The Inflation Reduction Act of 2022 (IRA), introduced in mid-2022, completely changed the federal tax credit in the United States. Today, we will take a look at this important incentive and which models qualify for it.
Requirements
The federal tax credit is a pretty significant incentive – of up to $7,500 for new plug-in electric cars that fully comply with the requirements.
Initially (mid-2022), the main requirement was that an electric vehicle must be produced in the US, Canada or Mexico.
After April 18, 2023, those requirements were expanded and quite tough. Moreover, with each following year, they are set to be tougher.
As of June 2023, the requirements include:
- Final assembly in North America: US, Canada or Mexico
- MSRP limit:
- SUVs, vans, pick-up trucks: $80,000
- Other Vehicles (cars): $55,000
- Income limits for different tax statuses:
- Single: $150,000
- Head of HH: $225,000
- Filing jointly: $300,000
- Battery requirements:
- Critical minerals ($3,750): 40% of the value of critical minerals need to be mined or processed in the United States (or FTA countries), or recycled in North America
(conditions have been relaxed to include Japan) - Battery components ($3,750): 50% of the value of battery components must be manufactured or assembled in North America
- Critical minerals ($3,750): 40% of the value of critical minerals need to be mined or processed in the United States (or FTA countries), or recycled in North America
- at least 7-kilowatt-hour (kWh) battery
- gross vehicle weight rating of less than 14,000 pounds (6,350 kilograms)
One of the best presentations of the requirements was included in the Fact Sheet IRA EV Tax Credits, released by Electrification Coalition and SAFE:
As we can see, the models that fully comply with the requirements are eligible for up to $7,500. Meeting just one of the battery-related requirements (critical minerals or components) will reduce the incentive to $3,750.
The available maximum tax credit, depending on meeting the critical mineral and battery component requirements:
- EVs that meet both requirements: $7,500
- EVs that meet only one requirement: $3,750
- EVs that do not meet requirements: $0
Starting in 2024, the federal tax credit will be significantly improved, because it will become a rebate (at the point of purchase).
Eligible BEV Models
In terms of manufacturers, so far only five of them were confirmed to qualify for the incentive: General Motors (Chevrolet and Cadillac), Ford, Rivian, Tesla, and Volkswagen.
The list of models, which can get either up to $3,750 or $7,500 changes from time to time and as of Jun 3, 2023 includes:
Interestingly, some of the all-electric cars that are locally produced are no longer eligible for the federal tax credit incentive.
A prime example of that is the Nissan Leaf, which lost its eligibility on April 18, 2023. This is an especially interesting case because the Leaf is also equipped with locally produced lithium-ion battery cells. We guess that it missed the battery-related requirements a bit.
Another example is the Genesis Electrified GV70, which entered production in Montgomery, Alabama in February. As we understand, its battery components are currently sourced from South Korea, which after April 18, 2023, means no incentive. Otherwise, it would be very competitive with the imported Genesis GV60 model.
Eligible PHEV Models
In the case of the plug-in hybrid car models, the list is even shorter, because there are three manufacturers (BMW, Stellantis – Chrysler/Jeep brands, and Ford – Ford/Lincoln brands).
Lease To Get $7,500 Incentive
One of the most important and also quite surprising things is that in the case of leasing, customers still can benefit from the full $7,500 federal tax credit, even if a particular model does not comply with the requirements outlined above (or if a customer is not eligible).
We saw many reports that lease rates might be lowered when deducting the incentive on the manufacturer/dealer level (passing them through the lease). To reduce monthly interest/taxes, customers can also buy out the car early.
The reason for that are two separate sections of the law:
- 30D section for individual purchase (includes all requirements)
- 45W section for commercial credits (does not include the requirements outlined above)
According to IRS’ December interpretation (via City Dwellers), businesses that lease vehicles are allowed to claim the commercial EV tax credit for each leased vehicle, which opens a way to pass the full $7,500 federal tax credit up to customers.
An example of the EV tax credit loophole was described in April for Hyundai and in May for Tesla. There were also reports about attractive lease deals from various models, including Kia EV6, Hyundai Ioniq 5/Ioniq 6, and Tesla Model 3. We believe that this solution might work with any brand and most are probably already offering attractive deals already.
