’S INCOME LIMITS. You don’t qualify for the credit if you’re an individual with adjusted gross income of $150,000 or more, a head of household with income over $225,000, or a married couple filing jointly with income over $300,000.
  • Important minerals. To qualify for the credit in 2023, at least 40% of the critical minerals — including lithium, nickel, manganese, graphite and cobalt — in vehicle batteries must have been mined, processed or recycled in the United States or a country. The United States has a free trade agreement. That percentage will increase to 50% in 2024, 60% in 2025, 70% in 2026, and 80% after 2026.
  • Battery components. To qualify for the credit in 2023, at least 50% of the value of the components in an EV’s battery must be manufactured or assembled in North America. That percentage will increase to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, and 90% in 2028.
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All of these rules were originally expected to come into effect by early 2023. But in December, the Treasury Department said it needed until March to figure out how to implement the last two rules, which would not go into effect. Until it ends. (Meanwhile, the IRS used other rules to determine which vehicles qualified for tax credits.)

Important minerals rule

For critical minerals, the Treasury Department proposed a three-step process for determining eligibility:

  • Find out where the important minerals in batteries come from.
  • Find out which minerals qualify as critical minerals under the IRA.
  • Calculate the percentage of minerals that qualify as critical minerals in an EV’s battery.

Additionally, EVs containing critical minerals sourced from a “foreign company of concern” will no longer qualify after 2025. (What does that mean? The Treasury Department said it will be clarified in the future.)

The Treasury Department’s proposed rules say the set of countries with eligible free trade agreements will change over time, but currently include Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Korea, Mexico, and Morocco. , Nicaragua, Oman, Panama, Peru, Singapore and Japan.

Battery components rule

The Treasury Department proposed a four-step process for battery components:

  • Find out which battery parts are manufactured or assembled in North America.
  • Find the incremental value of each component.
  • Determine the total value of all battery components.
  • Do the math to figure out what percentage of the battery’s components are worth by value.

Additionally, starting in 2024, EVs that contain battery components from a concerned foreign company will not be eligible for the credit.

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When will we know which EVs qualify?

EVs entering service on or after April 18 will be subject to requirements for critical minerals and battery components, the Treasury Department said. From that date, it will publish a list of eligible vehicles as determined by the automakers. FuelEconomy.gov.

But that may be a short list, at least for a while, as a lot of battery minerals and components now come from China.

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