Driving Into Savings: The Inflation Reduction Act Revs Up Clean Vehicle Credits
President Biden signed the Inflation Reduction Act (IRA) on Aug. 16, 2022, which created a host of new tax incentives for individuals and businesses to invest in green energy. Among the most notable are the credits for purchasing clean vehicles, a phrase which includes electric vehicles (EVs) and plug-in hybrid electric vehicle (PHEVs). The IRA provides for three separate clean vehicle credits: a revised credit for individuals purchasing new clean vehicles, a new credit for individuals purchasing pre-owned clean vehicles, and a new credit for businesses purchasing new clean vehicles.
Revised Individual Credit for New Clean Vehicles
The IRA revises the credit that was already offered to individuals purchasing a new electric vehicle. Although the maximum credit amount is the same, the revised credit’s requirements differ significantly from its predecessor.
Prior to 2023, purchasers of a new EV or PHEV could claim a credit between $2,500 and $7,500 depending on the type of vehicle and its battery capacity. However, for certain makes of vehicle, such as Tesla and General Motors, no credit was available because the old law limited the credit to the manufacturer’s first 200,000 qualifying vehicles sold. The revised credit included in the IRA has no such cap, so individuals are free to purchase from those previously limited manufacturers.
However, while removing the manufacturer cap expanded the pool of eligible vehicles, the IRA also restricted that pool by imposing strict new sourcing requirements. To qualify for the revised credit, a new clean vehicle needs to be assembled in North America (the “final assembly” requirement) and meet at least one of two additional battery sourcing requirements: a specific percentage of either 1) the minerals used in the battery, or 2) the battery’s physical components must be sourced from the United States or a country with which the United States has a free trade agreement. If the vehicle is assembled in North America and meets only one of the battery sourcing requirements, it is eligible for a $3,750 credit. If the vehicle is assembled in North America and meets both battery sourcing requirements, it is eligible for a $7,500 credit.
There are two notable transition rules relating to the new final assembly and battery sourcing requirements.
- Taxpayers who purchased and took delivery of a new clean vehicle between Aug. 16, 2022 (the date the IRA was enacted) and Dec. 31, 2022, were subject to all of the requirements of the previous law and also the IRA’s final assembly requirement.
- Taxpayers who signed a binding purchase agreement before the IRA was enacted and who took or will take delivery after that date may elect to claim the credit subject to the requirements of the old law, and therefore, avoid the final assembly and battery sourcing requirements.
Initially, it was unclear which vehicles – if any – would meet either of the battery sourcing requirements. In response to this uncertainty, the Treasury Department announced that, until it released additional guidance on how manufacturers may comply with the battery sourcing requirements, new clean vehicles only needed to comply with the final assembly requirement to qualify for a credit. Further, the Treasury announced the amount of the credit for a vehicle depended entirely on battery capacity – the same metric used by the old law. This announcement allowed a wide variety of vehicle models to qualify for the full credit until April 18, 2023, when the Treasury issued the additional guidance imposing the sourcing requirements. As a result of the new guidance, the list of qualifying vehicles shrunk, with some popular manufacturers like Nissan and Volvo falling off the list entirely.
In addition to the final assembly and battery sourcing requirements, the IRA’s revised credit for new clean vehicles is subject to additional requirements including:
- MSRP Limits – The MSRP must be below $80,000 for trucks, vans, and SUVs, and $55,000 for all else.
- Individual AGI Limits – The taxpayer’s adjusted gross income must be below $300,000 if married filing jointly, $225,000 if head of household, or $150,000 if filing as any other status. This threshold is based on the taxpayer’s modified AGI in either the year they take possession of the vehicle or the year before. A taxpayer need only fall below the threshold in one of the two years to qualify.
Click here to see a chart that compares the requirements across the various transition dates.
Although the IRA imposes new eligibility restrictions, many vehicles have already been certified as qualifying – and the list continues to grow. Click here to see which vehicles qualify for the revised credit and the credit amount.
Finally, it may behoove would-be purchasers to wait until next year. Beginning in 2024, individuals will be able to transfer the credit to the dealership in exchange for a reduction in sticker price. As a result, buyers will not need to wait to file their tax returns to receive the benefit – they will be able to take advantage of the credit when they buy the vehicle.
Individual Credit for Pre-Owned Vehicles
The IRA has also introduced a credit for the purchase of pre-owned clean vehicles worth 30% of the purchase price up to a maximum of $4,000. There are neither sourcing requirements nor a final assembly requirement for the pre-owned vehicle credit. Thus, eligibility for the pre-owned clean vehicles credit is generally more straightforward, but this credit is subject to the following requirements:
- Vehicle Age – The vehicle must be at least two model years old at the time of purchase.
- Type of Seller – The vehicle must be purchased from a dealership. Vehicles purchased from private sellers do not qualify.
- Purchase Price – The purchase price of the vehicle may not exceed $25,000.
- First Re-Sale – The vehicle only qualifies if the sale is the first re-sale of such vehicle since the enactment of the IRA.
- Individual AGI Limits – The taxpayer’s adjusted gross income for the year of purchase or the preceding tax year must fall below $150,000 if married filing jointly, $112,500 if head of household, and $75,000 if filing as any other status.
Business Credit for New Commercial Clean Vehicles
The clean vehicle credit available to businesses is the most straightforward. The credit amount is equal to the lesser of 15% of basis (or 30% for a vehicle not powered by a gas or diesel engine) or the incremental cost of the vehicle. The incremental cost is the excess of the vehicle’s purchase price over the purchase price of a comparable vehicle. However, the credit remains capped at $7,500 for most light vehicles, heavy vehicles could receive a credit of up to $40,000. There are no sourcing requirements, no final assembly requirement, and no income restrictions. Rather, a vehicle need only have a battery with a capacity of at least 7 kWh in the case of vehicles weighing less than 14,000 pounds or 15 kWh in the case of heavy vehicles.
A Workaround for Non-qualifying Vehicles or Buyers
For individuals who do not fall below the AGI limits for a new clean vehicle credit or who want to acquire an electric vehicle that fails to meet one or more of the sourcing, assembly, or MSRP requirements, leasing may be an option. Some vehicle dealerships have begun to claim the commercial clean vehicle credit on vehicles they purchase for lease and then pass those savings on to lessees. Interested individuals should check with dealerships in their area.
Additional Government Resources
The IRS has provided a series of frequently asked questions that provide additional information regarding all three of these credits.
The Department of Energy allows for specific vehicle lookup to determine if the final assembly requirement is satisfied.
Please contact a KSM advisor with questions or complete this form.
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