Inflation Reduction Act Drastically Reduces Customer Eligibility For Electric Vehicle Tax Credit

09.12.22

On August 16, 2022, the Inflation Reduction Act (the Act) went into effect and made significant changes to the tax credits available to electric vehicle (EV) purchasers. This article outlines key components of the EV tax credit changes that motor vehicle dealers should be aware of as production and demand for EVs continues to rise. Although these EV tax credit changes will not directly impact any dealer’s bottom line, they may influence customer relationships, satisfaction, and the supply chain overall. 

Since 2008, consumers who bought certain eligible EVs could claim a federal tax credit of up to $7,500. The Act immediately ended credits for approximately 70% of the 72 models that were previously eligible by imposing a new requirement that the EV must be assembled in North America. This means that a consumer interested in purchasing an EV in 2022 will no longer be able to claim a tax credit for that purchase unless the ​“final assembly” of that vehicle is in North America. 

Determining the final assembly location of a vehicle is not straightforward because for some manufacturers, the build location may vary based on the specific vehicle, trim, or the date in the Model Year when it was produced. Not to mention that some manufactures (e.g. GM and Tesla) with vehicles assembled in North America already reached a cap of 200,000 EV credits used and therefore are no longer eligible for the EV credit until 2023. 

Guidance from the Internal Revenue Service (IRS) recommends verifying the final assembly location for a specific vehicle by inputting the vehicle identification number (VIN) into the VIN Decoder tool on the National Highway Traffic Safety Administration (NHTSA)’s website. The Department of Energy has also provided a list of Model Year 2022 and early Model Year 2023 EVs that may meet the final assembly requirement in 2022 and 2023. But given that some models are built in multiple locations, the IRS warns that there may be vehicles on this list that do not meet the final assembly requirement in all circumstances. 

So which vehicles still qualify for the EV tax credit through the end of 2022? About 20 models, according to the Department of Energy’s list. And buyers who entered into a binding contract to take possession of an EV before August 16, 2022 may claim the credit, even if they did not take possession of the vehicle until on or after August 16, 2022 (for example, because the vehicle has not been delivered). Dealers should keep this in mind for customers still awaiting vehicle delivery.

While the 200,000-vehicle cap will be removed starting in 2023, new restrictions on sticker price, buyer income, battery component, and mineral sourcing will go into effect. The Act will impose annual increases in sourcing requirements for critical minerals and battery components used in eligible EVs, and manufacturers will be limited to sourcing from countries with free trade agreements with the United States. This may cause some manufacturers to reshape their supply chains currently centered around China for sourcing, which may ultimately impact dealer inventory as a result. 

With sales of battery-powered EVs hitting record highs in 2022, dealers should make sure they stay up-to-date on legislation that impacts consumer demand and decision-making regarding EVs. The drastic changes to the EV tax credit resulting in less eligible vehicles may impact a customer’s decision as to which EV to buy, if any. Customer satisfaction may improve with knowledgeable salespeople who can inform customers about their EV tax credit eligibility. And as manufacturers adjust to new sourcing requirements, dealers should be prepared to adjust to changes in the supply chain landscape.