The Inflation Reduction Act, (the Act or IRA) signed into law on August 16, 2022 by President Joe Biden, will inject hundreds of billions of dollars into clean energy and electric vehicle incentives and programs.
The Act aims to invest $369 billion over 10 years into energy and climate programs, providing a number of tax credits and incentives to promote clean energy technologies. The Act constitutes the largest investment in combatting climate change and incentivizing the onshoring of renewable energy production in US history.
This alert provides an overview of electric vehicle-related tax incentives and the multiple conditions and requirements that may initially limit their applicability and use, as well as a summary of some of the Act’s other renewable energy provisions.
New clean vehicle credit: EV manufacturers and suppliers, purchasers to benefit
Key provisions of the Inflation Reduction Act would revise and expand tax credits for electric vehicles (EVs) by providing a new tax credit of $4,000 for the sale of used electric cars and expanded tax credits of up to $7,500 for purchasers of certain new EVs.
Two-part clean vehicle credit
The IRA establishes new clean vehicle credits, which replace the prior “plug-in electric drive vehicle” credit. Eligible battery-powered electric vehicles must meet critical mineral and battery component content and other requirements to qualify for credits of up to $7,500 per vehicle. Vehicles that meet one of the requirements, but not both, are eligible for a credit of $3,750.
The US Treasury and Energy Departments issued implementing guidance on the day the President signed the IRA into law, limiting vehicles eligible for the EV tax credit in the remainder of 2022. Effective immediately, only EVs whose final assembly is conducted in North America are eligible for the existing credit. The result is that far fewer vehicles sold from August 17 to the end of calendar year 2022 will be eligible for the existing credit. The Treasury Department indicated that more guidance will be coming in the near future.
Significant eligibility conditions and requirements could limit use of clean vehicle credits
The Inflation Reduction Act conditions the two-part credits on a certain percentage of materials used in a vehicle’s batteries being extracted, processed, manufactured and/or assembled in the US or in certain US-allied countries.
- To qualify for the first $3,750 credit, a percentage of the value of applicable critical minerals contained in a vehicle’s batteries must be extracted or processed in the US or in a country with which the US has a free trade agreement or must have been recycled in North America. Applicable percentages increase from 40 percent prior to 2024, to 80 percent after 2026. Qualifying critical minerals include aluminum, cobalt, lithium, nickel, and graphite, among others.
- To qualify for the second $3,750 credit, a certain percentage of the value of the battery components in an EV must be manufactured or assembled in North America; applicable percentages increase from 50 percent prior to 2024 to 100 percent after 2028.
- Further, after calendar year 2024, a clean vehicle will not qualify for the tax credit if it contains any critical minerals that were “extracted, processed, or recycled by a foreign entity of concern” – including companies owned by, controlled by or subject to the jurisdiction of the government of the People’s Republic of China.
- After December 31, 2023, a vehicle may not qualify for the credit if any “components” contained in its battery are “manufactured or assembled by a foreign entity of concern”.
In addition to the above conditions, there are a number of other significant new restrictions on the clean vehicle credit:
- The final assembly of a qualifying vehicle must be conducted in North America.
- Limits based on MSRP: The credit is not allowed for vans, SUVs and pickup trucks for which the manufacturer’s suggested retail price exceeds $80,000 or for “any other vehicle” whose MSRP exceeds $55,000.(Although there is a separate tax credit of up to $40,000 for certain heavy-duty commercial clean vehicles.)
- Limits based on purchaser income: In general, the following are not eligible for clean vehicle credits: married taxpayers filing jointly whose adjusted gross income (AGI) exceeds $300,000, taxpayers who are heads of households whose AGI exceeds $225,000, and other taxpayers whose AGI exceeds $150,000.
- Taxpayers may transfer the credits to registered vehicle dealers who disclose to the buyer the manufacturer’s suggested retail price, credit amount, associated fees and the amount paid for vehicles sold after December 31, 2023.
- The credit is not allowed for any vehicle placed into service after December 31, 2032.
Taken together, the new credit eligibility criteria could significantly limit the availability and use of clean vehicle credits, at least initially. The vast majority of battery critical minerals are mined or processed in ineligible countries. Today, production of lithium and some other critical minerals for electric vehicle batteries is primarily conducted in China. The Electrification Coalition estimates that 90% of minerals used in EVs today are processed in China. The world’s largest producer of cobalt, another critical mineral, is the Democratic Republic of Congo. Minerals from those and several other major source countries do not count toward the battery content eligibility requirement, and any China mineral content is disqualifying starting in 2025. The Alliance for Automotive Innovation estimates that 50 of 72 models of battery electric, plug-in hybrid, and hydrogen-fueled vehicles sold in the US today would not be eligible for the new credit. And minimum content and geographic manufacturing/assembly requirements increase substantially over the next several years, as described above.
To a lesser extent, the MSRP limit also restricts the availability of the clean vehicle credit. While there are several electric vehicles assembled in the US that are offered for less than $55,000, the average sticker price for an EV in the US in 2022 was approximately $60,000.
Consistent with other clean energy provisions of the Act, an important aim of the vehicle tax credit provisions is to stimulate the development of domestic battery and electric vehicle supply chains and manufacturing capability. Supporters of this approach predict that increasing domestic capacity and declining EV prices spurred by the Act will increase the number and volume of vehicles eligible for the clean vehicle tax credit in coming years.
A recent analysis by the Congressional Budget Office found that the new $7,500 clean vehicle tax credit would result in an estimated $85 million budgetary impact in 2023. Other analyses have determined that this translates into only about 11,000 eligible new EVs sold in the coming year. However, that forecast increases to $451 million, equivalent to about 60,100 new EVs, in 2024, and projects continued increases through 2031.
The legislation also repeals the current 200,000 cap on the total number of vehicles per manufacturer that are eligible for the clean vehicle credit. The lifting of the numerical ceiling will benefit several auto manufacturers whose US EV sales have reached that cap.
Used electric vehicle credit
For previously owned electric vehicles, buyers can claim a credit of up to the lesser of either $4,000, or 30 percent of the sale price. This credit only applies to the first resale of a used vehicle and includes restrictions on sales between related parties. The sale price of qualifying vehicles may not exceed $25,000. Buyers with AGI of up to $75,000 ($150,000 for married couples filing jointly and $112,500 for head of household filers) can claim the credit.
Significantly, the Act allows clean vehicle tax credits to be claimed at the time and point of sale, rather than when the purchaser files an annual federal income tax return. This is in line with consumer preferences: A recent George Washington University study found that car buyers overwhelmingly preferred immediate rebates at the point of sale.
New advanced manufacturing production tax credit
The legislation also creates a new advanced manufacturing production credit (AMPTC), which is available for the US production of a number of components used in renewable energy generation, storage, and related manufacturing, including PV cells, PV wafers, solar grade polysilicon, solar modules, wind energy components, torque tubes, structural fasteners, and electrode active materials.
Additionally, the AMPTC incentivizes the production of battery components:
- Credit for battery cells is $35 multiplied by the kWh capacity of the battery cell.
- Credit for battery modules is $10 multiplied by battery capacity.
- Thus, component manufacturers can receive up to $45 per battery for modules and cells combined.
- Credit for battery critical minerals is equal to 10 percent of the cost of production.
- Credits may be adjusted based on components’ mass, watt-capacity, sales price, or production cost.
The credits are available for eligible components produced in the US and sold after December 31, 2022 and before January 1, 2030. Starting in 2030, the credits decrease by 25 percent each year and are phased out in 2033 (phaseout does not apply to credits for critical minerals).
New clean energy incentives
The Inflation Reduction Act includes over $60 billion in incentives for US clean energy and transportation technology manufacturing. A $10 billion investment tax credit is available to build domestic clean technology manufacturing facilities, such as electric vehicle plants, and wind turbine and solar panel manufacturing facilities. Another $2 billion in grants is available for retooling existing auto manufacturing facilities to produce clean vehicles. Additionally, the IRA provides up to $20 billion in loans to build new clean vehicle manufacturing facilities.
The Act also provides tax credits for clean sources of electricity and energy storage, as well as up to $30 billion in targeted grant and loan programs for states and electric utilities to accelerate the transition to clean power generation. Tax credits and grants are offered for clean fuels and clean commercial vehicles to reduce emissions from transportation and manufacturing processes. Over $9 billion is set aside for federal procurement of domestically produced clean technologies to create stable markets.
The Act’s extensive clean energy incentives and the opportunities they provide are discussed in detail in our alert – The clean energy provisions of the Inflation Reduction Act of 2022 – a historic effort to encourage the development of clean energy and reduce carbon emissions.
Enactment of the Inflation Reduction Act marks the culmination of a year-long-plus effort by Congressional Democrats and the Biden Administration to achieve many of their signature domestic priorities, including promoting clean energy alternatives to address climate change. The legislation is, however, significantly scaled back from the Build Back Better bill that passed the US House last year. Supporters estimate that the combined investments in the Inflation Reduction Act and existing measures would put the US on a path to a reduction of approximately 40-50 percent in net greenhouse gas emissions (from electricity production, transportation, industrial manufacturing, buildings, agriculture, and other sources) by 2030.
Supporters also maintain that the package would result in a net deficit reduction of roughly $300 billion over a decade. The House Republican Study Committee issued a memo detailing 52 provisions of the bill its members oppose, including several related to electric vehicles (EVs) and other green energy programs.
In the future, some may seek to revise a few of the more challenging conditions and limitations on clean vehicle tax credits in order to better advance the goal of increasing the number of EVs purchased in the US. For example, the Alliance for Automotive Innovation has suggested broadening the criteria regarding countries from which eligible batteries, battery components and critical minerals can be sourced, perhaps to include countries with which the US has military alliances.
To learn more about the impact of the Inflation Reduction Act on your business, please contact any of the authors or your usual DLA Piper attorney.