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Here’s how the IRS’s clean vehicle tax credit will change on April 18

Increasing percentages of battery components and critical minerals must be local.

Jonathan M. Gitlin – | 80
18 May 2022, Lower Saxony, Salzgitter: An employee removes battery modules from a worn-out battery of an electric car in battery recycling at the VW plant in Salzgitter. Volkswagen is building a battery cell factory at its Salzgitter site for its planned large-scale production of the Group's own battery cells. New battery systems for electric cars are already being developed at the research and development center.
Until the beginning of this year, an EV's tax credit was determined by the storage capacity of its battery pack. Now, the tax credit is linked to local manufacturing of components and locally sourced critical minerals. Credit: Julian Stratenschulte/picture alliance via Getty Images
Until the beginning of this year, an EV's tax credit was determined by the storage capacity of its battery pack. Now, the tax credit is linked to local manufacturing of components and locally sourced critical minerals. Credit: Julian Stratenschulte/picture alliance via Getty Images
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It has been a confusing few months for potential electric vehicle customers after the introduction of complicated new rules for the clean vehicle tax credit at the beginning of the year. Now the rules are changing once again.

On Thursday, the Internal Revenue Service published a draft of new guidance for the $7,500 clean vehicle tax credit and said that starting on April 18, it will begin enforcing the domestic sourcing requirement for battery minerals and components. As a result, many new EVs may not qualify for the tax credit.

Tell me the rules again

As we’ve detailed before, the revised clean vehicle tax credit has quite a few conditions that must be satisfied in order for that vehicle to be eligible.

The battery pack must have a capacity of at least 7 kWh. The vehicle cannot have a gross vehicle weight of more than 14,000 lbs (6,350 kg). Plug-in hybrid and battery EVs must be built by qualified manufacturers, although that requirement doesn’t apply to a hydrogen fuel cell EV. The vehicle’s final assembly must be in North America. And there are income and price caps—$55,000 for a sedan and $80,000 for trucks, vans, and SUVs—as well.

But those requirements are not the end of the story—they are necessary but not sufficient for eligibility. $3,750 of the credit requires that a certain percentage of the value of the battery pack’s components must be manufactured or assembled in North America. For this year, that’s 50 percent, and it increases by 10 percent per year until 2029, when all the value of the battery components in a new EV must be manufactured or assembled in North America to qualify.

The IRS declined to enforce this condition when the new rules went into effect at the start of 2023 as it figured out how it would apply it—a move that angered US Senator Joe Manchin, who was responsible for writing the new tax credit rules in the Inflation Reduction Act of 2022. Yesterday, Senator Manchin vowed to sue the federal government if he was able to make them start applying these rules—one can imagine he is therefore pleased that the domestic content and value rules will be enforced starting on April 18 now that the IRS has written guidance.

Now, there’s a four-step process for determining the value of the battery’s components. First, identify all the components manufactured or assembled in North America. Then determine the incremental value of all battery pack components, including those made or assembled in North America. Next, determine the total incremental value of the battery components, and finally, divide the total value of all North American-sourced components by the total value of all the components to get a percentage.

In time, it should be increasingly easy for automakers to satisfy this requirement; over the past few months, we’ve seen new battery factories announced in Michigan, Kentucky, Tennessee, Ohio, South Carolina, and Indiana, with yet more in the works.

Where did you get that lithium from?

In order to qualify for the other half of the $7,500 tax credit, some of the critical minerals used in the battery pack must be extracted, processed, or recycled in the US or extracted or processed in a country with which the US has a free trade agreement. Again, the IRS initially declined to apply this requirement in January before it could come up with guidance; that changes on April 18.

Like the battery value rule, the percentage of domestically sourced minerals has to increase year on year for a vehicle to be eligible. In 2023, 50 percent of the critical minerals must meet this requirement, increasing by 10 percent per year until 2029, when all the critical minerals must satisfy the domestic rule.

There’s a multistep process to determine eligibility here as well, one that runs too many pages in the draft IRS guidance. First, the procurement chains for each mineral used in the battery pack has to be determined. Then, any qualifying critical minerals have to be identified, and finally, the amount of those critical minerals in the pack has to be calculated.

The IRS has also provided a list of which foreign countries have qualifying free trade agreements with the US for critical minerals. They are Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. And the US is in the midst of negotiating a similar agreement with the European Union.

Not made in China

And just in case that wasn’t complicated enough, there are also new rules on sourcing components from “foreign entities of concern.” Beginning in 2024, a vehicle will be ineligible for the clean vehicle tax credit if any battery components are manufactured by a foreign entity of concern, which includes any state-owned companies in China. And from 2025, no critical minerals can be extracted, processed, or recycled by a foreign entity of concern if a vehicle wants to meet eligibility.

“The proposed guidance continues to highlight the challenges ahead for US automakers’ electrification efforts and consumers’ adoption of clean vehicles,” said Autos Drive America President and CEO Jennifer Safavian. “The number of vehicles eligible for even a partial tax credit has been significantly reduced, slowing adoption of electric vehicles, under the new rules. Autos Drive America members are committed to an electrified future for our customers and look forward to continuing to collaborate with Treasury as the guidance is finalized.”

How many EVs will still qualify for any or all of the tax credit remains unknown until at least April 18, when a list of eligible clean vehicles will be listed at fueleconomy.gov, the US Environmental Protection Agency’s consumer-facing site for vehicle efficiency and emissions. That will require automakers to provide that info to the EPA, but given the importance of subsidies in driving EV sales, those companies should be highly motivated to do so quickly.

John Bozzella, president and CEO of the Alliance for Automotive Innovation, thinks that few of the 90+ EVs currently on sale will still be eligible next month. “Some EVs will certainly qualify for a partial credit. Given the constraints of the legislation, Treasury’s done as well as it could to produce rules that meet the statute and reflect the current market,” he said.

Listing image: Julian Stratenschulte/picture alliance via Getty Images

Photo of Jonathan M. Gitlin
Jonathan M. Gitlin Automotive Editor
Jonathan is the Automotive Editor at Ars Technica. He has a BSc and PhD in Pharmacology. In 2014 he decided to indulge his lifelong passion for the car by leaving the National Human Genome Research Institute and launching Ars Technica's automotive coverage. He lives in Washington, DC.
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