March 31, 2023, the IRS released the long-awaited notice of proposed rulemaking for the federal EV tax credit revamped by the Inflation Reduction Act. The purpose of this rulemaking is to establish which car and truck models are eligible for the tax credit and provide clarity to manufacturers regarding the battery component and critical minerals requirements. All of these conditions must be met for a vehicle to be eligible for the full $7,500 tax credit. The proposed rule also contains provisions related to the definitions of the location of the vehicle’s final assembly, North America, MSRP, vehicle classifications, and placed in service requirements. Comments on the proposed rules are due June 16, 2023.
Because the battery component and critical minerals requirements do not take effect until April 17, 2023, consumers have two additional weeks to take delivery of all of the EVs previously eligible and still receive the full $7,500 tax credit. Once this two-week period ends, buyers should be aware that many of the EVs currently for sale in the U.S. will lose all or part of the tax credit in the short term. However, as supply chains and domestic manufacturing ramp-up, it is expected that most of these EVs will ultimately be eligible for the full tax credit. Starting on April 18, 2023, the IRS will maintain a list of eligible vehicles, updated monthly, available here.
Battery Component Requirement
In order to receive $3,750 of the tax credit, the battery components in the EV must be manufactured or assembled in North America based on the following timelines:
- 50% applicable percentage in 2023
- 60% applicable percentage in 2024
- 70% applicable percentage in 2026
- 80% applicable percentage in 2027
- 90% applicable percentage in 2028
- 100% applicable percentage in 2029+
The IRS proposed a four-step process for determining the applicable percentage:
- identify battery components that are manufactured or assembled in North America;
- determine the incremental value of each battery component, including North American battery components;
- determine the total incremental value of battery components; and
- calculate the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components.
Furthermore, beginning in 2024, an eligible EV cannot contain any battery components that are manufactured by a “foreign entity of concern,” a term the IRS stated that it will define at a later date.
Critical Mineral Requirement
In order to receive $3,750 of the tax credit, a certain percentage of the value of the critical minerals contained in the battery must be extracted or processed in the U.S. or a country with which the U.S. has a free trade agreement, or be recycled in North America.
- 40% applicable percentage in 2023
- 50% applicable percentage in 2024
- 60% applicable percentage in 2025
- 70% applicable percentage in 2026
- 80% applicable percentage in 2027+
The IRS proposed a three-step process for determining the applicable percentage:
- determine procurement chains;
- identify qualifying critical minerals; and
- calculate qualifying critical mineral content.
In addition, the proposed rule establishes a formula to determine which countries have a free trade agreement with the U.S. for purposes of this requirement. Qualifying countries currently include Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. Lastly, beginning in 2025 an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a “foreign entity of concern,” as this term is defined at some point by the IRS.
What’s next?
Only the future will tell the exact effect these requirements will have on the EV industry and the Biden Administration’s target of 50% of electric vehicle sale shares in the U.S. by 2030. In the short-term, however, we know fewer EVs will be eligible for the full tax credit. For example, GM announced that the Cadillac LYRIQ, Quinox EV SUV, Blazer EV SUV, and Silverado EV fleet will be eligible for the full credit, while the Bolt EV and Bolt EUV will only qualify for part of the credit. Nonetheless, these requirements are already bringing domestic manufacturing, discussed here, to the U.S. and establishing new supply chains with friendly nations. These advancements should ensure the future success of the U.S. EV market.
Again, comments on the proposed rules are due June 16, 2023. Please feel free to contact us if you have any questions or would like to discuss the benefits of filing comments on the proposed rules. Stay tuned as we continue to follow the accelerating EV market.
