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The US government is hellbent on getting electric car manufacturers to build their cars with materials and components that do not originate in China or get processed by Chinese companies. Since China dominates just about every segment of the electric car supply chain, that means companies must scramble to find other sources. Building a supply chain takes time, which means there will be a lag between when the regulations take effect and when supplies become available.
Rules and regulations are a thorny thicket of densely packed legalese. When it comes to electric car federal incentives under the Inflation Reduction Act, certain requirements have been put in place previously. To be eligible, final assembly must take place in the US, Mexico, or Canada. The maximum sales price for sedans is $55,000 and for SUVs and light duty trucks is $80,000. The buyer must meet certain income limits. Those rules will remain in force on January 1, 2024.
Electric Car Tax Credit Changes Coming
But the regulations regarding battery materials and components will change as of New Year’s Day. Here is the gist of the latest guidance from the Treasury Department. To decode the text, FEOC means a “foreign entity of concern,” i.e. China.
“To strengthen the security of America’s supply chains, beginning in 2024, an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC, and, beginning in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a FEOC. In conjunction with today’s Treasury NPRM, the Department of Energy has released proposed guidance defining what entities are a FEOC.”
Next, the Treasury announcement delves into what is known as a Notice of Proposed Rule Making, known as a NRPM. Yes, we know the initials are in the wrong order, but this is the federal government we are talking about here. Work with us.
“The NPRM provides proposed rules to determine whether applicable critical minerals (and their associated constituent materials) and battery components are manufactured or assembled by a FEOC for battery components, and extracted, processed, or recycled by a FEOC for critical minerals. The proposed rules would require manufacturers to conduct due diligence that complies with industry standards of tracing for battery materials.
“Under the proposal, FEOC-compliance for battery components would be determined at the time of manufacture or assembly, and FEOC-compliance for critical minerals would be determined by reviewing all phases of applicable critical mineral extraction, processing, and recycling. For example, a mineral extracted by an entity that is not a FEOC but processed by an entity that is a FEOC would not be compliant. Compliant battery components would have to be tracked to FEOC-compliant battery cells, and cells could not be manufactured or assembled by a FEOC.”
After a lot of other dense verbiage, the guidance from the Treasury gets to the crux of the matter:
BATTERY COMPONENT REQUIREMENT
To meet the battery component requirement and be eligible for a $3,750 credit, the applicable percentage of the value of the battery components must be manufactured or assembled in North America
- For 2023, the applicable percentage is 50 percent.
- For 2024 and 2025, the applicable percentage is 60 percent.
- For 2026, the applicable percentage is 70 percent.
- For 2027, the applicable percentage is 80 percent.
- For 2028, the applicable percentage is 90 percent.
- Beginning in 2029, the applicable percentage is 100 percent.
CRITICAL MINERAL REQUIREMENT
To meet the critical mineral requirement and be eligible for a $3,750 credit, the applicable percentage of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which the United States has a free trade agreement or be recycled in North America—as mandated by the Inflation Reduction Act.
- For 2023, the applicable percentage is 40 percent.
- For 2024, the applicable percentage is 50 percent.
- For 2025, the applicable percentage is 60 percent.
- For 2026, the applicable percentage is 70 percent.
- Beginning in 2027, the applicable percentage is 80 percent.
Beginning in 2024, an eligible clean vehicle may not contain any battery components that are manufactured by a foreign entity of concern and beginning in 2025 an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.
| Clean Vehicle Credit Requirement | 2024 (To receive $7,500) |
2025
(To receive $7,500) |
|---|---|---|
| Foreign Entity of Concern (Battery Component) | YES | YES |
| Foreign Entity of Concern (Critical Minerals) | NO | YES |
| Battery Component Percentage | 60% | 60% |
| Critical Minerals Percentage | 50% | 60% |
Ten Electric Car Models Are Eligible As Of January 1, 2024
If the purpose of the Inflation Reduction Act was to encourage people to buy an electric car, that welter of rules and regulations seems to be counterproductive, to say the least. Boil it all down and The Street says only ten EVs will qualify for the full $7500 benefit starting next year. Oddly, one is going out of production soon and several others are not yet in production but might be before the new year is through.
Here’s the list:
- Chevrolet Bolt EV – $26,500
- Chevrolet Equinox EV – $48,995
- Ford F-150 Lightning – $49,995
- Tesla Model 3 Performance – $50,990
- Chevrolet Silverado – $51,895
- Tesla Model Y Performance – $52,490
- Chrysler Pacifica PHEV – $53,425
- Chevrolet Blazer EV – $60,215
- Cadillac LYRIQ – $58,590
- Tesla Model X – $79,990
What About Partial Electric Car Tax Credit?
What The Street failed to mention is that there are several electric car models that will be eligible for half of the federal tax credit. Consumer Reports offers this list, which we know is not all inclusive since it omits the Tesla Model 3 and Model Y non-performance models, both of which we think will remain eligible for a $3750 credit.
- BMW X5 xDrive50e PHEV
- Ford Escape PHEV
- Ford E-Transit
- Ford Mustang Mach-E*
- Jeep Wrangler 4xe PHEV
- Jeep Grand Cherokee 4xe PHEV
- Lincoln Corsair Grand Touring PHEV
- Nissan LEAF
- Rivian R1S
- Rivian R1T
*Eligibiilty for the Mach-E is unclear at this time. Last week,Ford sent out a notice to dealers stating that it is “unlikely that any Mustang Mach-Es will qualify for the Federal Tax Credit beginning on 1/1/24,” according to a report by Cars Direct.
CR also says the following cars will lose their eligibility for any tax credits:
- Audi Q5 TFSI e Quattro PHEV
- BMW 330e sedan
- BMW X5 xDrive45e SUV
- Genesis GV70 Electrified SUV
- Volvo S60 PHEV, Extended Range, and T8 Recharge
I did my due diligence for the Volkswagen ID.4, which is assembled in Chattanooga, Tennessee but the Google gods failed to answer my question completely. The ID.4 is eligible for the full $7500 tax credit today but will it be eligible come January 1? I was unable to get a definitive answer to that question, which leaves it up to readers to figure out with help from their local dealer, a tax lawyer, and a team of accountants. Good luck!
The Takeaway
Buyers hate uncertainty, but that’s what we will have plenty of come January 1, 2024. The rules and regulations are designed to make certain Americans are getting what those tax credits are paying for — an electric car built in America with a specific percentage of materials and components in the battery that conform to certain political requirements.
It’s a mess, people, and guaranteed to convince a lot of prospective electric car purchasers to either stick with their current ride or buy a conventional car instead. But there is good news. Consumer Reports says all those silly battery materials and components rules go away if you lease that shiny new electric car instead of buying it outright. This is the exception the Treasury Department added to the regulations earlier this year that made Joe Manchin’s head explode.
If you are buying a new electric car in 2024, good luck. We predict many dealers won’t know what the rules are, so getting straight answers may require a call to your accountant. It’s not the ideal situation but it’s what we have to deal with. So go shopping for that electric car you have always wanted and don’t take “maybe” for an answer!
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