Revamped rules makes more U.S.-built EVs eligible for tax credits
As U.S. Treasury has revised conditions for its EV incentives, more electrified fleet models become eligible. The scheme has been adapted after opposition from car makers. Before the amendment, models like the Cadillac Lyriq or the seven-seater version of the Tesla Model Y didn’t meet the requirements.
Under Biden’s Inflation Reduction Act (IRA), electrified models qualify for a subsidy of up to 7,500 dollars if the vehicle is manufactured in North America and the parts for the battery pack are partially local-sourced. Fleet management companies receiving the tax credit usually adapt the leasing price accordingly.
Overshooting their target
However, the ruling followed a different vehicle classification than what was advertised by the car makers. This led to confusion. Where the five-seater Model Y got the green light, the seven-seater version was declined as it didn’t qualify as an SUV. The vehicle types determine the price cap (see below).
Also, better-equipped versions of the Ford Mustang Mach-E missed out. And the all-electric Cadillac Lyriq got scrapped from the tax breaks altogether, filing as a too-expensive crossover. Critics said the tax breaks were overshooting their target. The case for the Tesla Model Y was symbolic: not all versions of the nation’s best-selling EV qualified for a tax break.
The American car makers were displeased by the ruling’s vehicle classification, but Treasury has revised it and has adopted the Environmental Protection Agency’s (EPA) fuel economy labeling standards. These are found on a vehicle’s window sticker.
This widens the scope of approved electrified vehicles and now includes all the models mentioned above. In addition, Treasury has made the incentives retroactively available. So, they are valid for purchases as of the 1st of January 2023.
Summing up the rules for the revamped incentive scheme:
- Only electrified cars (BEV, PHEV & FCEV) built in the USA - or countries under free trade agreement - are eligible.
- The limit of the tax credit is $ 7,500. The buyer’s income cap doesn’t count for leasing.
- Manufacturer’s Suggested Retail Price (MSRP) for a crossover must be under $50,000. For SUVs, vans, and trucks, the barrier is at $80,000.
- These limits concern retail price, discounts do not apply.
- In the case of leasing, the dealer gets the incentive, not the end-user. Dealers have no obligation to pass the discount on.,
- The credit contains binary parts. Half of the amount is applicable if the vehicle’s battery critical minerals are sourced for 40% in the USA (or under free trade); the other half implies 50% of battery components come from the USA (or under free trade). These ratios gradually rise over the years.
- The qualification lasts from January 2023 to December 2032, or a decade.
- Not only BEVs but also PHEVs are accounted for if the battery pack is at least 7 kWh.
- Second-hand EVs are also eligible, but only once, for an incentive of up to $4,000 and with a price cap of $ 25,000.
Loophole for leasing
As for foreign brands, the Volkswagen ID.4 is the only European developed BEV eligible for a complete tax break since it’s built in Chattanooga. The plug-in hybrid versions of the Audi Q5 (manufactured in Mexico), the BMW 3 Series and X5 (Spartanburg), and Volvo S60 (Charlotteville) are also on the list. The IRS is awaiting a list of eligible models from Jaguar-Land Rover, Polestar, Mercedes-Benz, Porsche, Toyota, Kia, and Hyundai.
In March 2023, the funding scheme will be revised again. But the changes won’t be influenced by car classification, rather than battery requirements. It has already been decided that cell packs containing any degree of foreign materials will be expelled from the incentives as of 2024.
As an overwhelming quantity of battery components are currently sourced in China and can’t be replaced overnight, this might affect the list significantly as of next year. However, there might be a loophole for leasing formulas. This is still pending.
Biden’s Inflation Reduction Act aims at bringing the EV and battery industry, as its R&D, back to the home country.
Image Source: General Motors