Leased EVs Made Outside of US Eligible for Clean Vehicle Tax Credit: US Treasury

A Tesla Inc. electric vehicle charges at a supercharger station in Redondo Beach, Calif., on Jan. 4, 2021. (Patrick T. Fallon/AFP via Getty Images)

Electric Vehicles (EVs) that are assembled outside of but leased within the United States may be eligible for clean vehicle tax credits, according to new guidelines published by the U.S. Treasury Department.

This follows a plea in November from South Korean and Japanese officials who sought more “flexibility” from the U.S. for foreign automakers in reference to tax credit eligibility.

In an IRS fact sheet (pdf) published on Dec. 29, several changes were made to the Inflation Reduction Act of 2022 (IRA) for “qualified plug-in electric drive motor vehicles, including adding fuel cell vehicles.”

The removal of “North American final assembly” from section 45W was the notable change, meaning that foreign-made electric vehicles may qualify for tax credits if used for commercial purposes.

Commercial vehicle tax credits are covered under section 45W of the IRA, while a standard credit is covered under section 30D of the IRA.

Prior to the changes, it was a requirement that electric vehicles undergo final assembly in North America to be qualified for the tax credit.

The IRA was signed into law in August under the Biden administration, and allows Americans who purchase an electric vehicle from Jan. 1, 2023, to be eligible to receive the $7,500 tax credit.

According to the updated fact sheet, a leased electric vehicle is eligible for a commercial tax credit if it is taken by the lessor, and does not need to be assembled in the United States—meaning that electric vehicle dealerships can get the $7,500 tax credit for each leased electric vehicle.

Then the tax credit could be passed on to the leasee, the person leasing the electric vehicle, by being charged reduced lease payments.

Additionally, South Korea, Japan, the EU, and some automakers in early December argued that the commercial tax credit would boost local electric vehicle access.

US Senator Responds to Changes

U.S. Senator Joe Manchin (D-W.Va.), a Democrat who chairs the energy panel, urged Treasury to pause implementation of both commercial and new consumer electric vehicle tax credits, saying that the Treasury Department had rewarded “companies looking for loopholes.”

“The intent of the Inflation Reduction Act was clear—bring our energy and manufacturing supply chains onshore to protect our national security, reduce our dependence on foreign adversaries and create jobs right here in the United States,” Manchin said in a statement.

“It is unthinkable that we still depend on China and Russia for the materials and manufacturing necessary to power our nation in the 21st century and I cannot fathom why the Biden Administration would ensure we continue on this path.

“It only serves to weaken our ability to become a more energy secure nation,” Manchin said.

However, in a White House press release published in August, the Biden administration said that the IRA was “the most aggressive action on tackling the climate crisis in American history, which will lift up American workers and create good-paying, union jobs across the country.”

Restrictions Still Apply

Americans who purchase electric vehicles outside of North America won’t be eligible for the $7,500 tax credit.

The law also restricts battery minerals and component sourcing, sets income and price caps for qualifying vehicles, and seeks to phase out Chinese battery minerals or components.

However, for Americans who purchase electric vehicles that are assembled in North America, additional qualifiers will need to be met.

For example, new single electric vehicle buyers must have an annual income of less than $150,000, although that rises to $225,000 for heads of household and $300,000 for married couples who file their taxes jointly, according to Edmunds.

Purchasers of used electric vehicles must have an annual income of less than $75,000 if single, $150,000 if filing jointly as a married couple, and $112,500 if they are the head of a household.

Beginning in March 2023, the Department of the Treasury will issue further guidance governing battery minerals and components, according to NerdWallet.

Under the rules, at least 40 percent of the critical minerals used in the battery must be sourced from North America or a country with a U.S. free trade agreement or be recycled in North America, and cannot be from a “foreign entity of concern,” although that threshold will eventually rise to 80 percent in 2027.

Meanwhile, around 50 percent of the battery parts needed for the electric vehicle will have to be made or assembled in the United States or in any country that has a free-trade agreement with the United States, with this threshold eventually rising to 100 percent in 2029.

Reliability of Electric Vehicles

According to a study published in November by Consumer Reports (CR), electric vehicles are among some of the least reliable sold in the United States.

The study noted that while Tesla continues to be the “market leader in EV sales and the manufacturer on which CR received the most data from owners,” some vehicles from the automaker continue to be plagued with issues with the body hardware, steering/suspension, paint and trim, and the climate system.

However, the study found that hybrids are more reliable than plug-ins.

“With today’s inflated car prices, people are keeping their vehicles longer than ever. A hybrid can provide years of trouble-free miles, and they are a good defense against rising fuel prices,” said Jake Fisher, Consumer Reports’s senior director of automotive testing, in a statement.

“With a top-rated hybrid, you get solid reliability, better fuel economy, and lower maintenance costs without sacrificing acceleration, ride comfort, or cabin quietness.”

Meanwhile, 85 percent of drivers in the United States cannot afford an electric vehicle, reported Bloomberg.

Katabella Roberts and Reuters contributed to this report.