What Are Clean Vehicle Credits and Who Qualifies? Six Key Takeaways from a Chicago Fed Webinar
The Inflation Reduction Act (IRA) promised strong government incentives for the purchase and manufacture of green vehicles. However, specific guidance on these incentives came out slowly over the course of months.
To help shed light on the situation, the Federal Reserve Bank of Chicago hosted a webinar on the clean energy aspects of the IRA, a wide-ranging piece of legislation passed on August 16, 2022. Joining Kristin Dziczek, a Chicago Fed policy advisor and automotive industry expert, were David Schwietert, chief policy officer for the Alliance for Automotive Innovation (the industry association for major vehicle manufacturers and leading suppliers), and Andrew Koblenz, executive vice president of legal and regulatory affairs for the National Automobile Dealers Association.
The following six key takeaways, focusing on what consumers need to know about clean vehicles, were developed from the April webinar titled An In-Depth View of the Inflation Reduction Act’s Clean Vehicle Credits. For further detail on what Dziczek, Schwietert, and Koblenz had to say, including more on the legislation’s substantial incentives for producers, please read the transcript or watch the video from the event.
- The IRA makes tax credits available on the manufacture, purchase, and leasing of clean vehicles.
- Vehicles are eligible for the $7,500 30D consumer credit only if they meet certain battery component and critical mineral requirements.
- There is a federal website that lays out the key information consumers need to know about clean vehicle credits in simple language.
- Starting in 2024, consumers should be able to get the value of the clean vehicle tax credit directly from the dealer.
- There is a need for charging infrastructure across the U.S.
- Some questions remain unanswered.
The main provisions in the act to help consumers acquire clean vehicles are known as 30D, 45W, and 25E—part of what Dziczek called the “alphabet soup” of the Internal Revenue Service (IRS). Provision 30D is a federal tax credit for up to $7,500 available to buyers who purchase or lease a new clean vehicle. (Clean vehicles are defined as battery electric vehicles, plug-in hybrid vehicles, and fuel cell electric vehicles. A tax credit reduces the amount of taxes an individual owes when they file their taxes). There are many requirements for both consumers and vehicles to qualify for 30D, including North American assembly, price caps for the vehicle ($55,000 for cars and $80,000 for trucks, SUVs, CUVs, and vans), income caps for the buyer ($300,000 adjusted gross income, or AGI, for married filers who are filing jointly or $150,000 AGI for single filers), battery component and critical minerals requirements, and a prohibition on use of inputs from countries that are considered “foreign entities of concern.” According to Schwietert, only 43% of electric vehicles for sale in the United States were eligible for the credit in April 2023.
Similar to the 30D provision, section 45W is a tax credit for up to $7,500, but for those acquiring a clean vehicle for commercial purposes. In contrast to section 30D, 45W has fewer requirements. “There’s no income cap for the acquiring person, there’s no North American assembly requirement, there’s no minerals limitation, there’s no battery component limitation, and there’s no ‘entity of concern’ limitation,” said Koblenz. “None of those are present in [45W].” However, the vehicle must be for business use.
Even so, since leasing companies qualify for 45W incentives and can choose to pass some or all of the $7,500 benefit through to consumers who lease vehicles, this provision offers a way to access the incentives for vehicles or consumers not qualifying for 30D credits. “All vehicles technically qualify under 45W,” said Schwietert.
Section 25E provides incentives for used vehicle purchasers and shares many of the same requirements as 30D, including income caps (half of the AGI limits for the acquisition of a new vehicle) and price caps ($25,000). There are two additional requirements for 25E: The vehicle must be at least two years old, and it must be the first sale as a used vehicle after passage of the law in August 2022.
The tax credit rules are written to encourage growth in U.S. participation in all aspects of the clean vehicle industry. So, half of the $7,500 30D consumer tax credit comes from meeting the content requirements for critical minerals and the other half comes from meeting the content requirements for battery components, which are “the active materials inside a battery that help convert chemical energy into electrical energy,” said Dziczek. The requirement regarding critical minerals does not go into effect until 2025, starting at 40% of the value of the critical minerals contained in the battery and rising to 80% by 2027. The minerals must be extracted or processed in the United States or a free trade partner of the United States. The critical and other minerals listed in the law make up about 40% of the elements in the periodic table and include 48 elements and two compounds, noted Dziczek. An increasingly larger share of battery components must be assembled in North America, starting at 50% in 2024 and rising to 100% by 2029.
The IRA also requires that the battery components be assembled in North America starting in 2024, but there is an additional requirement related to countries the U.S. State Department labels “foreign entities of concern.” Dziczek shared the department’s definition of the term: a country that is “involved in torture, prolonged detention without charges, forces, disappearance, or other flagrant denials of life, liberty, and security of persons.” This requirement is still awaiting further guidance and clarification, she said, although to qualify for the credits, vehicles must not contain battery components or critical minerals processed, extracted, or recycled by one of these countries come 2025. A key issue here is that China is on the list of countries of concern, and it dominates the battery supply chain and battery manufacturing.
Fueleconomy.gov bills itself as “the official U.S. government source for fuel economy information,” and in addition to more general information such as trip calculators and lists of most efficient vehicles, it lists which vehicles qualify for new federal tax credits for clean vehicles. The site helps to “address some of the confusion between consumers or dealers in terms of the potential vehicles that qualify” for the IRA’s tax credits, Schwietert said. In other words, site visitors plug in a make and model, and the website tells them whether the vehicle qualifies for no credit, $3,750, or the full $7,500—and there’s also an FAQ that details the tax credits’ other requirements.
Eventually, the website should be even more precise in informing consumers whether a particular car they are considering qualifies for the credit, said Koblenz. Being able to look up a car by vehicle identification number (VIN) would provide that specificity so the shopping process is as simple and clear as possible for the consumer. “Right now, it’s at the make-model level, but the information is coming in from the [manufacturers] on a VIN basis,” he said. “And we hope that soon the IRS can move [the website] to a VIN tool.”
A challenge with 30D, panelists observed, is there is a three- to 15-month wait period before a purchaser can actually receive their credit, because it reduces the taxpayer’s liability when they file federal income taxes for the year in which they bought the vehicle. “Not everybody in the world has the cash flow that enables them to do that,” Koblenz said.
“Under the IRA, starting on January 1, 2024, there is a provision that allows the value of the credit under 30D to be transferred, shifted to the dealer so that the dealer can put it in the deal at the dealership,” he said. “The dealer is a conduit through which the value is passed to the consumer at an earlier point in time.”
While this provision will eliminate that wait time for consumers, there is still uncertainty in how the IRS is going to establish a set of rules that allows this to ensure dealers are reimbursed properly, according to Koblenz. Dealers still need guidance on “what information is going to have to flow between the consumer, the dealer, and the IRS for that to happen,” he said.
With the rise of electric vehicles comes an increasing need for charging stations. According to Schwietert, while 80% of charging happens at home or work, easily accessible public charging is necessary to alleviate “range anxiety” (the fear of running out of power in an EV before getting to a charging station) or simply to be able to make long trips. To accomplish this, Congress included $7.5 billion in the 2022 Infrastructure Investment and Jobs Act (a law that is separate from the IRA) to create a seamless network of charging stations along the highway system. “It's one thing to produce vehicles,” said Schwietert. “But we also need to ensure those vehicles can be accessibly refueled, recharged, refilled.”
There are additional issues that need to be addressed, which Schwietert and Koblenz briefly went over at the end of the webinar. Schwietert said he still wants to know what the process will be for validating critical mineral and battery component thresholds. Manufacturers will need to provide this information to both the general public and the IRS for a car to be categorized as eligible for a credit.
In addition to his previously mentioned concerns about the usefulness of the website and the 2024 rule that will let dealers factor the tax credit into the vehicle sale, Koblenz said he thinks the government should clarify the date on which a vehicle’s eligibility for the credits is determined. Currently, the meaningful date is when possession of the vehicle is transferred to the consumer, which is more of a “use-by” date than a “born-on” date, he explained. Koblenz said he believes it is more consumer friendly and less confusing to have a vehicle’s tax credit eligibility be determined by the set of requirements in place when the car’s manufacture was complete; otherwise, vehicles manufactured in one year may not qualify for the incentives when requirements become more stringent in the next calendar year.
An important continuing issue that Dziczek identified is the need for more clarity from the government on how the “foreign entity of concern” standard will be applied.
To explore further
Go to this page to watch the video replay, view presenters’ slide decks, and read the transcript.
