EV tax credit sourcing rules to take effect in April, officials say

WASHINGTON — Battery component and critical mineral sourcing requirements in the Inflation Reduction Act's consumer tax credit for new electric vehicles will take effect in April, the U.S. Treasury Department said Friday.

Treasury released its much-anticipated proposed guidance on the EV battery sourcing rules that are designed to incentivize domestic production and reduce reliance on foreign supply chains. Those eligibility requirements will go into effect for EVs placed in service — meaning the date the customer takes delivery of the vehicle — on or after April 18, the department said.

The consumer tax credit for new EVs, known as 30D, is available only for North American-assembled vehicles that also meet eligibility restrictions on sticker price and buyer income.

Among highlights of the guidance, intended to bring "clarity and certainty to manufacturers":

• Criteria identifying which nations that produce critical minerals have free-trade agreements with the U.S. Those criteria are not currently codified by law.
• A three-step process for determining the percentage of the value of the critical minerals in a battery.
• A four-step process for determining the value of the battery components manufactured or assembled in North America.
• A list of qualifying vehicles and the credit amount each may receive at fueleconomy.gov on April 18.

Starting April 18, the $7,500 tax credit will be parceled out in two halves for qualifying vehicles and buyers. Half is based on meeting escalating requirements for battery components to come from North America. The other half is based on critical minerals coming from the U.S. or its free-trade partners.

More specifically, the credit will require 40 percent of the value of a battery's critical minerals to be extracted or processed in the U.S. or in a country where the U.S. has a free-trade agreement in effect, or from materials that were recycled in North America. By 2027 — the last year of annual increases — it will require 80 percent.

It also will require 50 percent of the value of battery components to be made or assembled in North America. By 2029 — the last year of increases for this part of the credit — it will require 100 percent.

Starting in 2024, vehicles are ineligible if they contain any battery components that are manufactured by a "foreign entity of concern," which could include companies controlled by China. That exclusion starts in 2025 for critical minerals.

Treasury said it will issue additional guidance on the foreign entity of concern provision at a later date.

Newly negotiated critical mineral agreements will qualify, including the U.S.-Japan trade deal struck Tuesday on EV battery minerals, the department said. Other countries include Australia, Canada, Chile, Korea and Mexico.

U.S. officials also have been negotiating with the European Union on a battery critical minerals deal. European Commission Executive Vice President Margrethe Vestager on Thursday said she's "optimistic" a deal can be reached with the U.S.

Treasury missed its statutory year-end deadline in 2022 for issuing its proposed guidance on the tax credit's complex critical mineral and battery component requirements.

While the three-month delay allowed more EVs to qualify for a full $7,500 credit in the interim, the Alliance for Automotive Innovation said fewer vehicles will be eligible when the increasingly stringent sourcing rules are in effect.

"At this point, the credit shifts from a consumer incentive to a content requirement," John Bozzella, the group's CEO, said in a statement. "Given the percentages of those content requirements, it's likely fewer cars will qualify immediately for the full credit. And since companies will report directly to the IRS, we probably won't know right away what is happening in the marketplace as a result."

As of March 29, nearly 40 new models are potentially eligible for a tax credit of up to $7,500, according to an IRS list. It is not yet clear how many of those EVs will be eligible for a full or partial credit next month.

An updated list of eligible vehicles, including the amount of the credit, is expected to be available April 18 at fueleconomy.gov. The list will be updated "promptly" as automakers provide information on which of their vehicles qualify.

In a blog post Friday, Bozzella took a "best guess" for how many vehicles might qualify once the eligibility restrictions tighten.

"Few of the 91 models currently for sale. Some EVs will certainly qualify for a partial credit," he wrote. "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."

West Virginia Sen. Joe Manchin on Friday criticized Treasury's guidance for what he said "completely ignores" the law's intent of U.S. energy security and reducing dependence on foreign adversaries such as China for battery materials and manufacturing.

"It is horrific that the administration continues to ignore the purpose of the law, which is to bring manufacturing back to America and ensure we have reliable and secure supply chains," Manchin said in a statement. "American tax dollars should not be used to support manufacturing jobs overseas. It is a pathetic excuse to spend more taxpayer dollars as quickly as possible and further cedes control to the Chinese Communist Party in the process."

Manchin, who chairs the Energy and Natural Resources Committee, earlier this week also threatened legal action against the department over how it decides to interpret the EV battery sourcing rules.

"I think they're going to try to screw me on this, and I'm willing to go to court," Manchin, the Democrat who helped craft the EV tax credits, said at an industry event here Wednesday. "I'm willing to stop it all."

In December, Manchin also blasted Treasury's preliminary guidance that EVs leased by consumers could qualify for the commercial clean vehicle credit, known as 45W, which is not subject to the same eligibility restrictions as the 30D credit.

The 45W credit is limited to $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for all other vehicles. While the credit does not transfer directly to the consumer or lessee, it could be used by the lessor, or leasing entity, to lower lease prices.

While provisions in the Inflation Reduction Act aim to foster a domestic EV supply chain and bring jobs to the U.S., China still dominates the processing and refining of key battery minerals.

China "owns or controls about 60-plus percent of the production of critical minerals around the world, and it also has about 80-plus percent of processing around the world," Jose Fernandez, undersecretary for economic growth, energy and the environment at the U.S. State Department, said Tuesday at an event here. "They have a chokehold on many of these minerals."

He said the U.S. is working with its allies and partners on building strong and secure supply chains for critical minerals while also focusing on domestic sourcing and production.