The Energy Department has released new guidelines that will determine which electric vehicles qualify for federal tax credits in the coming years. The eligibility of these tax credits has a significant impact on auto stocks, making it crucial for investors to stay informed about the details.

Foreign Entities of Concern and Battery Supply Chains

The recently updated guidelines introduce the concept of "foreign entities of concern" (FEOCs) as part of the infrastructure law. These FEOCs are entities that operate in or have ties to China, Russia, North Korea, and Iran. Their participation in domestic battery supply chains is being limited, according to the Energy Department.

China, in particular, plays a significant role in the production of electric vehicle batteries and battery materials. As a result, vehicles purchased in 2024 may not qualify for the full $7,500 tax credit if they utilize battery components or materials sourced from China. This is because Chinese battery makers and battery material companies are considered FEOCs.

Exceptions for Materials Processed Outside of China

However, there is some leeway when it comes to materials processed by Chinese companies outside of China. If these materials are handled correctly by a business entity operating outside of China, they may still be allowed for tax credit eligibility, even if the parent company is ultimately Chinese.

According to Citi analyst Jack Shang, "the US government is more concerned about its EV sector becoming too reliant on batteries that are made in China." This suggests that the goal is to avoid excessive dependence on Chinese-made batteries. As long as batteries are sourced from other countries and there is enough separation from foreign control, investment from all parties, including Chinese companies, will be welcome.

It's important for both the electric vehicle industry and investors to closely monitor these guidelines as they are finalized. The decisions made regarding tax credits for electric vehicles will have a significant impact on the market and the future of the industry.

Ford's Battery Licensing Deal with CATL

Ford has made a strategic move by securing a licensing deal with CATL, China's largest battery maker. CATL, also known as Contemporary Amperex Technology Co. Ltd., qualifies as a First-Ever Offender Certificate (FEOC). This deal opens up opportunities for Ford to benefit from federal subsidies.

There is an interesting twist when it comes to Tesla. CATL supplies batteries for the standard range versions of both the Model 3 and Model Y. However, by 2024, these vehicles are expected to lose half of their tax credits, which is not ideal. Nevertheless, there is still potential for batteries produced by CATL outside of China to be utilized and qualify for tax credits.

It's important to note that tax credit systems are complex, with various factors at play. Different states also offer their own set of credits. In 2024, the $7,500 federal tax credit, or the applicable portion for an electric vehicle (EV), will be deducted at the dealership during purchase. This is advantageous for buyers as they won't have to wait for a tax return to receive the cash back.

Additionally, the leasing loophole remains in effect. Commercial car buyers, including leasing companies, can still take advantage of the tax credit regardless of the EV brand. Buyers have the opportunity to receive a $7,500 discount on any EV, as long as the leased car's price is $7,500 less than the original sticker price.

It is worth mentioning that Ford has not yet responded to a request for comment, and the same applies to Tesla.

In conclusion, Ford's partnership with CATL presents exciting possibilities for both companies in terms of federal subsidies. While Tesla may face challenges with tax credits in the coming years, the option to utilize CATL batteries produced outside of China could still provide some benefits. Buyers should also keep in mind that there are additional state-level credits available, and the 2024 federal tax credit can be redeemed right at the dealership. The leasing loophole also offers an attractive way to maximize the tax credit for commercial car buyers.