The Inflation Reduction Act of 2022 was signed into law on August 16, and part of the act brings a plethora of revisions to the Qualified Plug-in Electric Drive Motor Vehicle Credit, which is now called the Clean Vehicle Credit. Both names are a fancy way of describing the well-known federal tax credits for electric vehicles. Some of these new changes are unequivocally good, but many of them may actually leave EV buyers high and dry, in part because certain elements of the old tax credit program were instantly voided.
If you’re an EV reservation holder waiting for your car to be delivered or a consumer considering purchasing an EV, what do you do? Do you still qualify for the tax credit? Can you still afford the car? Should you get out of line? It’s a confusing time, but we’re here to help.
What Changed with the EV Tax Credit and Why Did It Change?
Under the old scheme, any plug-in vehicle with a battery size of more than five kWh was eligible for a tax credit up to $7,500, depending on battery size. As we’ve explained before, the tax credit had its flaws; it was a credit, meaning it wasn’t available to people until they filed their taxes, and depending on income and tax liability, it might not always be available to every EV buyer. There was also a 200,000 total sales cap for each manufacturer, which meant longtime sellers like Tesla, General Motors and more recently, Toyota weren’t eligible for tax credits anymore. These guidelines have now been changed.
One of the major focuses of the Inflation Reduction Act is addressing climate issues, and it changed a lot of qualifications, methodology, and limits of the EV tax credit scheme that is supposed to encourage people to buy electric. In theory, the bill stands to encourage EV supply chain growth and reduce dependence on foreign countries. Now, the new EV tax credits are targeted and designed to reward companies that assemble cars and battery technology in North America.
What Is the New Tax Credit?
With the new tax credit, eligibility for the $7,500 has been split in half, with each 50% of the tax credit needing specific qualifications. Both halves are tied to battery manufacturing, and vehicles made outside of North America aren’t eligible. Here’s a quick breakdown of the major points:
- $3,750 of the credit eligibility is based on battery manufacturing content. For 2023, EV batteries must have at least 40% of battery parts and materials sourced and made in a country the U.S. has “free trade” with. This percentage ratchets up 10% each year, reaching 100% by 2029.
- $3,750 of the credit eligibility is based on the battery’s assembly location. It must be made in North America.
- The 200,000 unit cap has been removed, which allows Tesla and GM vehicles to be eligible for EV tax credits once again. They previously had reached that cap and thus no longer qualified for credits.
- The tax credit can now be applied at the point of sale.
- Sedans more expensive than $55,000, and SUVs and Trucks more expensive than $80,000 are not eligible for the credit.
The changes from the new laws will be implemented in two tiers. Although the full effect won’t go in place until Jan. 1, 2023, the made-in-North-America eligibility caveat went into effect immediately. With this change, a ton of cars became ineligible for the tax credits, literally overnight. That’s where things get confusing.
Until that deadline next year, some aspects of the current tax credit scheme stay in effect. The Internal Revenue Service has declared a transitional period, but the transition period makes things a bit complicated, particularly for people who have been and currently are shopping for cars.
The Official Word From the IRS
The full IRS transition rule can be found here, but we’ll distill the big parts down to a manageable size for you.
When the bill was signed, the made-in-North America clause automatically stripped any EV made outside of North America of its eligibility for tax credits. The ruling was abrupt, so some reservation holders and those waiting for their EVs to arrive from the factory may have unknowingly become ineligible for a credit they thought they qualified for.
The IRS says that EV buyers awaiting a vehicle who entered into a binding purchase contract would be grandfathered into the old tax credit scheme. According to the IRS, “if a customer has made a significant non-refundable deposit or down payment, it is an indication of a binding contract.” This definition is massively important because many customers have put down orders and deposits long before their new EVs were ever produced.
For Vehicles Purchased Before August 16, 2022
From the IRS: “If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022 (for example, because the vehicle has not been delivered), you may claim the EV credit based on the rules that were in effect before August 16, 2022. The final assembly requirement does not apply before August 16, 2022.”
Vehicles Purchased and Delivered Between August 16, 2022, and December 31, 2022
More from the feds: “If you purchase and take possession of a qualifying electric vehicle after August 16, 2022, and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold). If you entered into a written binding contract to purchase a new qualifying vehicle before August 16, 2022, see the rule above.”
Why We Still Have Issues
The transitional period and made-in-North America clause leave a huge group of EV buyers in a tough situation. If you didn't enter into a purchase agreement by August 16, any non-U.S.-made EV just won't qualify for a tax credit, period. Cars like the Kia EV6 and Hyundai Ioniq 5 aren’t eligible for the $7,500 credit anymore.
The world is still recovering from the damage COVID-19 and its after-effects wreaked on the supply chain and the manufacturing ability of virtually every industry. That means there are plenty of customers who ordered EVs months ago and put down refundable deposits with anticipation that they’d likely receive their car later this year.
For example, this forum poster on the Hyundai Ioniq 5 forum claimed to have ordered a car in late February, with a September 1 delivery date. Unless he entered into a binding contract with Hyundai or at the dealer, his purchase no longer qualifies for the tax credit. There was no way that he could have known this in February, nor would Hyundai have been able to ship the car any faster.
To make things worse, the run-up from the bill’s finalization to becoming law was short, only about two weeks, with the transitional language and “purchase agreement” language only being finalized around August 7, when the bill passed the House of Representatives. That gave automakers a very small window to draft binding purchase agreements, and then convince reservation holders to convert their refundable deposits to non-refundable deposits. Some dealers may have done non-refundable deposits from the start, but not all. It was a free-for-all, with dealers, EV buyers, and automakers all trying to figure out which way is up.
Statements From Automakers
Understandably, automakers are trying to help their customers navigate through this weird time. Some manufacturers issued statements, while we reached out for comment from the rest. Certain brands have yet to respond or issue a statement, but we’ll update the list as the new information comes in.
Audi: “We are committed to helping the U.S. meet its climate change goals and those embodied in the Paris Climate Agreement,” an Audi representative said. “While this legislation doesn’t change our vision for a more electrified and sustainable future, it does remove the federal tax credit on most of our BEVs. We have and will remain closely engaged with the U.S. government and other stakeholders as we work through interpretation and implementation.
BMW: We have reached out for comment. No response yet.
Canoo: We have reached out for comment. No response yet.
Hyundai: “Hyundai has recently announced U.S. investments of $10B including EV manufacturing in Alabama and Georgia. We are disappointed that the current legislation severely limits EV access and options for Americans and may dramatically slow the transition to sustainable mobility in this market,” a Hyundai representative said in an email.
Scanning the Hyundai Ioniq forums showed that some dealerships may have required a non-refundable deposit to place an Ioniq 5 order, which would be considered a purchase agreement. However, many did not. The Ioniq 5 and Kona Electric no longer qualify for any incentives.
Jaguar: We have reached out for comment. No response yet.
Kia: “Our recommendation would be for potential Kia EV drivers to contact their local dealers for updates on ordering and upcoming inventory/availability,” a Kia representative said via email. Also, the representative linked us to a blog post from the Alliance for Automotive Innovation. That post criticizes the bill, and outlines the potential for EV adoption to slow because of its implementation. The Kia EV6, Niro PHEV, and Niro EV no longer qualify for EV tax credits.
Mazda: Mazda informed us that it has sold all of its available MX-30 EV crossovers before August 16. The 2023 Mazda MX-30 no longer qualifies for the tax credit, though.
Mercedes-Benz: “For sales occurring between now and December 31, 2022 the Tuscaloosa, Alabama-built Mercedes-EQS SUV – which we expect to launch shortly - will qualify for the tax credit. Independent of this legislation, Mercedes-Benz is fully committed to an electric future. With our expansive portfolio of electric vehicles and the best dealer network in the industry, we will jointly make the transition a reality,” said a representative from Mercedes-Benz.
Mini: The Mini Cooper SE no longer qualifies for the tax credit, but the Mini representative did explain that customers who made purchase agreements on or before August 16th would be grandfathered into the old scheme.
Nissan: The Nissan Leaf is made in Tennessee and should remain unaffected by the revised tax credit rules. The Nissan Ariya, however, is made in Japan, and deliveries weren’t set to begin until fall 2022. We asked Nissan about Ariya reservation holders, and a representative sent us this:
"We value our customers who reserved an all-new, all-electric 2023 Nissan Ariya crossover during our reservation period. On Friday, August 12 we sent reservation holders a special communication offering the opportunity to enter into an agreement to purchase an Ariya from an authorized Nissan dealer of their choosing when vehicles are available to best position them to claim eligibility for any federal EV tax credits that may otherwise be available to them under current law. This offer, which was popular for Nissan Ariya reservation holders, was active until the President signed the bill on Tuesday, August 16. Nissan cannot guarantee the availability of any EV tax credit and recommends that customers consult with their tax advisor concerning eligibility for any credit.”
Polestar: “Polestar has immediately restructured the Polestar 2 offer to remain competitive in the U.S.A., and we will continue to adapt to the market as additional information emerges,” a Polestar representative said in an email. Polestar required a refundable deposit to earmark a unit, which would not be considered a binding purchase agreement. Polestar has sent out messaging to reservation holders saying it understands if some were reliant on the tax credit, and it will refund reservation holdings.
Porsche: “With respect to customers who placed vehicles on order and are still awaiting delivery, their credit eligibility depends on the individual sales agreement, which is a matter between them and their independently owned and operated Porsche dealership,” a Porsche representative said. “For leases of eligible Porsche vehicles with Porsche Financial Services, the credit will no longer be available as a pass-through credit on or after the enactment date of the legislation.”
Subaru: We have reached out for comment. No response yet.
Toyota: The hybrid Prius Prime and electric BZ4X no longer qualify for government EV tax credits. Toyota says that it remains, “committed to an electrified future and making the case to policymakers about the best way to make electric vehicles more affordable and accessible to consumers, including our U.S. investments in battery production.”
VinFast: VinFast is giving $7,500 to current reservation holders if they no longer qualify for the IRS tax credit.
Volkswagen: Volkswagen might be affected by the ruling in the strangest way. Currently, all Volkswagen ID.4s on dealer lots have been manufactured in Germany, which makes them ineligible for the tax credit if purchased after August 16, and not part of a purchase agreement made before August 16. But, Volkswagen’s Chattanooga, Tennesse, plant recently started producing ID.4’s for the U.S. market in late July. The cars are not expected to reach dealer lots until at least October, meaning there is a handful of VW ID.4s on lots that are ineligible for the tax credit. We reached out to Volkswagen for comment but haven’t received any response yet.
Volvo: "In the short term, we anticipate the S60 Recharge, assembled in our Charleston facility, will be the only vehicle qualified for the new incentive program. In 2023 and onwards additional provisions are added so the Volvo Car USA team is working with government officials and hopes the legislation’s language will be clarified so the intent of the bill is fully realized to accelerate the adoption of electric vehicles in the United States," a Volvo representative said via email.
Rivian, Fisker, and Lucid: All three brands offered reservation holders the opportunity to turn their reservations into binding purchase agreements. If you didn’t for Rivian and Lucid, any car ordered after August 16 and delivered on or before December 31, 2022, would still qualify for the tax credit. However, given Lucid and Rivian’s issues with fulfilling orders, that is very unlikely to be possible.
GM, Ford, and Tesla: These companies' EVs are all made in North America and will remain eligible for the tax credit, provided the models meet the battery content requirements and fall below the price ceilings for each EV category.
What Do I Do?
Unfortunately, there is no cheat code or loophole. If you didn’t enter into a purchase agreement for an EV that was not built in North America, you can’t get a tax credit. This means that cars like the Kia EV6, Hyundai Ioniq 5, Polestar 2, and many more have become a lot more expensive.
If you’re a reservation holder awaiting your car and didn’t make a purchase agreement, these are your two options:
- Stay in line and eat the cost. Remember, the $7,500 tax credit is only applied when you file your taxes under the old scheme. The old scheme had plenty of holes, and at the end of the day, any financing numbers would be based on the full-fat price. If you’re a Lucid or Rivian reservation holder, your car will still qualify for the old tax credit without a purchase agreement, so long as it’s delivered before January 1, 2023.
- Get out of line and buy a North-American-made EV. This is easier said than done. Currently, only around 20 different models qualify for the new tax credit. Of those 20 models, many of them have deep, deep backlogs, if their order books are still open (some brands have halted orders or announced that cars are sold out due to supply issues). Stepping out of line may translate to waiting weeks or months to receive a new EV for a potentially discounted price. Considering the price changes among vehicles like the Ford F-150 Lightning, or any Tesla, it might not be worth it.
Similarly, if you’re still in the browsing stage, an EV ineligible for a tax credit may have a shorter waiting time than one with a tax credit available. Is the promise of credit up to $7,500 worth waiting for?
The new EV Tax credit puts EV buyers and automakers alike between a rock and a hard place. Cheaper EVs are coming, many of them made in North America, but until then, things are going to be expensive and rocky territory for EV buyers.
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