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Tax credits for electric vehicles are about to get confusing

Tax credits for electric vehicles are about to get confusing

The coming year could be overwhelming for anyone shopping for an electric vehicle.

a Law That goes into effect Jan. 1 will expand and crowd out the list of vehicles eligible for federal tax credits of up to $7,500 in ways that officials and automakers are still trying to sort out.

The Biden administration laid down on Thursday List of new cars that will be eligible for credits. That list, which included models from Chrysler, Ford, Jeep, Lincoln, Nissan and Rivian, is not complete, and the Treasury Department said it will be added to “over the coming days and weeks.”

Although not on the list, models from Tesla and General Motors, which exceeded the maximum number of cars that could collect benefits under an old law, are expected to be eligible again in January because the new law, the Inflation Reduction Act, eliminates the cap. But imported cars that qualified under the old law no longer qualify; These include cars made by brands such as Hyundai and Kia.

Even when the list published Thursday is complete, it may only be good for three months or so because officials plan to implement other parts of the law in March. That’s when the Biden administration plans new rules aimed at forcing automakers to buy batteries and raw materials from suppliers in the United States and its trade allies. Automotive experts said very few, if any, electric cars may qualify immediately after those rules go into effect.

The Reducing Inflation Act, which President Biden signed in August, is designed to promote battery-powered vehicles while providing incentives for companies to make them in North America. It is also designed to exclude competitors such as China and Russia from the supply chain.

But the details of how to apply those principles were left to the Treasury Department, which had only four months to work through dozens of brain-numbing technical details not fully addressed in the legislation.

For example, for a vehicle to qualify for credits, at least 40 percent of the metals in its battery, measured by its value, must come from the United States or a trade ally. The share will rise in stages to 80 percent in 2027. But it is very difficult to trace the origin of the raw materials. The law did not specify which countries should be considered trade allies.

The preliminary list released by the Treasury Department on Thursday includes countries such as Chile, Nicaragua and Singapore because they have trade agreements with the United States. but it excludes the European Union, with which the United States does not have a trade agreement. (Officials left open the possibility of countries being added to the list later.)

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Federal regulators face a dilemma. If they interpret the law too strictly, automakers may not attempt to qualify for the credits. If they interpret the law too liberally, it may miss one of its main goals — to force automakers to create jobs in the United States and keep supply chains away from China or other geopolitical adversaries.

China dominates processing of raw materials for batteries such as lithium and graphite, and controls mines in the Democratic Republic of the Congo, the source of most of the world. cobaltan essential component of the battery.

Since August, only cars assembled in the United States, Canada, or Mexico were eligible for the full $7,500 credit. On January 1, the law removed the 200,000-car-per-factory limit under an old law.

After March, or when the Treasury Department decides how to enforce restrictions on imported battery metals and components, the rules will get even stricter. It is possible that no vehicle will qualify immediately.

In other words, car buyers may have a short period — from January to March — to collect the full credit. Then they will have to wait months or years for mines to start producing crude in friendly countries, refineries to be built and domestic battery assembly lines to start rolling, analysts say.

Pablo D.C., CEO of Volkswagen of America, which makes electric cars in Chattanooga, Tennessee, and Mexico, pleaded to give automakers a few years to adjust. He said in an interview, “When you have an industry that has been disrupted the way it has been, you can’t make these sudden changes in technology, production and mineral extraction.”

And it is unlikely that Congress will review the law, given that Republicans will soon take control of the House of Representatives. Even with Democrats controlling both houses, the inflation-reduction bill was only passed after the Senate Majority Leader, Chuck Schumer, made major concessions to Sen. Joe Manchin III, Democrat of West Virginia, who initially joined Republicans in his opposition.

But it looks like the Treasury will try to give automakers and buyers a break by interpreting the law flexibly. For example, a battery component that is assembled in the United States, Canada or Mexico is likely to pass through, even if it is made from imported parts, the Treasury Department said Wednesday in a preliminary report.

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Some aspects of the law are fairly straightforward. Wealthy car buyers—defined as those whose adjusted adjusted gross income on their tax returns is $150,000 for individuals and $300,000 for married couples—will not be able to claim credits.

SUVs, vans, and vans are only eligible for credits if the manufacturer’s suggested list price is less than $80,000. For sedans and other vehicles, the price limit is $55,000. For plug-in hybrid cars, the size of the tax credit depends on the size of the battery.

This means expensive electric cars from companies like Mercedes Benz And the Lucid It probably won’t qualify even though it’s made in the US. Either their label prices are too high or their clientele is too rich.

How to classify vehicles is another issue. Officials are likely to define an SUV more narrowly than automakers’ marketing departments do.

A loophole in the law could provide a way for consumers to take advantage of credits even for vehicles that don’t meet local sourcing requirements.

The law excludes commercial vehicles from the metal and battery resource quotas, requirements for vehicle manufacture in North America. Auto industry lobbyists want the administration to interpret this ruling to mean that cars purchased by rental companies are commercial vehicles.

If that argument holds, and the Treasury Department indicated Thursday it will, leasing, shared transportation services and leasing companies could collect credits on imported vehicles or those with foreign parts and pass the savings on to their customers.

The loophole enraged Mr. Manchin, who on Thursday accused the Biden administration of bowing to industry pressure and undermining policies designed “to bring energy and manufacturing supply chains ashore to protect our national security, reduce our dependence on foreign adversaries and create jobs here in the United States of America.”

Mr. Manchin said he would introduce legislation “preventing this dangerous interpretation from the Treasury Department from moving forward.”

Excluding the rental companies may help calm down Asian and European allies Those who have complained about inflationary law discriminating against their automakers. South Korean leaders are particularly upset.

South Korea is a close military ally of the United States, and Hyundai is investing $5.5 billion to build batteries and electric cars in Georgia. But the plant, which will employ 8,000 people, won’t start mass-producing the vehicles until 2025.

Until then, the rules are a blow to Hyundai’s ambitions in the United States, where the Ioniq 5 was a hugely popular electric model. During the first nine months of the year, Hyundai and its sister company, Kia, captured nearly 8 percent of the electric vehicle market in the United States, second only to Tesla, which had 64 percent, according to Kelley Blue Book. Hyundai has requested that its cars be eligible for credits in order for the Georgia operation to run, but it seems unlikely that US officials will grant the request.

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For the first time, used electric cars will be eligible for credits of up to $4,000. There are limitations. The credit only applies to vehicles that sold for less than $25,000 and that are at least 2 years old. Buyers can earn no more than $150,000 if they file taxes as a couple, and no more than $75,000 if they file singly. The credit applies to a vehicle only once, and buyers can claim a credit no more than once every three years.

However, the credit means that electric cars should be more affordable for middle-income buyers. “It has the potential to change the way the used car industry operates,” said Scott Case, CEO of Recurrent, a company that tracks the used electric vehicle market.

For buyers confused by all these new rules, there will be ways to find out if the vehicles they’re considering will qualify for tax credits. Department of Energy keeps running List Eligible Vehicles – List will be updated later Thursday. Frequent site Buyers are allowed to type in the VIN and see if the used car qualifies.

One way that buyers can ensure that they will receive credit is by insisting that merchants apply it to the purchase price. This was not allowed under the old rules but will be possible from 2024. The change will help people whose taxes are very low to claim the full credit.

For all their complaints about the way the inflation-reducing law was written, automakers generally love the legislation. Speaking to investors in October, Ford CEO Jim Farley noted that the law contained subsidies for battery production separate from tax breaks for car buyers that could be worth up to $7 billion for the company and its suppliers through 2026. Those subsidies should help with Lower the price of electric cars.

Mr. Farley said the inflationary act would have “a wide range of positive effects for both our customers and Ford.”