The recently enacted Inflation Reduction Act of 2022 (Inflation Reduction Act) contains many energy-related tax provisions. This article explores how the new law affects electric vehicle tax credits.
Background
Prior to the Inflation Reduction Act, a new vehicle purchased and delivered by December 31, 2022, could qualify for a tax credit ranging between $2,500 and $7,500, depending upon the capacity of the battery. The credit begins to phase out for a manufacturer when that manufacturer sells 200,000 vehicles.
Clean vehicle tax credit
This tax credit is for the purchase of new qualified vehicles.
The new tax credit and the related provisions are generally effective as of January 1, 2023. The credit worth up to $7,500 is made of two parts: a $3,750 credit for satisfying the critical materials requirement (where a minimum percentage of materials in the battery must be sourced to the US or a country with which the US has a free trade agreement) and another $3,750 for satisfying the battery component requirement (where a minimum percentage of the battery must be manufactured or assembled in North America).
Final assembly must occur in North America for vehicles purchased after August 16, 2022, the date the Inflation Reduction Act was enacted into law. The build location can be determined either by referring the vehicle identification number (VIN) to the US Department of Transportation’s VIN decoder or by an information label affixed to the vehicle. The US Department of Energy has posted a list of vehicles that meet the final assembly in North America requirement.
Note: the IRS has announced that for vehicles purchased before August 16, 2022, and delivered after that date, the new final assembly rule does not apply.
Higher-income taxpayers will not qualify. The tax credit is only allowed where the lesser of modified adjusted gross income (AGI) for either the current or previous year does not exceed $300,000 for parties who are married filing jointly, $225,000 for heads of household or $150,000 for others. This means, where possible, a client may need to buy in 2022 while they can still qualify.
The new law imposes a limit on the purchase price. Cars with a manufacturer’s suggested retail price (MSRP) in excess of $55,000 do not qualify. Vans, SUVs and pickup trucks with an MSRP in excess of $80,000 also do not qualify.
For vehicles placed into service after December 31, 2023, the buyer will be able to transfer the tax credit to the car dealer at the time of purchase. Clients need to be aware this could create a clawback of the credit at tax time if their AGI exceeds the allowable limits.
This tax credit is also available for new qualified fuel cell motor vehicles. These are vehicles that are propelled by one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel.
The old rule capping car sales at 200,000 units per manufacturer is eliminated.
Previously owned clean vehicle tax credit
This new non-refundable tax credit is for the purchase of qualified used vehicles. The credit is the lesser of $4,000 or 30% of the sales price capped at a maximum vehicle cost of $25,000. The credit is available for vehicles purchased after 2022.
Similar to the new clean vehicle tax credit, the credit is only available to lower income taxpayers. However, the AGI thresholds are lower. The credit is permitted only if the lesser of either the current or preceding year modified AGI does not exceed $150,000 for parties who are married filing jointly, $112,500 for heads of household or $75,000 for others.
The model year must be at least two years earlier than the year the client buys the vehicle. The purchase must be from a qualified dealer and must be the first time it is sold as a used vehicle since August 16, 2022 (the date the new law was enacted). Once a client takes this credit, they must wait three years from the date of purchase to once again qualify.
As with the new clean vehicle tax credit beginning in 2024, the client will be able to transfer the credit to the dealer upon purchase.
Tax credit for qualified commercial clean vehicles
This is a new business tax credit for qualified commercial clean vehicles. The credit is the lesser of either 15% of the basis (30% if the vehicle is not powered by gas or diesel) or the incremental cost over a comparable vehicle. The credit is up to $7,500 or $40,000 where gross vehicle weight is at least 14,000 pounds.
For all three of these vehicle tax credits, the taxpayer will have to include the VIN on their tax returns.
For more tax updates and trends, check out a Becker CPE tax course.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.
