Buying an Electric Vehicle? Know These Tax Law Changes
Are you thinking of buying an electric vehicle or a plug-in hybrid?
And are you looking to beneﬁt from the $7,500 tax credit? If so, you have much to consider—thanks to the newly enacted Inﬂation Reduction Act.
The Electric Vehicle Credit for 2022
The maximum $7,500 credit for fully electric cars or plug-in hybrid electric vehicles that applies to both business and non-business vehicles remains in place through December 31, 2022, subject to one signiﬁcant change.
The Signiﬁcant Change Begins August 17, 2022
Electric vehicles purchased and placed in service after August 16, 2022, qualify for the tax credit only if they are assembled in North America.
The North American assembly requirement cuts the supply, leaving only 23 qualifying electric models; click here for the list. But note the instruction at the bottom of the list that you should verify the build location using the vehicle identiﬁcation number (VIN). Some of the 23 qualifying vehicles are built in North America, but others are not; hence the need to check the build location using the VIN.
Manufacturerʼs Sales Cap Remains in Place Through December 31, 2022
The credit is phased out once a manufacturer sells 200,000 electric vehicles. Many of the most popular electric vehicles have been phased out of the credit, including those manufactured by Tesla, GM, and Toyota.
Click this link to see the electric vehicles that are assembled in North America but for which no credit is available because of the 200,000 unit sales cap.
Electric Vehicles Purchased on or before August 16, 2022
If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, the rules in effect before the enactment of the Inﬂation Reduction Act continue to apply.
- This is so even if you place your electric vehicle in service on or after August 16, 2022 (but before December 31, 2022).
- This also means the pre-ordered electric vehicle does not have to be assembled in North America.
Entering into a binding contract means you signed a formal purchase agreement and made at least a 5 percent non-refundable deposit. Being on a waiting list for an electric vehicle before August 16, 2022, won’t cut it.
The Electric Vehicle Credit for 2023 and Later
A new clean vehicle credit goes into effect in 2023 and continues through 2032. Although the credit maximum remains $7,500, the credit is massively changed. Due to the changes, many taxpayers will no longer be able to claim the credit. And there may be fewer electric vehicles available that qualify for the credit.
Key Point: Business taxpayers have the decision to make when buying an electric vehicle in 2023 or later. They can choose either the new clean vehicle credit or the new qualiﬁed commercial clean vehicle credit.
200,000 Cap Eliminated
The old credit was limited to the sale of 200,000 electric vehicles per manufacturer. The new credit eliminates this cap. Thus, for example, electric vehicles manufactured by GM, Toyota, and Tesla can qualify for the credit if they meet the price cap and other requirements.
The maximum credit for 2023 and later remains at $7,500. But it has two components:
- A $3,750 credit if the electric vehicle complies with the domestic sourcing requirements for critical minerals used in the battery, as explained below
- A $3,750 credit if the electric vehicle satisfies domestic content requirements for battery components
According to the Alliance for Automotive Innovation, no electric vehicle currently available for purchase will qualify for the full $7,500 credit on January 1, 2023. Electric vehicle manufacturers are working feverishly to change this. The critical minerals requirements may prove particularly difﬁcult to comply with over the next few years. The domestic content requirements should be easier.
Thus, there may be a number of electric vehicle models that qualify for only a $3,750 credit.
Key Point: The business buyer avoids the component problem when using the qualiﬁed commercial clean vehicle credit.
Buyer Income Caps
The credit may not be claimed by taxpayers whose modiﬁed adjusted gross income (AGI) is more than:
- $300,000 for joint-return filers and surviving spouses,
- $225,000 for heads of household, or
- $150,000 for unmarried taxpayers and married taxpayers who file separately.
Modiﬁed AGI is adjusted gross income plus foreign earned income that is otherwise excluded from U.S. taxation. You can use your modiﬁed AGI for the prior year if it is lower.
Key Point: The business buyer avoids the AGI caps when using the qualiﬁed commercial clean vehicle credit.
Electric Vehicle Price Caps
The tax code does not allow the new clean vehicle credit if the manufacturer’s suggested retail price (MSRP) for the vehicle exceeds:
- $80,000 for a van,
- $80,000 for a sports utility vehicle (SUV),
- $80,000 for a pickup truck, or
- $55,000 for any other vehicle.
The IRS will provide guidance on which electric vehicles fall within these categories. Note that these caps are cliffs, not phase-outs. The credit is totally eliminated if the applicable MSRP is even one dollar over the cap.
Key Point: The business buyer avoids the dollar caps when using the qualiﬁed commercial clean vehicle credit.
Domestic Content Requirement for Electric Vehicle Batteries
The credit is designed to encourage the manufacture of electric vehicles in the United States. Thus, it imposes domestic content requirements on critical minerals and components used in electric vehicle batteries. The IRS will issue guidance on how these rules will work.
Critical minerals include lithium, copper, cobalt, and nickel used in electric vehicle batteries. Currently, the U.S. imports the vast majority of these minerals from China, Brazil, Chile, Australia, and South Africa.
The new credit requires that a speciﬁc percentage of critical minerals be sourced in North America or from countries with which the U.S. has a free trade agreement. The sourcing percentage rises from 40 percent in 2023 to 80 percent in 2027 and later. This requirement will likely cause production bottlenecks and drive up the cost of electric vehicles.
In addition, a speciﬁc percentage of battery components must be manufactured or assembled in North America. The percentage rises from 50 percent in 2023 to 100 percent in 2029 and later.
Beginning in 2025, any electric vehicle with battery minerals from a “foreign entity of concern” will be excluded from the tax credit. These foreign entities include China, Russia, North Korea, and Iran. The same rule applies starting in 2024 for battery components. This should knock China completely out of the U.S. electric vehicle battery supply chain by 2025.
Domestic Assembly Requirement
The ﬁnal assembly of the electric vehicle must occur within North America.12 In other words, the component parts must be put together at a plant or factory located in the U.S., Canada, or Mexico. This will be an easier requirement for electric vehicle manufacturers to meet than the battery sourcing rules.
Credit for Used Electric Vehicles
For the ﬁrst time, a clean vehicle credit will be available to individual purchasers of used electric vehicles (i.e., not corporations) starting in 2023. This credit is limited to electric vehicles that cost $25,000 or less and that are at least two years old. Very few used electric vehicles currently come in under that $25,000 price cap, although this may change in future years.
The credit is the lesser of $4,000 or 30 percent of the purchase price. To claim the credit, the individual taxpayer must purchase the used electric vehicle from a dealer, not from a private party. In addition, the purchaser’s AGI must be less than:
- $150,000 for joint-return filers and surviving spouses, · $112,500 for heads of household, or
- $75,000 for single taxpayers and married taxpayers who file separately.
The used electric vehicle credit may be claimed only once per used electric vehicle—that is, by the ﬁrst purchaser of the used electric vehicle. Additionally, the purchaser must not have claimed a used electric vehicle credit during the prior three years.
Used electric vehicles don’t have to satisfy either the same domestic content requirement for batteries as new electric vehicles or the North American assembly rules.
New Rule for 2024 and Later
Point-of-Sale Credit: Starting in 2024, an electric vehicle purchaser may transfer their credit to the dealer, who will, in turn, offer up to a $7,500 cash rebate or price reduction, or treat the purchaser as having made a down payment in the amount of the credit.15 This way, electric vehicle purchasers will beneﬁt from the credit immediately rather than having to wait until they ﬁle their tax returns.
Key Point: This is a tremendous boon for lower-income purchasers because the credit is non-refundable and some taxpayers may not owe enough tax to use the entire $7,500 credit when they ﬁle their taxes.
What If You Qualify for Both the Personal and Business Electric Vehicle Credits?
You could qualify for the electric vehicle tax credit using either the clean vehicle credit or the commercial clean vehicle credit. Note the word “either.” It’s either one or the other, not both.
Ordinarily, if you’re able to ﬁnd an electric vehicle that qualiﬁes for the full $7,500 personal clean vehicle credit and you come within the income limits, you should claim the personal credit. The commercial clean vehicle credit can never be larger than the personal credit (unless the electric vehicle weighs over 14,000 pounds), but it can be smaller.
The commercial clean vehicle credit is equal to the lesser of:
- 15 percent of the vehicle’s basis (30 percent if the vehicle is fully electric), or
- The incremental cost of the vehicle (the excess of the electric vehicle’s purchase price over the price · of a comparable non-electric vehicle).
- The maximum credit is $7,500—the same as the personal credit.
For example, if you purchase an $80,000 fully electric van and use it 25 percent for business, your depreciable basis is $20,000. Your maximum commercial clean vehicle credit is $6,000 (30 percent x $20,000).
But if you claim the personal clean vehicle credit, you’ll get $7,500—which you need to allocate, claiming 25 percent as a business credit and 75 percent as personal credit.
Key Point: With no taxable income, you would get zero beneﬁt from the non-refundable personal tax credit. But you can carry the non-refundable business credit back one year and forward until used for up to 20 years.
Also, if you purchase your electric vehicle during 2024 or later, you’ll be able to transfer the personal clean vehicle credit to the dealer and get up to $7,500 in a price reduction or rebate at the time of purchase. This is not possible with the commercial clean vehicle credit—you must claim the commercial credit when you ﬁle your tax return.
Here are seven things to know from this article:
- The qualiﬁed plug-in electric drive motor vehicle credit remains in place through December 31, 2022, but if you purchase a qualifying electric vehicle after August 16, 2022, it must have been assembled in North America. The credit maximum remains $7,500.
- A new clean vehicle tax credit takes effect in 2023. The maximum amount of the new credit is also $7,500, but many new requirements are imposed, including:
– Electric vehicle price caps,
– Electric vehicle purchaser income caps, and
– Domestic sourcing requirements for Electric Vehicle Batteries.
- Beginning in 2023, the new clean vehicle credit eliminates the 200,000 vehicles per manufacturer cap. Popular electric vehicles manufactured by GM, Toyota, and Tesla will qualify for the 2023 credit if they meet the price cap and other requirements.
- Starting in 2023, individual taxpayers can purchase certain used electric vehicles from dealers (not individuals) and claim a credit of up to $4,000 if their income is below an annual cap.
- Starting in 2024, electric vehicle purchasers will be able to transfer their credit to the dealer, who will in turn offer them up to $7,500 in a cash rebate or price reduction, or treat the credit as a down payment.
- Business taxpayers have the option of qualifying for the tax credit under either the personal clean vehicle credit or the commercial clean vehicle credit.
- The commercial clean vehicle credit avoids the North American assembly rules, income limits, and price-of-vehicle limits.
So, now you’re up-to-date on the newly enacted Inflation Reduction Act that includes an expanded tax credit for electric vehicles.
Although personal credit for electric vehicles has gotten most of the publicity, the new law launched a new Commercial Clean Vehicle Credit—specifically for Business-Use Electric Vehicles. And it’s much better than the credit for Personal-Use Electric Vehicles.
The new law’s Personal-Use Electric Vehicle Credit is now called the Clean Vehicle Credit. But, it comes with many new restrictions…
If you have questions, need clarity, or need help understanding how to maximize your Tax Credits for your Business Electric Vehicles to further help retain or maximize your financial gains, please contact us at Morris + D’Angelo. This is our Expertise! Yes, we have Crypto Experts available for you.
At Morris + D’Angelo, we believe that Tax Optimization is one of the most empowering and responsible things you can do to protect your growing financial assets. Tax optimization looks at a multi-year approach to minimizing tax costs. Tax avoidance is integral to tax optimization.
Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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