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The Treasury Department on Friday proposed new rules to determine which electric vehicles are eligible for tax credits under new “critical minerals” and battery component requirements included in last year’s Inflation Mitigation Act.
While the Treasury Department has yet to say which vehicles will be eligible for the loans — it will do so on April 18 — we now know how the Department plans to figure out which EVs make the cut and which don’t.
The new rules, proposed by the Treasury Department on Friday, explain how to determine which electric vehicles meet requirements for critical minerals and battery components, each of which offers a $3,750 tax credit. An EV that qualifies for both—and meets the other requirements—is eligible for the full $7,500 credit.
Note that it’s up to automakers to calculate and tell the Internal Revenue Service which of their vehicles qualify.
The Inflation Reduction Act, signed into law by President Joe Biden last August, provides federal tax credits of up to $7,500 for electric vehicle buyers who meet a new list of requirements:
- Vehicle Price Caps. Cars priced over $55,000 and trucks, vans, and SUVs priced over $80,000 are not eligible for the tax credit.
- Manufactured in North America. Only EVs that are “finally assembled” in the US, Canada or Mexico are eligible for credit.
- Buyer Income Limits. If you are a single individual with a modified adjusted gross income of $150,000 or more, or a head of household with an income of more than $225,000, or a married couple with an income of more than $300,000, you are not eligible for the credit.
- Critical Minerals. To be eligible for credit in 2023, at least 40% of the critical minerals — including lithium, nickel, manganese, graphite, and cobalt — in vehicle batteries must have been extracted, processed, or recycled in the United States or in a country with which the USA has a free trade agreement. This percentage will increase to 50% in 2024, 60% in 2025, 70% in 2026 and 80% after 2026.
- battery components. To be eligible for credit in 2023, at least 50% of the value of the components in an electric vehicle battery must be manufactured or assembled in North America. This percentage will increase to 60% in 2024 and 2025, 70% in 2026, 80% in 2027 and 90% in 2028.
All of these rules were originally scheduled to come into effect in early 2023. But in December the Treasury Department said it would need until March to figure out how to implement the last two rules and would not go into effect until that was done. (Meanwhile, the IRS used the other rules to determine which vehicles were eligible for the tax credits.)
The critical minerals rule
For critical minerals, the Treasury proposed a three-step process to determine eligibility:
- Find out where the critical minerals in the batteries come from.
- Identify which minerals are considered critical minerals under the IRA.
- Calculate the percentage of minerals in the electric vehicle battery that are considered critical minerals.
Additionally, an EV containing critical minerals sourced from a “foreign company of concern” will be banned after 2025. (What does that mean? The Treasury said it will clarify in the future.)
The Treasury’s proposed rules state that the group of countries with eligible FTAs will change over time, but for now, qualifying countries include Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador , Guatemala, Honduras, Israel, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore and Japan.
The battery components rule
The Treasury proposed a four-step process for battery components:
- Identify which battery components were manufactured or assembled in North America.
- Find the incremental value of each component.
- Find the total value of all battery components.
- Do the math to find out what percentage of the battery’s components are worth considering.
Additionally, beginning in 2024, an EV containing battery components from a questionable foreign company will no longer qualify for the credit.
When will we know which electric vehicles qualify?
The Treasury Department said electric vehicles entering service on or after April 18 are subject to critical mineral and battery component requirements. Beginning with that date, it will post a list of eligible vehicles – as determined by automakers – at FuelEconomy.gov.
But it will likely remain a short list, at least for a while, as many battery minerals and components currently come from China.