Why Do Fewer EVs and PHEVs Qualify for the Federal Tax Credit?
After the passage of the Inflation Reduction Act of 2022, the IRS published updated eligibility rules and requirements for those looking to claim a tax credit with the purchase of a new EV after January 1, 2023.
Unfortunately for potential EV buyers in the US, the number of EVs that are eligible for the federal tax credit has decreased. We examine the details of the IRS updates to the new clean vehicle tax credit in the US to see what has changed and which vehicles still qualify for it in 2023.
EV Federal Tax Credit Requirements Changed in 2023
When we reported onevery electric vehicle that qualifies for a tax creditin 2023, 13 automakers with 37 models met the criteria to be eligible for the full $7,500 credit. They are either fully electric vehicles or plug-in hybrids.
By adopting the Inflation Reduction Act, lawmakers aimed to encourage car manufacturers to build batteries using domestic supply chains. These rules apply to the sourcing of car battery components and critical minerals. Upon adoption, several vehicles became completely ineligible for the EV tax credit, while others only qualified for the partial credit now.
Initially, the IRS only required vehicles to be assembled in North America to be eligible for the new clean vehicle tax credit. Then, requirements for minimum battery sizes and price caps were also added for vehicles to qualify.
The IRS added the following requirements related to manufacturing and material sourcing that automakers must meet in order for EVs to qualify for the full or partial clean vehicle tax credit amount:
EVs can also qualify if their battery packs are made out of materials recycled in North America.
Automakers that don’t build their EVs in North America or those that don’t have enough domestic or partner country-supplied components in their vehicles have become ineligible for the new clean vehicle tax credit. Should either of these conditions change, however, the IRS can reassess a vehicle’s suitability.
Vehicles That No Longer Meet Tax Credit Requirements
Foreign automakers may not be so fond of these rule changes. For example, Volkswagen and Audi, still in a fragile state post-Dieselgate, may find that this rule change will negatively impact their ambitious EV sales plans if they are unable to meet the new battery component requirements.
EVs from many automakers no longer qualify for the federal tax credit in 2023, although plug-in hybrid vehicles from these same brands may still be eligible. The automakers are:
EVs and PHEVs That Qualify for a Partial EV Tax Credit
While domestic automakers like Ford, General Motors, Stellantis, and Tesla stand to benefit most from these IRS rule updates, several American-made models had the amount of credit they qualify for cut in half, so they get $3,750. This includes the following EV and PHEV models:
If a manufacturer uses different suppliers or assembly locations for certain models, some vehicles may qualify while others may not, even if they come from the same automaker. These vehicles could still become eligible to receive the full tax credit in the future if manufacturers make changes to their battery component suppliers or if the US signs more free-trade agreements.
Partial EV Tax Credit Requirements
If an EV or PHEV does not qualify for the full $7,500 clean vehicle tax credit with the IRS, it may still be eligible for half of the credit, or up to $3,750.
Vehicles only need to meet one of the two new manufacturing and material sourcing requirements discussed above in order to qualify for the partial tax credit.
More EVs and PHEVs May Qualify for the Tax Credit in the Future
It is disappointing to see the number of vehicles that qualify for the new clean vehicle tax credit in the US drop. In a time of increasing EV sales and investments in EV production, more vehicles should be considered eligible for this tax credit rather than fewer.
However, all this seems temporary, as experts believe the list of eligible vehicles will grow again once automakers get properly adjusted to these new rules from the IRS. They will adapt by changing their battery pack supply chains and continue to apply for eligibility.
The EV federal tax credit doesn’t just get knocked off the price of your new EV, unfortunately. It’s a little more complicated.
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