photo credit: Paul Braren/Post: Barry Kresch

IRA Went into Effect with Rule-making Still a Work in Progress

The most challenging part of the rule-making has to do with the rules around battery minerals. The IRA requires a minimum percentage (40% in 2023) of battery critical minerals be sourced either domestically or with a free-trade partner. The IRS is still accepting comments, through June 16th. The EV Club is working with the Electric Vehicle Association (EVA) and the Clean Vehicle Coalition (CVC). Our primary input on this is that manufacturers should certify compliance on a model-year basis since that is how they plan their manufacturing and that is how consumers think about cars. Furthermore, once a model/model year is certified, it should be the manufacturer’s responsibility to ensure compliance. And if compliance isn’t achieved, the manufacturer would be responsible for the resultant tax liability. Let’s keep consumers out of the VIN-checking business and definitely out of exposure uncertainty.

IRS Flexibility

The certification question notwithstanding, what we are hearing is that the manufacturers are generally pleased with IRS rule-making. They expanded the list of free trade partners. They are allowing the OEMs to self-certify and they have 3 options for doing so: point in time, individual vehicle, or average over a defined period of time (year, quarter, month). We are trying to find out the limits of the self-certification and whether there is exposure for the consumer. More to come on this.

What the OEMs are most concerned about is when the foreign entities of concern rule kicks in. They have not figured out how to get China completely out of the equation.

Used Teslas

If anyone has looked at the fueleconomy.gov page to view the makes that are eligible for the used EV incentive, you will see that Tesla is conspicuously omitted. We have been advised that the reason is that the Tesla paperwork is churning slowly through the wheels of the IRS bureaucracy. Tesla is trying to get it unstuck. We expect that to happen reasonably soon.

Leasing

Leasing has emerged as a big loophole. The IRS has ruled that consumer leases are commercial transactions and not subject to any of the restrictions associated with a consumer purchase. All leased vehicles, no matter where the battery comes from, no matter how high the MSRP or the lessee’s income, are incentive-eligible. However, it is our understanding that Tesla, General Motors, and Ford are not passing through the incentives for leasing customers at this time. They are not legally required to do so, but it is not consumer-friendly in our view. If any reader has different information, please let us know.

Transfer Provision

This begins in 2024. The consumer will have the option of transferring the incentive, which is a tax credit, to the seller, who then gives the incentive to the consumer as a rebate. That sounds complicated but it boils down to the incentive becoming cash on the hood, so it’s unequivocally a good thing. Not only does the consumer not have to wait for their taxes to be filed, but for people who don’t have enough tax liability to burn off a tax credit, this will enable them to use the incentive. So, this is an important equity provision. Unlike with a lease, a transfer has to be passed to the consumer. You may ask what happens if the consumer seeks to use the transfer when leasing a vehicle? Good question. To be continued.

Joint Ventures

Could joint ventures be a way to skirt the foreign entity of concern rules? Another good question. Ford announced a joint venture with the big Chinese battery manufacturer, CATL, to build a plant in Michigan. Our understanding is that it is likely that the output of this plant will be incentive-eligible because Ford owns the plant and is licensing IP to make LFP batteries from CATL. Still, we await a final ruling.

Photo above: Ford expects its Mustang Mach-E to qualify for half the incentive; Chevy expects the same for its Bolt.

Battery Rules Issued

January 1 came and went. The new federal incentives in the Inflation Reduction Act became law but the implementing agency, the IRS, had not completed rule-making for several portions of it, most particularly how manufacturers can be in compliance with the new rules for sourcing and refining of critical minerals and battery assembly. The IRS said it needed until March. True to its word, the rules were issued on March 31 and take effect April 18th. This interim period allows manufacturers to determine which vehicles will be eligible and whether the certification will be for the full $7500 credit or only half.

Consumers have gotten a benefit from this delay as more vehicles were temporarily eligible. Many vehicles are expected to lose incentives due the rules. If you have cash burning a hole in your pocket and are in the market, you can still move fast and pick up an EV with the full incentive applied (assuming the other criteria are met). But you have to take possession of it before April 18th. The incentives are applied, in IRS speak, at the “date placed in service.”

What Rules Apply

The rule-making itself is highly technical in nature. The law requires that 40% of the sourcing and refining of critical battery minerals occur either domestically or with a free-trade partner and that 50% of battery assembly takes place in North America during 2023. Going forward, these levels escalate. So, how do you define 40%/50%? The IRS has determined that it is to be based on value. So how does one define value? What is the legal definition of a free-trade partner? (The ink is still wet on some frantic dealmaking that happened so that some friendly nations, e.g. Japan and South Korea, could officially become free trade partners.)

We’ll know on April 17th what vehicles are eligible for how much of the incentive, but it will be a continually evolving list as manufacturers wrangle supply chain logistics and as the requirements escalate. It is possible that a vehicle eligible in one year loses eligibility in a subsequent year if the supply chain has not maintained pace with the requirements. And it has to be done in an environment of (presumably) a rapid ramping up of production volume. This article from Reuters includes statements by some manufacturers regarding which vehicles stand to lose incentives. This is the Department of Energy page that lists qualifying vehicles. It will be updated on April 17th.

Making Sure the Vehicle is Incentive-Eligible

It certainly helps if a manufacturer certifies that a given vehicle is incentive-eligible. But the IRS is officially determining eligibility based on the VIN. This is a new world we’re about to enter, and with all that is being written in the press about how these incentives work, there hasn’t been much discussion of this potential for a consumer to be left in the lurch.

It is possible that two of the same make/model/model year vehicles have different incentive statuses, based on when and where the manufacturing and delivery take place. When filing for the tax credit, the VIN is required and Treasury matches it to its records. It is advisable to check the VIN before buying the vehicle. That can be a hassle, as for a made to order vehicle, the VIN isn’t available until late in the game.

The EV Club, in partnership with the Electric Vehicle Association, recommended that the IRS use make/model/model year and deal with it at the manufacturer level. Our take is that asking consumers to be in the VIN checking business is a clunky way to go. It could cause an unpleasant surprise. It definitely fosters confusion.

For readers of this blog, if you buy an EV after the new rules are in effect, we are interested in hearing about the process and if you felt protected if you were promised an incentive.

Leasing

For those who lease, none of the rules apply, not even North American final assembly. The full incentive applies. Just remember, the finance company gets the incentive. It is up to the consumer to verify it is being passed along, which is not legally required. It is called a subvented lease.

Other Rule-making

Yes, there’s more, particularly the foreign entities of concern rule and the transfer.

Foreign Entities of Concern

The foreign entities of concern rule, which will phase in during 2024 and 2025, will likely include several countries, but is really all about China, which currently dominates the battery mineral supply-chain and has a lot of battery IP. What about Chinese investments in this country? Ford recently announced a joint venture with the big Chinese battery company, CATL, to build a plant in Michigan to manufacture LFP (Lithium Iron Phosphate) batteries. Does this comport with the law? In this case, Ford is banking on the fact that it is only the IP that comes from CATL and that the plant is owned by Ford. This is an article in Politico that discusses it in some detail but stops short of making a definitive statement. Stay tuned.

Transfer Provision

The transfer provision kicks in as of Jan 1, 2024. This year, the incentive is a tax credit. There are two drawbacks to tax credits. The first is that you have to wait until you file your taxes to get the incentive. The other is that you need to have the tax liability to burn it off. The transfer provision allows the consumer to transfer the incentive to the dealer or manufacturer and take the credit as a “cash on the hood” rebate. Unlike with a lease, the law requires the dealer to transfer the full amount of the credit to the consumer. That solves the timing problem. But what about if the consumer doesn’t have $7500 of tax liability? Could there be a claw-back? That seems unlikely. The intent of the transfer provision is, in part, to be an equity measure, so people without tax liability could take advantage of the incentive.

An Opportunity to Walk Through the Incentive Details

This blog has written a number of posts about the new EV incentive since the legislation was enacted in August of 2022. We are now in the implementation phase with IRS rule-making in progress. While we have a detailed description on our Incentives page, the law is complicated enough that we decided to devote a meeting to walking through the details and answer questions.

This is a Zoom meeting, scheduled for Thursday, March 2nd, at 7 PM. We are planning for one hour, but if there are a lot of questions, we can hang out a bit longer. Anyone is welcome to attend. Registration is free at this link.

Sanity Finally Reigns

The body-style of an EV determines the MSRP cap for incentive eligibility. Sedans have an MSRP cap of $55,000 and SUVs, pickups, and vans can be eligible up to $80,000. MSRP is defined by the manufacturer suggested base price plus factory-installed options. Dealer installed options, software, taxes, and destination fees are not included.

The first round of classifications issued by the IRS fell in the “What were you thinking” category. For example, the Tesla Model Y 5-seat was classified as a sedan while the 7-seat version, which uses the exact same body, was an SUV.

These classifications have been revisited and it is looking much better. All Model Ys are now SUVs. The same is true for the Ford Mustang Mach-E, which had been classified as a sedan. All versions of the Volkswagen ID.4 are now SUVs.

The old classifications were based on the EPA CAFE standards. The revisions result from moving to the consumer-facing EPA Fuel Economy Labeling standard.

This is the IRS page with all of the vehicles for which a determination has been made.

Best of all, these changes are retroactive to January 1! And because of the delay in battery rule making, all of these vehicles receive the full $7500.

EV Manufacturers/Dealers Offering Consumer EV Leases, Incentives Included

This is a follow up to a post from January 5, when we first published about a surprising turn of events with respect to eligibility for the electric vehicle (EV) incentives that are part of the Inflation Reduction Act.

As we have written here and other places, while the Inflation Reduction Act, IRA, has a lot to recommend it, the design of the consumer EV incentive is overly complicated and confusing with numerous restrictions on which cars and individuals qualify.

In a counter-intuitive twist, the complex became simple, at least for leasing customers. While there are all sorts of restrictions around whether a vehicle or a purchaser qualifies for the tax credit, the IRS issued guidance on 12/29/22 that a consumer lease should be considered a commercial transaction. The commercial EV incentive has none of the restrictions that apply to a consumer purchase. Whatever the vehicle cost, wherever it is made, no matter the body style, it qualifies for the $7500 maximum incentive. (If you want to know the details of those consumer restrictions, see our incentives page.)

The IRS logic here is that the dealer or manufacturer sells the vehicle to the finance company which holds the title. This is a commercial transaction. The fact that the finance company then executes a lease with a consumer is beside the point. As such, it falls under the rules for commercial incentives, which are governed by a separate provision in the law that does not impose the consumer restrictions.

We are now seeing examples of this in the marketplace. The photo at the top of the post is of an ad for a Lucid EV. A recent entrant as an EV-only startup, Lucid makes ultra high-end EVs that, judging by the reviews, are pretty great. Car and Driver described its “unbeatable range and great performance.” However, the Lucid far exceeds the price caps imposed on the EV incentives in the IRA. But with a lease, voila, no MSRP cap. I received similar information from a CT dealership company that sells Hyundai and Genesis vehicles, that they have received new lease pricing that reflects the incentive. Both of those vehicles are manufactured in South Korea and thus run afoul of the North American final assembly rules if purchased.

Delay in Battery Rules

For buyers there is another loophole, for want of a better word, that gives the consumer a break, albeit temporarily. The IRS has not finished writing the regulations for the battery mineral sourcing/refining and manufacturing requirements. As a result, the incentive defaults to the old battery rules until the IRS issues these new regulations. They have said this will happen in March. In the meantime, we are now in a period where incentives are likely to be higher for most, if not all, EVs than they will be in a few months. Buy now, but be sure to take physical possession of the vehicle before the battery rules take effect or risk losing the incentive.

Manchin Agonistes

It has been widely reported that Senator Joe Manchin  is not happy about either of these two developments. As reported in The Verge, he has introduced legislation to delay the implementation of the incentives until the IRS finishes its rule making, and to claw back incentives that may have been granted under the IRS interim rules.

Manchin is also not pleased about the IRS interpretation of leasing as a commercial transaction and may try and correct that legislatively as well.

I doubt Manchin’s legislative proposal(s) will become law. The House is too preoccupied getting its house in order. And what appetite will the Senate have to revisit this hard-fought reconciliation-passed bill? Nobody else in either chamber seems to be all that concerned about either of these developments, at least not on the record.

I think Manchin genuinely wants to bring manufacturing back America. I’m not so sure he cares about people buying EVs. The threat of a retroactive restriction and claw back only punctuates this. Part of the cleverness of the IRA is that it strikes a balance of both supply side and demand side incentives. But when it comes to EVs, the design of the consumer EV incentive is so perversely self-defeating, that with respect to Senator Manchin, this feels like karma.

Update: As reported in Reuters, Manchin tried to get his bill passed on January 26th by unanimous consent, but it was blocked by Sen. Debbie Stabenow of Michigan. She is quoted saying, “It is not unreasonable what Treasury is doing … they have been given an incredibly complicated task to try to figure out how this consumer credit will work.” Separately, she also noted the inherent unfairness of this bill to consumers in that it “would literally take away credits from people who are buying cars today … Fundamentally, (Manchin) is not a fan of EVs.”

The usual disclosure: This information is accurate to the best of our knowledge. Always check with an accountant when it comes to tax matters.