Thought you understood the federal EV tax credit? Think again. Big changes are coming in 2024 that could significantly impact which clean cars qualify for the up-to-$7,500 kickback in years to come.
In 2022, the Inflation Reduction Act revised the EV tax credit to prioritize cars and batteries built in North America, to build out a local supply chain. However, the act stipulates that, starting in 2024, any vehicle containing battery components from a so-called “foreign entity of concern” (FOEC) like China will be disqualified from receiving tax breaks. The same rule will apply to battery minerals in 2025. The thinking there, and the thrust of the policy more broadly, is to boost clean vehicle sales while challenging China’s dominance of EV supply chains and seeding domestic alternatives.
But the law left vague exactly what that requirement would mean in practice, or how difficult it would be for automakers—many of whom heavily rely on Chinese content in their EVs—to meet. Auto industry groups worried that too strict an interpretation would boot electric models from the program, even if they had successfully jumped through other hoops. A lax approach, on the other hand, could send U.S. taxpayer dollars flowing into the hands of adversaries.
The practical effect is this: fewer EVs could soon qualify for the tax credit since so many of them depend on batteries, minerals or other materials from China. And that seems to be exactly what’s happening.
On Friday, the U.S. Treasury and Energy departments released long-awaited proposed rules on the matter, giving the industry and consumers some clarity as to what’s off-limits and what’s OK.
The guidance clarifies that a company controlled by, owned by, incorporated in, headquartered in, or “performing the relevant activities in a covered nation” would be classified as a FOEC. (Covered nations include China, Iran, and Russia.)
In addition, if 25% or more of a company’s ownership or board seats are held by an entity of concern, whatever parts or minerals it produces would be off-limits for vehicles hoping to qualify for a credit. Licensing agreements with FOECs may be in the clear.
The Treasury Department also gave the auto industry a break by proposing a transition period that will allow for trace amounts of low-value materials for a few years, even if they don’t technically comply.
It’s still unclear how the FOEC rule will impact today’s selection of credit-eligible vehicles. But, given that some of today’s approved vehicles use Chinese battery packs, some kind of shakeup appears likely. Tesla’s website invites customers to buy a car before the end of the year, since tax credit reductions are “likely for certain vehicles in 2024.” Even U.S. or North American-built vehicles from companies like Ford, Volkswagen and Chevrolet could see an impact here.
“We don’t know yet how the FEOC rules will impact which EVs qualify for some or all of the tax credit. Time will tell,” John Bozella, president and CEO of the Alliance for Automotive Innovation, an industry trade group, said in a statement on Friday. “But Treasury’s effort to make the rules workable means the list of eligible vehicles won’t completely disappear in 2024 (which was a real worry).”
Some automakers were more clear on what could happen. “Beginning Jan 1, 2024, the Mustang Mach-E may not be eligible for the current $3,750 federal tax credit,” a Ford spokesperson told InsideEVs earlier this month. “We expect [the F-150] Lightning to remain eligible for $7,500 for models that meet the MSRP cap. We are waiting to hear from the Treasury what the rules are.”
Others told us they just want clear answers here sooner than later, so they know what to do. “GM’s perspective has always been about clarity of the FEOC rules, encouraging Treasury to implement rules that follow the intention of the IRA, to help to onshore and near-shore EV supply chains, expand job opportunities and offer EVs across a broad range of segments and price points,” a General Motors spokesperson said earlier this month. “This was reflected in our 2022 and 2023 filed comments where we clearly state ‘Scope is important, but clarity is key.’”
The original EV tax credit established during the Obama Administration doled out $7,500 to buyers of any new electric car, so long as its manufacturer hadn’t yet sold more than 200,000 plug-in vehicles.
The new and “improved” program is more targeted and thus has many more moving parts. Vehicles now must be assembled in North America to qualify. The IRA removed the sales cap while slapping new limits on household income and vehicle price. To beef up domestic vehicle and battery production, it introduced restrictions on where a car’s battery minerals and components can come from.
We’ll keep you posted about how the FOEC rule will change things in the coming weeks and months. Right now, the EV tax credit seems confusing and restrictive, but it’s important to remember it’s still in its early days and many more models should gain eligibility in coming years.
At the same time, losing tax credits could have a big impact on EV sales in 2024, right at a time when demand for them is proving to be uneven. And it could put a damper on some sales where buyers were anticipating getting the tax credit at the point of sale, when they bought the car, and not after they filed their taxes later on. Just know that when you see a car lose part of its credit or get kicked off the approved list altogether, those tightening requirements are likely the culprit.
“We knew when this law went into place that there was going to be this two-to-three-year adjustment period for the industry in terms of adjusting their supply chains to qualify for these tax credits,” Chris Harto, a senior transportation and energy policy analyst at Consumer Reports, told InsideEVs. “I really see 2025, 2026, as a potential boom time for EVs.”
Additional reporting from Patrick George
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