Inflation Reduction Act Incentives Officially Begin – But Which Cars Qualify?

It is anticipated that consumer confusion will ensue with the advent of the new incentives. Not only have they become a lot more complicated, but many manufacturers have yet to finish the registration process that certifies vehicles. Also, the IRS, which was handed the Herculean task of crafting all of the implementation rule-making in the span of about 4 months, unsurprisingly, is not yet finished. The Department of the Treasury has announced a 3 month delay. This most particularly affects the rules concerning batteries. The incentive provisions are, therefore, being phased in.

No More Manufacturer Cap

The manufacturer unit sales cap is now gone. That means that Tesla and General Motors are no longer excluded on that basis. Toyota, Ford, Nissan, and Hyundai/Kia had also either surpassed or were close to reaching the 200,000 unit threshold, which will now not apply to them either. (Toyota and Hyundai/Kia are presently disqualified due to final assembly not occurring in North America.)

Delay in Battery Rules Means 3 Months Without Them

The biggest challenge for the automakers will be to source the required percentage of critical minerals, either domestically or from countries with whom we have a free trade agreement. A somewhat lesser challenge will be to have battery assembly located in North America. But for this 3-month window before the rules are complete, they simply don’t apply. This is, in effect, Treasury’s “Buy Now” sale! Incentives for most BEVs will almost certainly decline when the new provisions get implemented as this degree of supply-chain reorganization will take some time, but for now, enjoy the full $7500 incentive. Note: The buyer must be in possession of the vehicle prior to the implementation of the new battery rules to take advantage of the full incentive if the new rules would cause the vehicle to lose all or some of it.

Absent the new battery rules, PHEVs are subject to the battery pack size rules that existed before the IRA. When the new rules kick in, PHEVs will be eligible for the same incentives as BEVs.

Which Cars Are Eligible?

Good question, and not exactly straightforward. This is the page on the IRS website that lists the manufacturers and specific vehicles. A number of manufacturers, namely Kia, Mazda, Mercedes, and Subaru are listed as having entered into an agreement to become a “qualified manufacturer,” but have not submitted specific vehicles. Other manufacturers are missing from the page altogether. Specific vehicle models are listed for Audi, Ford, GM, Nissan, Rivian, Stellantis, Tesla, Volkswagen, and Volvo. For the vehicle models that are listed, eligibility is not guaranteed (see MSRP cap below). The IRS advises this page will be updated on an ongoing basis.

MSRP Cap

Treasury is defining MSRP as the manufacturer’s suggested retail price, including options, accessories, and trim (but not destination charges). This may be different than what you pay for the vehicle. For example, if a dealer either discounts or surcharges the price, it is still the price as suggested by the manufacturer that rules.

How a vehicle is classified with respect to body type determines which MSRP cap applies. Vans, SUVs, and pickups have an $80,000 cap. All other vehicles have a $55,000 cap. And it looks like the IRS is being persnickety about this classification insofar as crossovers, which in the marketplace are direct competitors to SUVs, are not classified as SUVs and are subject to the lower cap. Some examples are the Ford Mustang Mach-E, the 5-seat version of the Tesla Model Y (the 7-seat version is classified as an SUV), all of the non-AWD versions of the VW ID.4. It doesn’t make a lot of sense to me either. Unfortunately, we foresaw this problem and included it as part of our comments to the IRS. It is a sneaky thing that ends up overweighting the incentives toward PHEVs.

Just because a vehicle is listed on the IRS web page does not mean that there is a trim level that falls under the cap. The cheapest Tesla Model Y, for example, is $65,990 (long range, non-performance, 5-seat configuration), obviously more than the $55,000 cap.

Other rules

Personal income rules are in effect – $300K for joint filers, $225K for head of house, $150K for a single filer. You can use current (purchase) year or prior year income to make this determination.

The incentive is in the form of a tax credit for when you file your 2023 taxes. The transfer option doesn’t take effect until 2024. Yes, you can use a tax credit if you use the standard deduction. The credit is good insofar as you have the tax liability to burn it off. To the extent the credit isn’t used, it goes away – no carry forward. Leasing the vehicle is a way to utilize the credit if you don’t have the tax liability.

The used EV incentive is now in effect.

North American final assembly rules have been in effect since the legislation was signed by President Biden on August 16th. The Department of Energy has a VIN decoder on this page, which you can use to make sure. Unfortunately, a VIN is not available until late in the sales cycle if you custom order, though it is available for a car on the lot.

The seller is required to send to the IRS the vehicle VIN and the purchaser’s tax ID. The purchaser is required to include the VIN when filing for the credit.

For a more complete description of how the new incentives work, please see our incentives page.

Note: All incentive advice is to the best of our knowledge and cannot be guaranteed. Also, IRS rule-making may subsequently change things.

Higher Incentive Levels, Low MSRP Cap, New Income-Limited Incentives

Note: This page is updated to note that the new incentive levels have been implemented as of June 7, 2021. The CHEAPR home page has been updated but we think the explanation below is clearer. If you do look at the CHEAPR page, please ignore the $9500 incentive headline. Nobody will get that level of incentive. It would only apply to an income-limited individual buying a fuel-cell vehicle this year, which is ridiculous since there aren’t any fuel-cell vehicles for sale in the state, and how would an income-limited individual afford an expensive fuel-cell vehicle.

An updated set of rules was adopted by a 6-3 vote of the CHEAPR board that supersedes the last rule change made in October 2019. Here are the most relevant changes:

BEV = Battery Electric Vehicle, PHEV = Plug-in Hybrid Electric Vehicle, MSRP = retail price

Major Changes

• No difference in incentive levels based upon EV range.
• Higher incentive levels for the remainder of 2021.
• New income-limited incentive for used EVs
• New income limited supplemental incentive for new EVs
• Likely effective date is on or about April 1.

There is no longer a difference in the size of the incentive as it relates to the range of any given BEV. Incentives are higher across the board. The MSRP cap was left unchanged at $42,000. There are new income-limited incentives for used EVs and a supplemental incentive for new EVs. The supplemental gets added to the base incentive for qualifying income-limited individuals buying a new BEV or PHEV. There is no MSRP cap for a used EV.

The CHEAPR incentive limit has been increased to twice per driver per lifetime. And the clock resets as of June. If you already received a CHEAPR rebate before then, you are entitled to two more. (It is different than the federal tax credit which can be used each time someone buys or leases a new EV.)

Other CHEAPR Program Details

There is still a fuel cell incentive and the MSRP cap for an FCEV is still $60,000, though there is none of that type of vehicle being brought into the state presently.

Dealers receive an incentive of up to $125. This, once upon a time, was higher. DEEP, in its analysis for its EV Roadmap, questioned whether the dealer incentive accomplished its objective because most of the time it was not being passed along to the salesperson, which was the basic idea. However, it remains in this reduced form.

Income-Limited Incentives and Eligibility

The incentive for a used EV applies to purchases from a licensed dealer. This applies to any dealer of used cars, not just new car dealers that also sell used vehicles. It does not apply to private sales.

An individual’s eligibility for the income-limited incentive is determined by whether that person is already participating in certain assistance programs. Administratively, this is simpler than performing an income verification, but it still takes a few steps and involves a lag in receiving the money. These are the programs that are determinative:

Unlike the way the primary part of the program works, where it can be cash on the hood, the buyer completes an application to confirm eligibility based on one of these programs. DEEP estimates that it will take about a month to process the paperwork at which point a rebate check will be issued. This process can be done online (desktop or mobile) or via postal mail. This is the workflow:

Since nobody wants an applicant to get a surprise denial, DEEP promises outreach and education so that buyers understand what is involved and whether they qualify before filling out the application.

Incentive Structure

As noted in the table at the top of the page, someone buying a new BEV will receive a $2250 incentive. However, the way it is actually structured is that the base incentive of $1500 from the current program is actually retained and a “stimulus increase” of 50% is added to it. This additional stimulus is earmarked for calendar 2021, funds permitting. It will be tracked and reviewed regularly. This is why you get that odd $1125 number for a used PHEV. The base is a more neatly rounded $750. Each incentive size will then revert to its base level in 2022. We will update our information as it gets confirmed closer to the end of the year.

Start Date

The changes take effect as of June 7th, 2021. The income limited used and supplemental incentives are now ongoing, but the higher incentive levels may revert to the old levels at the end of 2021.

Our Take

The Connecticut EV Coalition made a proposal to the board that would have raised the stimulus to $2500 for BEVs and the MSRP cap to $50,000. The incentive including the stimulus adder is close to our proposal but the MSRP cap remains at a level that excludes too many vehicles. According to Cox Automotive, the average cost of an EV is $55,600. MSRP caps exist in other states but at much higher levels: MA – $50,000, NJ – $55,000, NY – $60,000. Given that the program was about 70% underspent in 2020, we expect it will underperform in 2021, though to a lesser degree.

We like the introduction of the equity aspect of the program, particularly the used EV incentive, as this market is not well-developed.

This structure of an incentive plus a stimulus adder is not the most consumer-friendly formulation. This allows the incentive to revert to a lower level after this year without making a formal change to the program. It is administratively convenient, but it has the potential to be confusing. To the consumer, it will still be a change. We think the incentive should be the incentive and if it needs to be changed, it needs to be changed.

The fuel cell incentive is there because the state is trying to be supportive of this industry. We are not sure if there will be a compelling and cost-effective case for hydrogen in light-duty vehicles, especially green hydrogen. Be that as it may, our main issue with this is the way it has consistently been used as a misleading headline. It has now been made even more misleading.