Electric vehicle federal tax credit rules tightened as of April 18, 2023

Beginning Tuesday, April 18, the number of electric vehicles (EVs) that qualify for the full $7,500 federal tax credit will be greatly reduced as stricter battery-sourcing rules take effect. The US Treasury Department released a list of electric and plug-in hybrid vehicles that qualify for the full amount of new EV tax credits available, or $,7500, which stem from the Inflation Reduction Act (IRA) passed last August..

The new rules, which were included IRA, require that at least 75% of the battery components or raw materials for an EV be sourced from North America or countries with U.S. free-trade agreements.

As a result, according to fueleconomy.gov and as of April 18, only nine EVs will qualify for the full tax credit:

• General Motors Co.'s Cadillac Lyriq
• General Motors Co.'s Chevrolet Bolt EV
• General Motors Co.'s Chevrolet Bolt EUV
• General Motors Co.'s Chevrolet Equinox
• General Motors Co.'s Chevrolet Silverado
• Tesla Inc.'s Model 3 (performance only)
• Tesla Inc.'s Model Y (performance, all-wheel drive, and long-range all-wheel drive)
• Ford Motor Co.'s F-150 Lightning  (standard and extended range battery
• Volkswagon AG's ID.4 (Pro, Pro S, Pro S Plus, S, S Standard)

Six additional EVs made by Tesla, Ford, and Rivian qualify for half credits, meaning $3,750 is available to eligible consumers.

The new rules are a major setback for the Biden administration's goal of getting 50% of new vehicles sold in the U.S. to be electric by 2030. But they could also help to accelerate the development of a domestic EV supply chain, which could ultimately make EVs more affordable and accessible for consumers.

Tighter sourcing rules slash electric vehicle tax credits

The list of eligible vehicles that was released Monday, April 17 made official what auto makers feared: many consumers would not be eligible for federal incentives for their EVs because not enough of their battery components or raw materials are sourced from North America.

Hyundai Motor Co., Nissan Motor Co., BMW AG, and Volvo Car AB each had vehicles eligible for at least partial credits earlier this year that no were longer eligible as of April 18.

And several EVs—including Ford's Mustang Mach-E sport utility vehicle and the Standard Range version of Tesla's Model 3 sedan—will see their credits shrink to $3,750 from $7,500.

The full tax credit will be even tougher to come by for another few months than the government's list suggests. Three of the 10 that qualify—electric versions of GM's Chevrolet Silverado pickup and Blazer and Equinox SUVs—aren't available until this summer or fall.

Leasing loophole provides some relief to EV credit requirements

The Biden administration did give automakers some wiggle room on the requirements, following an intense lobbying blitz after its passage in August. In December, the Treasury Department said it would consider leased cars and trucks to be commercial vehicles, which aren't subject to sourcing requirements. 

Details on the EV tax credit

The Electric Vehicle Tax Credit is a tax credit available to individuals and businesses that purchase or lease an electric vehicle. The credit is up to $7,500, depending on several factors, including the vehicle type. The EVTC was first introduced in 2009, has been extended several times since then, and the latest extension was included in the IRA.

Requirements to claim the EVTC

Vehicles have to meet several requirements to qualify for any portion of the EVTC. As outlined in the Treasury guidance, these include:

• A certain percentage of an EV's battery components must be manufactured or assembled in North America to claim any portion of the EVTC. In 2023, this percentage is 50% and will increase by 10% each year until it reaches 90% in 2028.
• At least one of the critical mineral and battery component requirements must be met for EVs to be eligible for any portion of the credit (see more details below). 
• All EVs must undergo final assembly in North America.
• All EVs must cost less than $55,000, or $80,000 for SUVs.
• All EVs must be purchased by an individual with an annual income of less than $150,000 or a family with an annual income of $300,000.

Notable commercial vehicle exception

Commercial vehicles leased or rented by businesses aren't subject to these North America-assembly or battery-sourcing requirements for EV tax credit purposes, significantly broadening the number of eligible vehicles.

Details about mineral and battery component requirements

As noted, at least one of the critical mineral and battery component requirements must be met for EVs to be eligible for any portion of the credit. The Treasury and IRS proposed rules, issued on Friday, 03/31, break down the requirements in more detail to claim any portion of the EVTC.

At least 40% of the battery minerals must be extracted or processed in the U.S. or countries that have free-trade agreements with the U.S. or recycled in North America.

At least 50% of the battery components must be manufactured or assembled in North America.

Electric vehicles that meet both the critical mineral and battery component requirements are eligible for the full $7,500 credit. Vehicles that meet one of the requirements are eligible for a $3,750 credit.

Some debate about how many EVs will qualify for the credit

Both the Biden administration and Treasury Secretary Janet Yellen have repeatedly said they expect the number of vehicles for which consumers can claim the full tax credit to decline temporarily with the introduction of the new criteria. In the long term, they have said they believe new domestic vehicle and battery plants being built by U.S. and foreign companies will mean more cars will be eligible. As of the last update to this article, 11 models are listed as eligible on the FuelEconomy.gov website.

Meanwhile, industry officials such as John Bozzella, president of the Alliance for Automotive Innovation trade group, believe that most EVs in the market won't qualify for the credit.

Goals of the new guidance

Most of the world's batteries and critical minerals used by EVs are manufactured in China. One of the goals of this new guidance is to reduce reliance on China and other adversaries while increasing the move to EVs.

According to Treasury Secretary Yellen, "The Inflation Reduction Act is a once-in-a-generation piece of legislation that is lowering costs for American consumers, building a strong U.S. industrial base, and bolstering supply chains. Today, 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, while creating American manufacturing jobs and strengthening our energy and national security."

In line with these objectives, the Treasury will soon issue guidance on the so-called rule on "foreign entities of concern." The intent is to make vehicles ineligible for the tax credits in 2024 and beyond if they use batteries containing components or critical minerals sourced from China or "other adversaries."

Many U.S. allies unhappy with "North American" focus

To alleviate concern expressed by many U.S. allies, the Treasury has listed more than 20 countries as free-trade agreement countries that qualify under the critical-minerals rule. However, many key allies, such as the EU nations and the U.K., remain ineligible.

Read the full guidance issued by the IRS on March 31.