In a bid to incentivize the adoption of electric vehicles (EVs), the American government is offering tax credits for eligible buyers as stipulated within the Inflation Reduction Act of 2022. However, recent changes in the qualification criteria for these credits have significantly narrowed the options available to consumers.

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“The primary reason for the credit was to get people to switch to electric vehicles,” said Eric Scaringe, principal at certified public accounting firm UHY. “Now, the government wants to make sure EV parts are sourced within the U.S., and specifically deter you from certain countries.”

To qualify for the full $7,500 tax credit in 2024, an EV must meet a series of manufacturing requirements.

The vehicle must undergo its final assembly within the continent North America and source at least 50% of its battery components from the U.S. or countries that hold free trade agreements with the U.S.

Qualifying vehicles are also required to derive at least 50% of the critical minerals which power its battery from domestic and free-trade sources. By 2027, these battery sourcing rules will increase to 80%, potentially limiting choices even further.

“In some cases, vehicles must be ordered and may be delivered in a different tax year than the order,” said Alison Flores, manager for The Tax Institute at H&R Block. “If taxpayer or vehicle eligibility changed, it’s possible the taxpayer may qualify for a lower credit or no credit.”

While increasing the requirement on where EV battery materials can come from may impact the future eligibility of some vehicles, other stipulations could impact the qualification status of more models as early as next year.

Beginning in 2025, vehicles with critical minerals extracted, processed, or recycled by “entities of concern,” namely China, will not qualify.

It will be a difficult ask for automakers, with China currently accounting for 90% of the EV supply chain, according to a Morgan Stanley report.

Starting in 2024, vehicles with any battery components manufactured or assembled in an entity of concern were also made ineligible for tax credits.

The implications of these regulations are already evident, with 24 EV variations that qualified for tax credits last year no longer meeting the criteria.

Prominent options like the Nissan Leaf, Chevy Blazer, Ford Mustang Mach-E, and certain Tesla models are among those affected. Only five EV models and one plug-in hybrid option now remain available to receive the full credit.

This change is disappointing news for consumers who were planning to purchase an EV in 2024, as dealerships gained the ability to provide instant access to tax credits this year. Before 2024, EV buyers had to wait until after filing their taxes to claim the credit.

To adapt to the new rules, automakers and EV battery manufacturers are investing heavily in North American-based infrastructure, totaling more than $40 billion so far.

The Treasury Department has said that “automakers are adjusting their supply chains to ensure buyers continue to be eligible for the new clean vehicle credit, partnering with allies and bringing jobs and investment back to the United States.”

“Automakers may change where they source battery components and minerals from,” said Jordan Argiz, a partner at BDO USA, which provides audit, tax and advisory services to dealerships. “Additionally, more and more foreign brands are building factories in the U.S. to assemble their vehicles.” 

However, building these facilities will take years, leaving car companies with the challenge of making adjustments to their EV offerings in the interim.

“There are still the incentives that we’ll see from automakers as they balance their inventory,” said Elizabeth Krear, vice president of J.D. Power’s EV practice. “There are still automakers that are going to work their supply chains throughout the year to come back into the fold.”

In response to losing tax credit qualification status, General Motors (GM), which experienced a 93% increase in EV sales last year, is offering incentives equal to the full tax credit for its affected vehicles. Ford, whose F-150 EV retained its vehicle credits, is raising prices on some of its electric trucks by $10,000, while also implementing significant production cuts on certain EV models.

Tesla, the leader in global EV sales during 2023, is also adjusting its strategy. The company has indicated on its website that changes will be made to ensure more of their vehicles qualify for tax credits, with the Cybertruck expected to meet the criteria later this year.