The U.S. Treasury Department has announced new electric vehicle tax credit sourcing rules that will take effect in April, aiming to incentivize domestic production and reduce reliance on foreign supply chains. The new rules will remove full eligibility for several popular EVs. These amendments come months after the IRS issued preliminary EV tax credit rules. Here’s the latest from the federal government.

New EV Tax Credit Guidance

Starting April 18th, the $7,500 tax credit for new EVs will be split into two parts for qualifying vehicles and buyers. The new rules include:

• Half of the credit will be based on meeting escalating requirements for battery components to come from North America.
• The other half will be based on critical minerals coming from the U.S. or its free-trade partners.
• By 2027, 80% of the value of a battery’s critical minerals will need to be extracted or processed in the U.S. or a country with a free-trade agreement in effect.
• By 2029, 100% of the value of battery components will need to be made or assembled in North America.
• 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.
• Criteria identifying which nations that produce critical minerals have free-trade agreements with the U.S.
• Starting in 2024, vehicles are ineligible if they contain any battery components manufactured by a “foreign entity of concern,” which could include companies controlled by China. That exclusion starts in 2025 for critical minerals.

Newly negotiated critical mineral agreements, such as the U.S.-Japan trade deal on EV battery minerals, will qualify. Other qualifying countries include Australia, Canada, Chile, Korea, and Mexico. This is huge news for fans of Hyundai and Kia EVs. The European Union is also in negotiations with the U.S. on a battery critical minerals deal.

How Battery and Mineral Sourcing Is Determined

Here’s a look at the proposed three-step process for determining the percentage of the value of the critical minerals in a battery that contribute toward meeting critical minerals requirement: 1) determine procurement chains, 2) identify qualifying critical minerals, and 3) calculate qualifying critical mineral content.

The U.S Treasury department also proposes a four-step process for determining the value and sourcing of batteries: 1) identify battery components that are manufactured or assembled in North America, 2) determine the incremental value of each battery component, including North American battery components, 3) determine the total incremental value of battery components, and 4) calculate the qualifying battery component content by dividing the total incremental value of North American battery components by the total incremental value of all battery components. Sound complicated? What else would you expect from government guidance. Check out the official press release here.

Eligible Vehicles List

Starting April 18, 2023, new electric vehicles placed in service will need to adhere to the critical mineral and battery component requirements specified in the U.S. Treasury Department’s rule. To assist buyers, FuelEconomy.gov will provide a comprehensive list of eligible clean vehicles on that date. This list, submitted by qualified manufacturers to the IRS, will detail the vehicles meeting the new clean vehicle credit requirements, including the exact amount of the credit they are eligible for.

While the new EV tax credit sourcing rules aim to promote domestic EV supply chains and job creation, China still dominates the processing and refining of key battery minerals. The U.S. is working to build secure supply chains for critical minerals and focusing on domestic sourcing and production. However, EV incentives could be eliminated, at least partially, for several popular electric vehicles. Check back for the updated eligible vehicles list once it is made public on April 18, 2023.