Tax Credits for Your Electric Vehicles: The Latest from the IRS
After a many-month-long wait, the IRS has ﬁnally issued its proposed regulations for the new clean vehicle tax credit and the commercial clean vehicle credit.
With this new IRS guidance and its previous guidance, we have answers to most of the questions about how Electric Vehicle (EV) credits work.
The credits are available for qualifying fully electric cars, plug-in hybrid EVs (PHEVs), and fuel cell vehicles.
There are four ways you can potentially beneﬁt from a federal tax credit for an EV you place in service in 2023 or later:
- Purchase an EV, and claim the clean vehicle credit.
- Lease an EV, and benefit from the lessor’s EV discount.
- Purchase a used EV that qualifies for the used EV tax credit.
- Purchase an EV for business use, and claim the new commercial clean vehicle tax credit.
Clean Vehicle Credit
The new clean vehicle credit went into effect on January 1, 2023, and continues through 2032. The maximum credit is $7,500. This credit may be claimed whether a qualifying EV is used for personal or business driving, or for both.
The credit is non-refundable (limited to the purchaser’s tax liability) if the EV is used for personal driving. But to the extent the EV is used for business driving, the credit becomes part of the general business credit and may be carried back for three years and forward for 20 years.
This is a complicated tax credit. To qualify for a 2023 credit, you have to make three things happen.
1. Pass the MAGI Limit
First, your modiﬁed adjusted gross income (MAGI)4 must not exceed the speciﬁed limits in either the taxable year you purchase the EV or your prior year. The MAGI limits you may not exceed are as follows:
- $300,000 for joint-return filers and surviving spouses
- $225,000 for heads of household
- $150,000 for single taxpayers and for married taxpayers who file separately
The IRS’s proposed regulations make it clear that only one credit is allowed per EV, which is then claimed on one return. Thus, if spouses ﬁle separately and each come within the MAGI limit, only one spouse can claim a single credit. The spouses must choose which spouse claims the credit, and that spouse’s name must be on the seller’s report to the IRS.
Key Point: You can buy more than one EV. Say you buy three. You could have two tagged to your Social Security number, and your spouse could have one EV tagged to him or her.
If a C corporation purchases an EV, the AGI limits don’t apply.
If a pass-through entity (that is, a partnership, an S corporation, or a multi-member LLC) purchases an EV and its owners claim the credit, the AGI limits apply to the owners when they ﬁle their Form 1040s.
2. Donʼt Exceed the MSRP Cap
Second, the EV you purchase must come within a price cap. The caps are based on the manufacturer’s suggested retail price (MSRP) listed on the vehicle’s window sticker, not on the sale price. So you can’t get the credit if a dealer gives you a big discount on a luxury EV.
There are two caps: $80,000 and $55,000.
The $80,000 cap is for vans, SUVs, and pickup trucks. The IRS’s proposed regulations helpfully deﬁne these vehicles using the same deﬁnitions used for the Environmental Protection Agency (EPA) fuel economy labeling standards, which are listed on a vehicle’s window sticker.10
As a result, the $80,000 MSRP limit applies to all the following vehicle classes:
- Small Sport Utility Vehicles
- Standard Sport Utility Vehicles
- Small Pickup Trucks Standard Pickup Trucks
If an eligible vehicle is not in one of the classes listed above, the $55,000 MSRP limit applies.
The IRS adopted these EPA deﬁnitions on February 3, 2023. Some vehicles that were previously subject to the $55,000 MSRP limit are now classiﬁed as SUVs and get the beneﬁt of the $80,000 MSRP limit retroactive to January 3, 2023. These include the following vehicles:
- Ford Mustang Mach-E
- Ford Escape PHEV
- Volkswagen ID.4
- Tesla Model Y (every trim level)
3. Pass the Domestic Assembly and Components Rules
The EV’s ﬁnal assembly must occur within North America. In other words, the component parts must be put together at a plant or factory located in the U.S., Canada, or Mexico. This requirement went into effect on August 17, 2022, and eliminated many popular EVs from eligibility for a credit.
April 18, 2023, and later. For vehicles placed in service (delivered) on or after April 18, 2023, the credit amount will depend on the vehicle meeting the critical minerals sourcing and/or battery components sourcing requirements. A vehicle meeting both sourcing requirements may be eligible for the full $7,500 credit, and a vehicle meeting only one of these sourcing requirements may be eligible for a credit of $3,750. A vehicle meeting neither requirement will not be eligible for a credit.
Before April 18, 2023. If you purchased and took delivery of your EV before April 18, 2023, you’ll qualify for a tax credit if you satisfy the AGI limit, price cap, and domestic assembly requirements. The amount of the credit is based on the vehicle’s battery capacity. The maximum credit is $7,500. The minimum credit is generally $3,751.
Finding the qualifying vehicle. The federal government has a website that helps you ﬁnd vehicles that qualify for the tax credits discussed in this article. Click this link to make this government website work for you, and ﬁnd a vehicle that qualiﬁes.
Backdoor Approach to the Tax Credit: Lease an EV
If you can’t ﬁnd an EV that qualiﬁes for the credit, or if your income is too high for you to qualify, you have another alternative: the commercial clean vehicle tax credit. The backdoor approach to this credit on a personal vehicle is to lease an EV from a leasing company.
The leasing company may claim up to a $7,500 commercial clean vehicle tax credit for each EV it purchases. The leasing company may then pass on all or part of the credit to you, the lessor, in the form of reduced leasing costs.
The IRS has stated that this practice is acceptable, so long as the lease is a true lease and not a sale disguised as a lease.
The commercial clean vehicle credit is not subject to most of the restrictions applicable to the clean vehicle credit— that is, there are no income or price restrictions, and the EV need not comply with the critical minerals or battery components rules.
So it should be much easier to ﬁnd an EV to lease at a discount than to purchase one that qualiﬁes for the clean vehicle credit.
Purchasing a Used EV
If you don’t want to lease an EV, you may be able to obtain a credit if you purchase a used EV from a dealer. Used EVs are not subject to the North American assembly, critical minerals, or battery components rules. As a result, many more used EVs qualify for a credit than new ones.
But this credit is limited in so many ways, there’s a good chance you won’t qualify.
First, the income caps are much lower than when you buy a new EV. The purchaser’s MAGI for the year the vehicle is placed in service or the prior year 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.
In addition, the credit is limited to EVs that are at least two years old and are sold by a dealer for no more than $25,000.17 The credit is the lesser of $4,000 or 30 percent of the purchase price. You’re entitled to claim the full credit even if a prior owner claimed the clean vehicle credit for new EVs in a prior year. You can claim the used EV credit only once every three years.
We captured the list of used EVs from the IRS website—see them in a PDF by clicking in footnote 20 below.
Purchasing an EV for Business Use
If you purchase an EV for business driving, you can qualify for the commercial clean vehicle tax credit.
This credit is available for battery EVs or PHEVs with four wheels that have their ﬁnal assembly in the United States. The EV must be acquired for business use or lease (personal or business), not for resale.
This credit is not subject to the critical minerals or battery components rules that apply to the clean vehicle credit. Thus, far more commercial than personal EVs will qualify for this credit starting April 18, 2023.
For EVs with a gross vehicle weight rating less than 14,000 pounds, the credit is equal to the lesser of:
- 15 percent of the vehicle’s basis (30 percent if the vehicle is fully electric—that is, not partly powered by a gasoline or diesel engine), or
- the incremental cost of the vehicle.
The “incremental cost” is the excess of the EV’s purchase price over the price of a comparable non-EV. The IRS has announced that for 2023, it will accept $7,500 as the incremental cost of all EVs other than compact PHEVs. In other words, the incremental cost will not harm your credit on these vehicles.
The maximum credit is $7,500—the same as the clean vehicle credit. Thus, the commercial clean vehicle credit can never be larger than the full clean vehicle credit, but it can be smaller depending on the cost of the EV and the percentage of business use. For example, if you purchase a $60,000 PHEV SUV and use it one-third of the time for business, you’ll qualify for a $3,000 credit (15 percent x $20,000 [one-third of $60,000] = $3,000).
If you claim the commercial clean vehicle credit, you can’t also claim the clean vehicle credit for the same vehicle.
One other good thing about the commercial clean vehicle credit is that it is part of the general business credit. Any amount that can’t be used to reduce the current year’s tax liability can be carried forward 20 years or carried back three years.
For more on the commercial EV tax credit, see New Law: Business Tax Credits for Your Electric Vehicle Purchases.
Claiming an EV Credit
If you are able to purchase an EV that qualiﬁes for the clean vehicle EV credit, the seller must complete a seller’s report with pertinent information and provide a copy to you and the IRS.
The credit will be allowed only on the tax return of the owner listed on the seller’s report. Along with your return, you must ﬁle IRS Form 8936, Qualiﬁed Plug-In Electric Drive Motor Vehicle Credit. The vehicle identiﬁcation number must be included on the form.
For the commercial clean vehicle credit, you (or your corporation or partnership) will ﬁle IRS Form 8936-A, Qualiﬁed Commercial Clean Vehicle Credit. You enter most of the details for each qualiﬁed vehicle on Schedule 1 of Form 8936-A.
With the release of new IRS regulations, all the provisions of the new clean vehicle tax credit took effect on April 18, 2023. These include domestic sourcing rules for critical minerals and for components used in EV batteries. Most current EV models do not satisfy these rules.
As a result, only 22 EVs qualiﬁed for the credit as of April 18. To see the list of vehicles, click this link.
EVs purchased and delivered before April 18, 2023, don’t have to comply with the critical minerals and domestic sourcing rules. There are 35 models that qualiﬁed for the clean vehicle credit before April 18, 2023. To see a video on how to ﬁnd the list of vehicles that qualify, click this link.
The new commercial clean vehicle credit took effect on January 1, 2023. It can be claimed for EVs used for business driving. The credit is equal to 15 percent of the vehicle’s depreciable basis (30 percent if the vehicle is fully electric). The maximum credit is $7,500. The commercial clean vehicle credit is not subject to the critical minerals and domestic sourcing rules, so many more EVs qualify for this credit than for the clean vehicle credit.
EV leasing companies may claim the new commercial clean vehicle credit for EVs they purchase and then lease to their customers. They have the option of passing on all or part of the credit to their customers in the form of reduced leasing costs.
Thus, EV leasing can serve as a backdoor means of beneﬁting from the credit. The IRS has approved this practice so long as the lease is a true lease and not a sale disguised as a lease.
A credit of up to $4,000 is available to purchasers of at least two-year-old EVs. But such used EVs must be purchased from a dealer for less than $25,000. In addition, purchasers are subject to relatively low-income caps: $150,000 for married taxpayers and $75,000 for singles. The used EV credit is not subject to the critical minerals and domestic content rules.
As I highlighted in this article, the new IRS regulations for the clean vehicle tax credit took effect on April 18, 2023, and only 22 EVs qualified for the credit as most current EV models do not meet the domestic sourcing rules for critical minerals and battery components. Vehicles purchased and delivered before April 18, 2023, are not subject to these rules.
Keep in mind with the new IRS regulation, most current EV models do not satisfy these rules.
At Morris + D’Angelo, we are passionate about empowering our customers to make the most of their financial assets through smart tax optimization strategies. If you have questions or concerns about the new Tax Credits for Your Electric Vehicles, our expert team is here to help.
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Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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