Tougher EV tax credit rules: What they mean for buyers

The Treasury Department on Friday finally issued guidance on the battery production and minerals sourcing requirements for federal EV tax credits for consumers, though the rules may create more chaos than clarity.

The guidance was originally scheduled to be released in January, but more input was needed by stakeholders like automakers and suppliers for the scheduled rollout of requirements, which the industry has said are onerous for a nascent EV industry.

“Today, Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas, while creating American manufacturing jobs and strengthening our energy and national security,” Treasury Secretary Janet Yellen said in a statement.

Congress split the $7,500 EV tax credit into battery specific eligibility requirements for full EV, plug-in electric hybrid, and even fuel cell vehicles.

First, 40% of the critical minerals in the battery must be extracted or processed in the U.S. – or in a country with a U.S. free trade agreement. This credit is worth $3,750, or half the tax credit total.

Second, 50% of the battery components as a percentage of value must be made in North America, which is the remaining $3,750 of the tax credit.

Note that both of these percentages ramp up considerably over the next few years — hitting 80% for the critical minerals (by 2027) part and 100% for the component manufacturing (by 2029) piece of the legislation. If a vehicle passes both parts of the battery eligibility requirements, the vehicle will receive the full tax credit (this assumes the other criteria like North American vehicle assembly, MSRP, and income requirements are met).

It sounds simple, but here comes the hard part of figuring out which cars now qualify for the revised tax credit.

“I don’t know. It’s not a question that can be answered today,” says John Bozzella, president and CEO of automaker trade group the Alliance for Automotive Innovation on which EVs are eligible. “Automakers will report directly to the IRS which EV models (effective April 18) meet the critical mineral and/or battery component requirements.”

That April 18th date is important as it means the current tax credit regime is in place (meaning the battery and mineral requirements don’t kick in until that date).

Bozzella says there are 91 EV models currently for sale in the U.S., and after April 18 some vehicles will qualify for a partial credit. “Treasury’s done as well as it could to produce rules that meet the statute and reflect the current market,” Bozzella said.

The rules are still evolving however, when it comes to minerals and processing. For instance, the U.S. and allies including Japan and the E.U. are in discussions to be added to free trade agreements for minerals sourcing, which would be a positive for government objectives to reduce exposure to China-based sources.

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Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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