IRA Credits for Electric Vehicles and Batteries: More Complexity and More Benefits for American Manufacturing | Hogan Lovells

Consumer / 30D Credit

The IRA extends the electric vehicle consumption tax credit under Section 30D of the Internal Revenue Code, to allow the credit for electric vehicles put into service until the end of 2032, and expands the credit to include fuel cell vehicles; however, it also dumps the old credit requirements and formulas, modifying the section with much more restrictive and complicated requirements. The highlights of the new credit formula and the requirements (key terms in boldkey dates bold and underlined) related to electric vehicles are as follows:

  • VE under ‘binding contracts‘for sale, concluded after 12/31/21 and before promulgation (August 16, 2022) still eligible for the tax credit under the old 30D rules.

  • Effective for sales after August 16, 2022no sales of EVs in the United States (other than those under binding contract prior to 8/16/22) will qualify for 30D credits unless their ‘final assembly‘ is in North America.

    • “Final assembly” in the bill is defined as “process by which a manufacturer produces a clean new vehicle in a factory, plant or other location, or using a factory, or other location from which the vehicle is delivered to a dealer or importer with all necessary components to the mechanical operation of the vehicle included with the vehicle, whether or not the components are permanently installed in or on the vehicle.”

  • Between August 16, 2022 and the day after Treasury Department guidance released in 2022 as described below, the EV credit remains at $7,500 for EVs with minimum capacity batteries that were manufactured by non-phased-out OEMs to reach their 200k limit, as under the old rules 30D, (and regardless of where the batteries are assembled or the source of critical minerals, etc.) as long as these electric vehicles have their final assembly in North America.

  • Efficient January 1, 2023, the old cap of 200,000 per OEM is repealed. (It remains in place until the end of 2022.)

  • Efficient January 1, 2023electric vehicles put into service from this date are subject to the AGI and MSRP ceilings:

    • Taxpayers whose adjusted adjusted gross income (either for the year an EV credit would otherwise be claimed, or for the previous year) exceeding $150,000 (individual), $225,000 (head of household), or $300,000 ( married joint return) are not eligible to claim the credit.

    • Electric vehicles with a manufacturer’s suggested retail price over $80,000 (sport utility vehicles, vans or pickup trucks) or $55,000 (all other vehicles) are not eligible for the 30D credit.

  • Efficient for EVs put into service on or after January 1, 2024battery-powered electric vehicles Components of which were made Where assembled by a “foreign entity of concern“NOT get a 30D tax credit.

  • Efficient for EVs put into service on or after January 1, 2025electric vehicles with a battery the “in forcecritical minerals in which were extract, treaty Where recycled by a “foreign entity of concern“NOT get a 30D tax credit.

    • Foreign entity of concernis defined in the Infrastructure Investment and Employment Act 2021 and includes any entity “subject to the jurisdiction or control of a government of a foreign country that is a covered nation”. covered include China and Russia.

    • The “critical minerals” subject to this restriction are defined in the new Section 45X of the Internal Tax Code and include a long list of minerals, including lithium, nickel and cobalt, among many others.

  • Effective for commissioned EVs the day after the guidelines were released in 2022 by the Secretary of the Treasury Department(directives must be issued no later than December 31, 2022), the IRA is replacing the old 30D credit calculation (which was simply $7,500 for EVs with batteries meeting the minimum capacity level), with a new credit scheme that allows the EV credit with batteries that meet the minimum percentage thresholds (by dollar value) as follows:

    • Critical minerals Assess: ½ of the credit ($3,750) for electric vehicles equipped with batteries that meet the following percentage thresholds, depending on when the electric vehicle is put into service, based on the percentage of the total value of the critical minerals in the battery which are recycled in the USA; Where treaty Where extracted in the United States Where countries with which the United States has a free trade agreement:

      • The daytime after directives issued until 31/12/2340%;

      • In calendar year 202450%

      • In calendar year 202560%

      • In calendar year 202670%

      • After 202680%

    • Value of battery components: The other ½ of the credit ($3,750) for electric vehicles equipped with batteries that meet the following percentage thresholds, depending on when the electric vehicle is put into service, is based on the percentage of the total value of the battery components which are made Where assembled in North America:

      • The daytime after directives issued until 31/12/2340%;

      • In calendar year 202450%

      • In calendar year 202560%

      • In calendar year 202670%

      • After 202680%

  • Effective for commissioned EVs on or after January 1, 2024consumers eligible for EV credits have the option of transferring these tax credits to a dealer from whom the vehicle is purchased (in exchange for a reduction in the selling price of the vehicle) who in turn is eligible for a direct refund of the Treasury Department.

Credit for used electric vehicles

The IRA also creates a new tax credit – under the new Section 25E of the Internal Revenue Code – for used electric vehicles (and other clean vehicles such as fuel cell vehicles), effective for sales after the date of proclamation (July 16, 2022) until the end of 2032. The highlights of this credit provision are:

  • Buyers can claim credits for used electric vehicles under $4,000 or 30% of the sale price.

  • The used EV must meet the eligibility criteria for the clean new vehicle Section 30D credit and must be of a model year at least 2 years prior to the date of sale.

  • The selling price cannot exceed $25,000.

  • Taxpayers with adjusted adjusted gross income greater than $75,000 (individual), $112,500 (head of household), or ($150,000) (married joint filing) are not eligible for the credit.

  • Buyers must purchase the vehicle from a dealership and cannot claim the credit more than once every 3 years.

  • The credit only applies to the first resale of a used vehicle and includes restrictions on related party sales.

  • Credit may be transferred to the dealer/seller of the vehicle and deducted from the selling price at the time of sale in the same manner as permitted under Section 30D.

Business credit for commercial electric vehicles

The IRA also creates a new business tax credit for electric vehicles under new Section 45W of the Internal Revenue Code. This credit is effective for qualified clean utility vehicles (electric vehicles and fuel cell vehicles) effective for sales on or after January 1, 2023 and before January 1, 2033. The highlights of this credit provision are as follows:

  • Qualified clean commercial vehicle buyers can apply for a credit of 30% of the cost of the vehicle, up to $7,500 for a vehicle weighing less than 14,000 pounds and up to $40,000 for all other vehicles .

  • The amount of the tax credit also cannot exceed the amount by which the EV exceeds the cost of a “comparable” internal combustion vehicle (otherwise comparable in size and usage).

  • A qualified clean utility vehicle is any vehicle:

    • whose initial use begins with the taxpayer,

    • that is acquired for use or lease by the taxpayer and not for resale,

    • that is manufactured by a qualified manufacturer (an automotive OEM under Title II of the Clean Air Act, and who files required sales reports with the Secretary of the Treasury),

    • that is deemed to be a motor vehicle for the purposes of Title II of the Clean Air Act or a mobile machine

    • which is powered largely by an electric motor which draws its electricity from a battery with a capacity of at least 15 kilowatt hours (7 kilowatt hours for vehicles weighing less than 14,000 pounds) and which can be recharged from ‘a source of electricity, or is a fuel cell vehicle under the requirements of Section 30B of the Internal Tax Code, and

    • is of a character subject to capital cost allowance.

  • Vehicles powered by an internal combustion engine in addition to an electric or fuel cell motor are eligible for a reduced credit of 15%.

Incentives for the manufacture of electric vehicles and batteries

Automakers are also eligible under the IRA for tax credits and financing programs designed to encourage US manufacturing of clean energy technologies. These are detailed here.

Sharon D. Cole