Thought you understood the federal EV tax credit? Think again. Big changes are coming in 2024 that could significantly impact which clean cars qualify for the up-to-$7,500 kickback in years to come. <\/p>\n
In 2022, the Inflation Reduction Act revised the EV tax credit to prioritize cars and batteries built in North America, to build out a local supply chain. However, the act stipulates that, starting in 2024, any vehicle containing battery components from a so-called \u201cforeign entity of concern\u201d (FOEC) like China will be disqualified from receiving tax breaks. The same rule will apply to battery minerals in 2025. The thinking there, and the thrust of the policy more broadly, is to boost clean vehicle sales while challenging China\u2019s dominance of EV supply chains and seeding domestic alternatives. <\/p>\n
But the law left vague exactly what that requirement would mean in practice, or how difficult it would be for automakers\u2014many of whom heavily rely on Chinese content in their EVs\u2014to meet. Auto industry groups worried that too strict an interpretation would boot electric models from the program, even if they had successfully jumped through other hoops. A lax approach, on the other hand, could send U.S. taxpayer dollars flowing into the hands of adversaries. <\/p>\n
The practical effect is this: fewer EVs could soon qualify for the tax credit since so many of them depend on batteries, minerals or other materials from China. And that seems to be exactly what\u2019s happening.<\/p>\n
On Friday, the U.S. Treasury and Energy departments released long-awaited proposed rules on the matter, giving the industry and consumers some clarity as to what\u2019s off-limits and what\u2019s OK. <\/p>\n
The guidance clarifies that a company controlled by, owned by, incorporated in, headquartered in, or \u201cperforming the relevant activities in a covered nation\u201d would be classified as a FOEC. (Covered nations include China, Iran, and Russia.) <\/p>\n
In addition, if 25% or more of a company\u2019s ownership or board seats are held by an entity of concern, whatever parts or minerals it produces would be off-limits for vehicles hoping to qualify for a credit. Licensing agreements with FOECs may be in the clear. <\/p>\n
The Treasury Department also gave the auto industry a break by proposing a transition period that will allow for trace amounts of low-value materials for a few years, even if they don’t technically comply. <\/p>\n
It\u2019s still unclear how the FOEC rule will impact today\u2019s selection of credit-eligible vehicles. But, given that some of today\u2019s approved vehicles use Chinese battery packs, some kind of shakeup appears likely. Tesla\u2019s website invites customers to buy a car before the end of the year, since tax credit reductions are \u201clikely for certain vehicles in 2024.\u201d Even U.S. or North American-built vehicles from companies like Ford, Volkswagen and Chevrolet could see an impact here.<\/p>\n
\u201cWe don\u2019t know yet how the FEOC rules will impact which EVs qualify for some or all of the tax credit. Time will tell,\u201d John Bozella, president and CEO of the Alliance for Automotive Innovation, an industry trade group, said in a statement on Friday. \u201cBut Treasury\u2019s effort to make the rules workable means the list of eligible vehicles won\u2019t completely disappear in 2024 (which was a real worry).\u201d <\/p>\n
Some automakers were more clear on what could happen. \u201cBeginning Jan 1, 2024, the Mustang Mach-E may not be eligible for the current $3,750 federal tax credit,\u201d a Ford spokesperson told InsideEVs <\/em>earlier this month. \u201cWe expect [the F-150] Lightning to remain eligible for $7,500 for models that meet the MSRP cap. We are waiting to hear from the Treasury what the rules are.\u201d <\/p>\n Others told us they just want clear answers here sooner than later, so they know what to do. \u201cGM\u2019s perspective has always been about clarity of the FEOC rules, encouraging Treasury to implement rules that follow the intention of the IRA, to help to onshore and near-shore EV supply chains, expand job opportunities and offer EVs across a broad range of segments and price points,\u201d a General Motors spokesperson said earlier this month. \u201cThis was reflected in our 2022 and 2023 filed comments where we clearly state \u2018Scope is important, but clarity is key.\u2019\u201d<\/p>\n The original EV tax credit established during the Obama Administration doled out $7,500 to buyers of any new electric car, so long as its manufacturer hadn\u2019t yet sold more than 200,000 plug-in vehicles. <\/p>\n The new and \u201cimproved\u201d program is more targeted and thus has many more moving parts. Vehicles now must be assembled in North America to qualify. The IRA removed the sales cap while slapping new limits on household income and vehicle price. To beef up domestic vehicle and battery production, it introduced restrictions on where a car\u2019s battery minerals and components can come from. <\/p>\n We\u2019ll keep you posted about how the FOEC rule will change things in the coming weeks and months. Right now, the EV tax credit seems confusing and restrictive, but it\u2019s important to remember it\u2019s still in its early days and many more models should gain eligibility in coming years. <\/p>\n At the same time, losing tax credits could have a big impact on EV sales in 2024, right at a time when demand for them is proving to be uneven. And it could put a damper on some sales where buyers were anticipating getting the tax credit at the point of sale, when they bought the car, and not after they filed their taxes later on. Just know that when you see a car lose part of its credit or get kicked off the approved list altogether, those tightening requirements are likely the culprit. <\/p>\n \u201cWe knew when this law went into place that there was going to be this two-to-three-year adjustment period for the industry in terms of adjusting their supply chains to qualify for these tax credits,\u201d Chris Harto, a senior transportation and energy policy analyst at Consumer Reports, told InsideEVs. \u201cI really see 2025, 2026, as a potential boom time for EVs.\u201d <\/p>\n