Which Cars Qualify For An EV Tax Credit? Tough New Rules Create Confusion

The U.S. Treasury Department is tightening rules for consumers to get a generous income tax credit for buying a new electric vehicle starting next month, setting a requirement that key components including battery materials be sourced mainly from within North America. Few of the 91 EVs currently qualifying for the credit will continue to do so starting on April 18.

The Inflation Reduction Act signed into law last year created a credit of up to $7,500 for new EV purchases, including $3,750 if essential minerals like lithium, cobalt and nickel in its battery pack were sourced in North America and $3,750 for batteries with anodes, cathodes and other components made within the region. Those requirements were waived in the year’s first quarter, allowing most EVs made in North America to get the full credit. From April 18, the “critical mineral and battery component requirements” will be enforced, the Internal Revenue Service said on Friday.

“Which EVs – make and model – now qualify for the tax credit… and which don’t?” John Bozzella, president and CEO of the Alliance for Automotive Innovation, the main industry trade group, wrote in a blogpost. “Short answer: I don’t know. It’s not a question that can be answered today. … Here’s what I can say: this latest turn will further reduce the number of eligible EVs. Fewer vehicles (and fewer customers) will qualify for the full $7,500 credit in the near term.”

Automakers have so far been unsuccessful in persuading the Biden Administration to ease the requirements, given that very few of the raw materials and battery components required are currently produced within the U.S., Canada and Mexico. The IRA included that rule specifically to spur an entirely new domestic supply base for battery materials. Numerous companies including General Motors and Ford, and startups such as Redwood Materials and Sila, plan to begin domestic production of battery anodes and cathodes. But high-volume supply of such materials, now sourced mainly from China, isn’t likely for two to three years.

The changes add some confusion as EV sales, led by Tesla, have seen record growth in the U.S., accounting for about 6% of new vehicle sales last year. The Auto Alliance said the segment grabbed 10% of the market in December 2022. It likely grew further in this year’s first quarter owing to the tax credit availability.

Incentives increase the appeal of battery-powered vehicles as they typically cost more than gasoline engine models. According to industry researcher Edmunds, the average transaction price for a new EV was $59,132 last month, compared to $47,680 for all vehicles.

“Plans for manufacturing or material sourcing isn’t something that can be changed overnight, so while automakers are likely grateful for the government push toward more affordable electrification, compliance with the guidelines could be wrought with frustrations and some behind-the-scenes scrambling,” said Jessica Caldwell, Edmunds’ executive analyst. “Consumers confused about which EVs qualify for tax credits won’t get much additional guidance from today’s announcement beyond some very short-term advice: if you’ve been eyeing an EV you know you can buy on the spot or take delivery of before April 18, it’s time to lock in your purchase.”

The tax credit is only available on electric cars priced up to $55,000 and light trucks that cost up to $80,000. Higher-income American households, with earnings of more than $300,000 annually, also don’t qualify for the credit.

The announcement comes on the last day of the first quarter. Earlier this month Tesla was encouraging potential buyers to order Model 3 sedans and Model Y crossovers before the end of March given the likelihood that they wouldn’t qualify for the tax credit starting in April.