Fisker Ocean pictured above

Transfer Provision Details

The transfer provision is now in place for the federal incentive. This allows the buyer to transfer the tax credit to the seller and take the incentive as, in effect, a point of sale rebate, even if it technically still is a tax credit. Consumers still have the option to take the tax credit the old-fashioned way if they so choose.

The benefit of the transfer provision is the point of sale immediacy, but also the fact that a consumer does not need to have tax liability in order to utilize the credit. (The tax credit is non-refundable and has no carry-forward provision.) Another benefit of the transfer provision is that if you are financing the vehicle, it lowers the amount of interest paid because you are financing a smaller amount. The incentive does not lower the sales tax.

Dealer Registration

A dealership has to register at a portal created by the Treasury Department. This portal captures the transactions, the associated VINs, and enables the process whereby the Treasury issues reimbursement for the incentive to the seller and verifies the transaction at tax filing time. This applies to both new and used EVs. It also applies regardless of whether you are taking the transfer or the standard tax credit. In other words, if you are counting on the incentive, don’t waste your time speaking with an unregistered dealer.

According to Treasury press releases, about 50% of new car dealers have registered. This could still increase over time. Sellers of vehicles that are not eligible may not have a reason to register at present, though they would still need to if they sell used EVs. Not every dealer who registers gets approved, though we don’t have detail as to why that would be. Buyers of a vehicle from an unregistered dealer only get the standard tax credit.

Only a very small percentage of the 150,000 used car dealers have registered. Big sellers like Carmax and Carvana have not registered. Nor has Hertz which has been selling a large number of used Teslas.

There is no master list from Treasury delineating which dealerships have registered. This is very disappointing. The only option for consumers is to directly ask the dealership. (Some dealerships are advertising their registration.) We recommend making sure a dealer is registered before going there to shop if you are thinking about using the transfer.

The dealer issues a seller’s report for the transfer. You must get this before the car leaves the lot. If you do not, the only option available to you is the standard tax credit.

VIN Verification

Final determination of vehicle eligibility cannot be made until a VIN is available. Hopefully, dealers will be supported by their affiliated manufacturers and be able to accurately represent the status of a vehicle, including build to order.

Used EVs

A reminder, incentive-eligible used EVs must be at least two years older than the current model year and have not previously had an incentive associated with the VIN. Almost no used EVs have received an incentive, so for the time being the prior incentive consideration is largely beside the point. The income limits (see below) are half what they are for new EVs and the negotiated price must not exceed $25,000. Used EVs are eligible for the transfer provision. Hopefully, more used car dealers will register. In the near term, the transfer is more likely to be available from a new car dealer that also sells used EVs.

Battery Rules Lead to a Reduction in Eligible Vehicles

The new rules for 2024 are in effect, specifically higher thresholds for battery critical minerals, battery assembly, and the implementation of the first half of the foreign entity of concern (FEoC) rule. For the FEoC, no battery component assembly can take place in China as of this year.

A car must certified by the manufacturer that it meets the requirements and must appear on the EPA list at FuelEconomy.gov to be incentive-eligible.

It is not a surprise that the number of incentive-eligible vehicles has decreased. We expect a gradual recovery going forward as more North American assembly and battery plants come online, and more critical minerals come from eligible sources.

Income/MSRP Cap

The non-battery-related provisions of the incentive rules remain in place.

The income limit is $300K/$225K/$150K for joint/head of household/individual filers respectively. This refers to modified adjusted gross income. You can fulfill this requirement with either your current or prior year income. There is one exception to this, which is if you get married during the year you bought the vehicle and the income of your new spouse put you over the limit, you would not be disqualified.

The federal incentive has an MSRP cap of $55K for sedans and $80K for an SUV. The definition of MSRP includes factory-installed options but not software.

Discounting

We have been seeing reports that several manufacturers, and we have specifically seen reports of GM, Ford, and Hyundai, discounting vehicles to partially or fully compensate for the lack of an incentive. This is an example from GM Authority. Discounting is even better than an incentive because it lowers the sales tax.

Leasing

None of this changes the fact that these rules don’t affect leases. The finance company that holds the lease receives the incentive and it is not subject to battery, assembly or any other rules. The lessor is not required to pass the incentive to the consumer. And leasing costs tend to be opaque due to the different factors that determine them. That places a greater burden on the consumer to obtain the specifics of if/how the incentive is incorporated into the monthly rate. All of that said, however, EV leasing has shot up rapidly, as can be seen in this chart from The Peterson Institute for International Economics, using data from Edmonds. The biggest increases are from non-North American brands, so apparently, the incentive is getting passed along.

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.