Everything You Need to Know about the New Electric Vehicle Tax Credit

President Biden’s August 16th signing of the Inflation Reduction Act (IRA), a $739 billion tax, climate, healthcare, and energy law, is changing the landscape for Americans interested in buying an electric vehicle (EV). 

The law replaces a previous EV tax break with a new set of credits called the Clean Vehicle Credits, which are dependent upon where the vehicle is assembled and where key vehicle components are manufactured

Electric Vehicle Tax Credit Expansion

For EVs placed into service beginning January 1, 2023, the IRA extends the $7,500 tax credit for 10 years through December 31, 2032. The exact amount of the credit will be based on a calculation that considers factors such as the vehicle’s sourcing and assembly.

Additionally, used EVs will finally receive a separate tax credit. To qualify, the used EV must be at least two years old and not being purchased for resale. The eligible credit will be the lesser of $4,000 or 30% of the used EV price.

A couple other noteworthy changes include:

  • Other eligible “clean vehicles” – hydrogen fuel cell vehicles, plug-in hybrids with four to seven kilowatt hours of battery capacity and commercial clean vehicles
  • Beginning in 2024, consumers have the option to take the EV credit as a discount at the time of purchase vs. waiting until tax time to receive the credit benefit

So what about the rest of 2022?

What if you have a written, binding sales contract for an EV, but have not received the vehicle yet?

The IRA includes a “transition rule” by which any customer who entered into a “written binding contract for purchase” of a new EV before August 16, 2022 (the date the law was in effect), may choose to take the old tax credit and conform to the old rules, even if the vehicle is delivered after the January 1, 2023.  Customer reservations are not explicitly covered in the bill’s language, but 5% deposits and signed contracts are.

For any consumer that enters an EV sales contract between August 16, 2022 and December 31, 2022, the credit eligibility is subject to the new North America assembly requirements, but the old 200,000 sold EV cap.

Once a manufacturer hits the 200,000-vehicle sold cap, the credit drops to 50% and eventually zero. Today General Motors and Tesla have reached the manufacturer cap and are not currently eligible for the Clean Vehicle Credit through December 31, 2022.

That means if you want to buy a new Chevy Bolt today, a US made EV, it will not qualify for the Clean Vehicle Credit. But if you wait until January 1, 2023, those old 200,000-vehicle limit rules will disappear, and you can once again qualify for the EV tax credit.

Steps and rules to consider today in determining eligiblity and maximizing your credit 

So now that you have the new Clean Vehicle Tax Credit background and you’re in the market for a new EV since August 16th; here are 4 steps to help determine your eligibility and maximize your credit.

1. Your income matters

Now that you’ve found that perfect EV, the last hurdle to obtain the Clean Vehicle credit is an income cap.  Beginning January 1, 2023, tax filers are eligible for the credit if their income is less than $150,000, for heads of households less than $225,000 and joint taxpayers if their combined income is less than $300,000.

2. EV assembly must be in North America

As of today (the list will continue to grow), there are 30+ Clean Vehicles assembled in North America which can be found here on the Department of Energy’s website.  If the EV is not listed, the assembly location can also be determined by typing in the VIN at the bottom of the website.

3. The 200,000-vehicle sales cap expires December 31, 2022

Some manufacturers that assemble vehicles in North America but have sold 200,000 units will be eligible for a reduced credit or no credit at all. Those EVs can also be seen on the Department of Energy’s website. The IRS has a list of qualified vehicles and credit amounts here sorted by manufacturer for EVs purchased and delivered before December 31, 2022.  The 200,000-vehicle sales cap will be removed beginning January 1, 2023.

4. The EV final purchase price matters beginning January 1, 2023

New battery electric cars that cost more than $55,000 do not qualify for the Clean Vehicle tax credit. New electric SUVS, vans and pickup trucks that cost more than $80,000 are ineligible.  And no, there is not inflation adjustment for future years and final vehicle price matters (so all add-on packages impact eligibility).

Complicated enough?

Added battery manufacturing complexities to 2024 and beyond – 2 additional steps

There is an important nugget on page 366 of the IRA that adds battery component requirements beginning January 1, 2024 that is already giving auto manufacturers headaches.

Under the new rules, EVs with battery components sourced from “foreign entities of concern,” like China (where most battery parts and minerals come from), will no longer qualify for the tax credit if they are placed in service after January 1, 2024.  If the battery only contains minerals from these countries and no other parts, the vehicle will become ineligible beginning January 1, 2025.

What are the battery requirements in the Clean Vehicle Tax Credits?  And how can it limit my $7,500 credit?

EVs that go to market by January 1, 2024 must exceed 40% battery components assembled in North America threshold. EVs that come to market during 2024 must exceed 50%. And it goes up from there:

  • 60% for EVs that go on sale in 2025
  • 70% for EVs that go on sale in 2026
  • 80% for EVs that go on sale in 2027 - 2028
  • 100% for EVs that go on sale in 2029

Let’s break this down. It’s 2024 and you’re buying an EV that is assembled in North America. If 41% of its battery components are assembled in the region as wellyou have met half of the EV tax credit criteria and will be eligible for $3,750.

Let’s review the raw materials criteria for the other half of the credit.

Where do the battery materials come from?

Just like battery component assembly, the law tackles the problematic issue of where the raw materials used in the battery come from.

After 2024, any vehicle with “critical minerals” that were extracted, processed, or recycled in a “foreign entity of concern,” will not qualify for the other half of the EV tax credit, so $3,750.

That same year, the law has a percentage requirement for where these critical minerals come from. In short, a certain percentage of critical minerals must be extracted or processed in countries with which the U.S. has a free trade agreement.

The percentage requirement can also be met if they have been recycled in North America. That recycling part is going to become even more important as these percentages increase, and perhaps big business for startup battery recycling companies. 

The percentage requirements:

  • 40% of critical minerals through end of 2023
  • 50% in 2024
  • 60% in 2025
  • 70% in 2026
  • 80% after 2026
So what is a critical mineral, anyway?

The law has a long list of critical minerals including lithium, graphite, cobalt, nickel, and manganese.

Final food for thought

According to the Alliance for Automotive Innovation, there are currently 72 EV models available for purchase in the US. 

Of these models, only 22 qualify under the new Clean Vehicle tax credit rules. By 2029, when the additional sourcing restrictions go into effect, no EVs today would qualify for the full credit. As you can imagine, the pressure will continue to mount for automakers to curb reliance on “foreign entities of concern” and pave a path forward to a battery powered future.

Schneider Downs Automotive Services Group will continue to monitor guidance relative to the new Clean Vehicle Tax Credit. Detailed guidance on the credit is expected to be issued before year-end. In the meantime, feel free to reach out to any of our Schneider Downs Auto Advisors at [email protected] for accounting, tax, technology, and business advisory needs.

About Schneider Downs Automotive Industry Group

The Schneider Downs Automotive industry group serves dealers of all sizes, from single-point locations to mega-dealerships. Our members cross departments and meet regularly to ensure efficiencies in the services provided to our clients and discuss issues, regulations and trends affecting the automotive industry. 

To learn more, visit our Automotive Industry Group page. 

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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