U.S. tax credit rules delayed: good news for Chevy Bolt, and other EVs
New federal tax credit rules for EVs were supposed to come into effect in the U.S. on 1 January, but just a few weeks before the New Year, the Treasury partly delayed them until 1 March. That is good news for the Chevrolet Bolt (pictured), Tesla’s Model 3, and other EV models which will now remain fiscally attractive for longer.
Even though they are lumped in with President Biden’s Inflation Reduction Act (IRA), the new EV tax credit rules have nothing to do with inflation. Rather, they’re designed to help America’s domestic EV manufacturing industry, and especially reduce U.S. dependency on EV batteries made in China.
Assembled in North America
Until 1 January, EV buyers could benefit from a $7,500 federal tax credit, under certain conditions – one of them being that the manufacturers of those EVs had sold fewer than 200,000 EVs.
Under the new IRA rules, which were supposed to go into effect on 1 January, that tax credit will only be available to EVs assembled in North America (i.e. the U.S., Canada and Mexico). However, the credit will only be granted if two further conditions are met:
- The EV battery must source at least 40% of its critical minerals from the U.S. or its free trade partners. This will unlock $3,750 of the tax credit.
- The EV battery must have at least 50% of its components manufactured or assembled in North America. This will unlock the other $3,750 of the tax credit.
To ensure the U.S. has a homegrown and viable EV battery industry, those percentages are set to ramp up in years to come.
While some elements of the new rules have gone into effect on 1 January, the U.S. Treasury decided in mid-December to delay the guidance on critical minerals until 1 March. As a result, some EVs will remain eligible for the full tax incentives for longer.
So, who benefits from the (partial) delay of the new rules?
- For one, GM and Tesla. One of the innovations that has taken effect on 1 January, is the abolition of the 200,000-EV eligibility threshold. Both manufacturers have sold more EVs than that number, but their EVs are now again eligible for the tax credit.
- Also, manufacturers (in North America) of EV sedans and smaller cars under $55,000 and SUVs and trucks under $80,000 – price thresholds for credit eligibility under the new rules.
- Crucially, manufacturers who don’t yet meet the 40% rule for critical minerals in their EV batteries. Most don’t, and many have said they will need a lot of time to do so. GM, for example, said it would need “two to three years” to fulfil the sourcing requirements.
As a result of the above, a range of EV models is now again (or will remain for a while longer) eligible for the federal tax credits.
GM’s Chevrolet Bolt and Cadillac Lyric are among the EV models that will benefit from the partial delay of the new rules, as will North American-built EV models by Ford, Nissan and Volkswagen, among others – irrespective of where the critical minerals in their batteries are sourced from. Tesla’s Model 3 also qualifies, but not its Models S and X, which are too expensive.
However, EVs from Hyundai and Kia – which include some of the top-selling EV models in the U.S. – are excluded from the tax credit, because they are manufactured in South Korea. The rule similarly applies to EVs manufactured in Europe, with the exception of the commerical fleet market.
The new EV tax credit rules have been criticized as overly complex and difficult to enforce – and ironically, that may be the reason why the rule about critical minerals was delayed.
It remains to be seen whether they will come into full effect on 1 March, or whether the Treasury will eventually decide to delay the critical minerals rule further. Which means it’s as yet unclear how long the window in which certain EV models can continue to benefit from the tax credit.
However, that benefit may remain theoretical for most prospective buyers. The supply of new cars in general, and new EVs in particular, remains very limited.