It’s Difficult To Understand The New Federal Tax Credit For Electric Cars

Since 2005, there has been a federal tax credit available for electric vehicles. Initially, it was meant to persuade automakers to produce EVs at a period when nearly no one was interested in them. It was originally planned to phase it out once the first 200,000 electric vehicles (EVs) were registered in the US, but electric car activists altered that to the first 200,000 from each manufacturer to raise the total. The justification was that a company wouldn’t require any additional assistance from Uncle Sam once it produced 200,000 electric vehicles.

The last 17 years have seen numerous changes. Today, the impending danger of a warming planet is abundantly clearer to all of us. Initiatives to reduce carbon emissions have received more attention after the 2015 Paris climate accords. The US government is now committed to accelerating the switch to clean energy and sustainable transportation as a result. The Inflation Reduction Act of 2022 aims to give that procedure some government policy clout.

ELECTRONIC CARS; THE IRA ANDAMP The IRA significantly alters the game’s rules, but it does not eliminate the federal tax credit for electric vehicles. In relation to the initial tax credit, according to the IRS For vehicles purchased after December 31, 2009, the credit is equal to $2,500 $417 for each additional kilowatt hour of battery capacity over 5 kilowatt hours for a vehicle that uses a battery with at least 5 kilowatt hours of capacity. The maximum credit that can be given for a car is $7,500.

As a result, a car must have a battery that is at least 18 kWh in size to be eligible for the full tax credit. The credit is only accessible for the purchase or lease of a vehicle, according to the IRS. No credit is available if it is purchased for resale, which may put off some of the people who have learned how to profit from flipping electric cars.

The new law removes the 200,000 vehicle threshold for subsidy phaseout and sets maximum price limitations for vehicles that qualify ($55,000 for sedans and wagons and $80,000 for SUVs). According to the EPA, it is an SUV. For instance, the Subaru Outback is categorized as an SUV, yet the Honda HR-V is classified as a wagon. The riding height appears to be the deciding factor. Expect manufacturers to covertly raise the riding height of some cars to classify them as SUVs. The new tax credit is also only available to people with incomes of $150 000 or less, or $300 000 or less for married couples filing joint returns.

AN OPPORTUNITY WINDOW The catch is that the new regulations only apply to electric vehicles bought or leased after January 1, 2022. A whole new set of regulations go into effect on January 1, 2023, and they have two effects on the tax credit. These electric vehicles must first be produced in North America. Second, the batteries in those vehicles must be made of parts or materials that were either recycled in North America or came from the US or other nations with which the US has free trade agreements.

Here is a list of electric vehicles sold in the US that, according to Consumer Reports , are currently eligible for the federal tax credit but won’t be in the following year:

The GV60 Audi E-Tron Fisker Ocean Infiniti Ioniq 5 Infiniti Ioniq 6 Kona Electric Hyundai Nexo Jaguar I-Pace Hyundai Kia EV6 Niro Kia Electric Toyota RZ MX-30 Mazda EQB Mercedes-Benz Subaru Solterra Nissan Ariya Polestar 2 Subaru bZ4x Nissan Micra ID.4 for Volkswagen (only certain models) Swedish C40 You had better purchase one of the vehicles on that list before the year is through if you have your heart set on one. Additionally, according to Consumer Reports, the following vehicles will be eligible for the new federal tax credit (provided they do not violate the rules on the sourcing of battery materials):

Chevrolet Lyra (but only if it is classified as an SUV) Volkswagen Blazer EV Bolt Chevrolet EUV Chevrolet Bolt Silverado EV from Chevrolet (with certain options and trim levels) Ford Lightning F-150 (with certain options and trim levels) Mach-E Ford Mustang Subaru Leaf R1S Rivian (with certain options and trim levels) R1T Rivian (with certain options and trim levels) Cybertruck Tesla (with certain options and trim levels) Model 3 Tesla (with certain options and trim levels) Ford Model Y (only if it is classified as an SUV it appears that it is and only with certain options and trim levels) Volkswagen ID.4 (only models manufactured in Tennessee after 2023) ELECTRIC CAR BATTERY SUPPLIER SOURCING It is necessary to briefly explain the motivation behind the battery materials sourcing requirements. The US and Europe have been happy to let China provide them with affordable goods ever before Nixon visited China. The neoliberal playbook that has dominated global financial thought held the article of faith that offshore and outsourcing were the secrets to unending riches. But the globalization rose is no longer in bloom. When you realize your servant is your master, Sting famously sang, “I’ll turn your face to alabaster.”

In a recent interview with Wards Auto , Abigail Wulf, head of the Center for Critical Minerals Strategy at Securing Americas Future Energy (SAFE), said: Despite not being the main producer of cobalt, nickel, or lithium, China is the main processor of these metals. Less than 4% of all mineral commodities are processed in the US. Furthermore, China manufactures 80% of all anodes and more than 60% of all (battery) cathodes.

According to Wulf, China presently controls the processing of more than 85% of the world’s rare earth elements, 35% of the world’s nickel, 65% of the world’s cobalt, and over 60% of the world’s lithium. The US imports 100% of its yearly graphite needs, the majority of which comes from China. Different numbers are used in the chart below from Benchmark Mineral Intelligence, but the overall narrative is the same.

Who is Earth’s owner? The race for minerals becomes urgent Benchmarks for @thetimes foot @hjesanderson

Metals that are essential to the contemporary economy are under Chinese control. Is the West’s comeback unsuccessful? #EV #Lithium #Cobalt according to the IRS 0 according to the IRS 1 according to the IRS 2

according to the IRS 3 according to the IRS 4
Simon Moores, according to the IRS 5 (@sdmoores)

In other words, the US and other countries would be in serious trouble if China were to close the supply chain taps on those vital elements, especially once the EV market became, say, 70% of the car market rather than the 5% it is at in the US today.

Germany in particular made the decision to mortgage Europe’s futures to Russia in exchange for cheap gas supplies. Similar to how most of the globe has ignored the risk of largely depending on China for essential resources, the consequences are now coming home to roost. Because a US official dared to visit Taiwan, Xi Jinping decided to empty his nursery of all the toys, which has only made the situation worse.

OUTSOURCING AND ONSOURCING The US has now made the decision to defend itself against the economic threat posed by letting China take the front stage. The deadline will put tremendous pressure on all actors, but the new manufacturing and battery materials sourcing standards are intended to encourage investments in North America. Although it’s admirable that the IRA is concentrated on establishing a base of processing and manufacturing here, Brett Smith, technology director at the Center for Automotive Research in Michigan, tells Consumer Reports that the program’s implementation and consumer education will be extremely difficult.

The battery recycling sector is one possible gainer. If battery components from China are reprocessed in North America and utilized to make fresh batteries for electric vehicles made in North America, they become eligible for the new federal tax incentives. The issue is that there aren’t very many batteries that can be recycled right now and won’t be for several years. It may take an EV battery 12 or even 15 years before it is ready for its next life, according to a recent statement by Elon Musk. There aren’t many 12-year-old electric vehicles on the road today, nor are there many with batteries that are almost ready to be recycled after an accident or another incident.

The stipulations in the IRA may temporarily impede EV sales, but overall, says Chris Harto, CR’s senior policy analyst for transportation and energy, they are a huge plus for EV adoption. Longer term, he claims, manufacturers will make adjustments, move their supply chains for making EVs and batteries to North America, and make sure that American tax money are going to support American employment. A similar viewpoint was just published by CleanTechnica: The US Clean Vehicle Tax Credit’s Hardest (and Best) Aspect.

Even while some now qualified automobiles may lose their eligibility, the tax credits were going to expire someday and most likely quite fast for the majority of popular vehicles, so the benefit would have been fleeting. According to Brett Smith in Consumer Reports In general, it will be difficult to establish processing here and extremely difficult to establish mining here.

REMAINS QUESTIONS The functioning of the new tax incentives for electric vehicles is still a subject of many unsolved concerns. Do you receive, a.) the amount of your tax due if you purchase a car that qualifies for the full credit and owe less than $7,500 in federal taxes? b.) $7,500? c) bubkes Sincerely, we are unsure about the solution. You will always receive the entire amount of the credit, according to this blurb from according to the IRS 6:

You have to pay cash up front for your vehicle. Manufacturers frequently present the incentive as a price break on the car. Instead, you can use a government program to claim a credit of up to $7,500 against the federal income taxes you owe in the year you purchase the vehicle. It lessens your tax liability, to put it another way. You will also receive the amount of your credit if you are entitled to a refund.

Buyers are still required to pay the agreed-upon price for the vehicle (whether paying it in cash or folding it into a car loan). When they file their taxes for the following year, they can then claim the credit. The credit reduces your tax obligation. If your tax obligation is less than the credit, you will receive a refund for the remaining amount. You cannot, however, carry over that credit or any unpaid debt into the following tax year.

But until the law clears the House of Representatives and is signed by Joe Biden, we won’t be able to confirm anything. Instead, we’ll have to wait till that happens and the legal professionals can interpret the final legalese.

There are more. Nowhere in the statute does it make it clear how Tesla and other businesses who sell to consumers directly, without a dealer, must comply with this. We are aware of a new tax credit for old electric vehicles, however it stipulates that the sale must be conducted by an authorized dealer. Lots of secondhand cars are sold by Tesla. Does Tesla qualify for the used-car credit? Inquisitive brains are curious. The text of the bill makes it seem like any business authorized to sell automobiles in a state is a dealer, but we are unsure if this applies to Tesla, Lucid, Rivian, and other businesses that don’t use conventional dealerships.

Please take note that this post was created on August 10th, a Wednesday. The House has not yet approved the IRA, and the president has not yet given it his signature. Between now and the time the legislation’s final version is passed, a lot of changes might occur. This article likely contains mistakes or omissions because current information gaps prevent the availability of reliable data. You’ll know more as we learn more.

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