The Inflation Reduction Act May Be Worth a Drive
By Kelly Yim, Director, Tax & Business Services
If you are planning to buy an electric vehicle (“EV”), there is great news. The Inflation Reduction Act (“IRA”) created new taxpayer credits for placing an EV in service after December 31, 2022. There are credits for new and used clean vehicles, as well as clean commercial vehicles. Whether for personal or business use, there are significant tax savings with every purchase. Here are some of the highlights:
The New Clean Vehicle Credit
Taxpayers may claim a tax credit of up to $7,500 on the purchase or lease of a new EV. To qualify, the vehicle must be placed in service after December 31, 2022, and before 2033.
There are also other standards for the credit. Here are the four most important:
1. The vehicle must satisfy domestic content requirements for critical minerals and battery components, and its final assembly must occur in North America. The credit has two domestic content components:
- A $3,750 credit applies for critical minerals in the battery.
- A $3,750 credit applies for battery components.
The domestic content requirement for critical minerals is satisfied if at least 40% of the applicable critical minerals (such as aluminum, chromium, cobalt, graphite, nickel, tin, etc.) come from the U.S. or a country with a free trade agreement with the U.S. The battery component requirement is satisfied if the vehicle’s qualified manufacturer certifies that 50% of the value of the battery components were manufactured or assembled in North America. Both the critical mineral and the battery component percentage requirements apply to vehicles placed in service before January 1, 2024. These percentages will gradually increase each year.
2. The credit is not available to high-income taxpayers whose modified adjusted gross income (MAGI) exceeds:
- $300,000 for married filing jointly and surviving spouses;
- $225,000 for heads of household; or
- $150,000 for other taxpayers.
3. Vehicle price and type also matter. The credit is not allowed if the manufacturer’s suggested retail price (MSRP) for the vehicle exceeds $80,000 for a van, sport utility vehicle (SUV), or pickup truck; or $55,000 for any other vehicle.
4. Finally and most importantly, the new clean vehicle credit is a nonrefundable personal credit, meaning you need to have federal tax liability on your individual income tax return to get a full or partial benefit. To get the full $7,500 credit, you must have a federal tax liability of at least $7,500. Any unused credit cannot be refunded or carried forward — it is permanently lost.
As an alternative, you may elect to transfer the credit to a qualified dealer when you purchase the EV. In exchange, you’ll receive a $7,500 cash rebate, price reduction, or down payment on the vehicle. Please note the transfer election applies only to vehicles acquired after 2023.
The Commercial Clean Vehicle Credit
If the EV is for your trade or business, you may want to consider buying or leasing it under your business’s name. Starting in 2023, you may qualify for the commercial clean vehicle credit that applies to certain EVs placed in service for business purposes. The credit is equal to the lesser of the following amounts:
- Fifteen percent of the vehicle purchase price for plug-in hybrid electric vehicles (30% of the vehicle purchase price for EVs and fuel cell electric vehicles), or;
- The incremental cost of the vehicle.
A vehicle’s incremental cost is the excess of the vehicle’s purchase price beyond the price of a comparable vehicle, which is any vehicle powered solely by a gasoline or diesel internal combustion engine and comparable in size and use.
The maximum credit will be capped at $7,500 for vehicles with a gross vehicle weight rating (GVWR) of less than 14,000 pounds (lbs.), or $40,000 for all other vehicles.
By putting the EV under your business name, your maximum credit can be as high as $40,000 (assuming your EV’s GVWR is greater than 14,000 lbs.). This is more than five times the maximum credit under the new clean vehicle credit available to individual taxpayers.
As with the new clean vehicle credit, the EV must be brand new. However, this credit is much easier to claim than the new clean vehicle credit because it doesn’t have the modified adjusted gross income limitations, vehicle MSRP pricing caps, mineral and battery component requirements, or the final assembly requirements.
To qualify, an EV with a GVWR of less than 14,000 lbs. must have a battery capacity of at least seven kilowatt-hours (kwh). A vehicle with a GVWR above 14,000 lbs. must have a battery capacity of at least 15 kwh. Please note that the commercial clean vehicle credit is not allowed for a vehicle that was allowed a new clean vehicle credit.
Unlike the new clean vehicle credit, any unused funds from the commercial clean vehicle credit can be carried back one year and forward 20 years.
The Used Clean Vehicle Credit (IRC 25E)
While both the new clean vehicle credit and commercial clean vehicle credit are limited to brand-new vehicles, taxpayers can also benefit by buying a used EV. For the first time ever, Congress will give you a $4,000 tax credit for certain used or previously owned EVs acquired after 2022 and before 2033. In case you are wondering what “used or previously owned” means, it means the car is at least two years old.
Here are the requirements to qualify for the $4,000 credit. You cannot be a dependent of another person, and you must not have claimed the previously owned clean vehicle credit during the last three-year period ending on the date of the vehicle’s purchase. Your modified adjusted gross income cannot exceed $150,000 if you are filing jointly, $112,500 if filing head of household, or $75,000 if filing single. The used EV’s GVWR must be less than 14,000 lbs. Finally, the sale must take place through a dealer, the vehicle must carry a sale price of $25,000 or less, and it must be the first transfer since August 16, 2022.
Like the new clean vehicle credit, the used clean vehicle credit is a non-refundable personal credit. You must have a federal tax liability of at least $4,000 to fully benefit from the credit. Any unused credit cannot be refunded or carried forward. Like the new clean vehicle credit, you can choose to transfer the credit to a dealer for a $4,000 discount, cash rebate, or down payment, as long as you place the used vehicle into service after December 31, 2023.
With all these great tax benefits, it may be time to go for a test drive. The tax provisions covering these credits are complex, so before you head to a car dealership, contact your Marcum LLP tax advisors to see if you may be eligible for these credits.