Here are six things to know from this article:
- The qualified plug-in electric vehicle credit remains in place through December 31, 2022, but if you purchased 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 2024, electric vehicle purchasers will be able to transfer their credit to the dealer.
- 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.
Read further for more in-depth information:
The maximum $7,500 credit for fully electric cars or plug-in hybrid electric vehicles that applies to both business and non-business vehicles remained in place through December 31, 2022, subject to one significant change: electric vehicles purchased and placed in service after August 16, 2022, qualify for the tax credit only if they are assembled in North America. Some of the 23 qualifying vehicle models are built in North America, but others are not; verify the build location using the vehicle identification number (VIN).
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. This phaseout remains in effect for 2022.
A new clean vehicle credit goes into effect in 2023 and continues through 2032.
Although the credit maximum remains $7,500, the credit has massive changes that mean many vehicles and taxpayers will no longer qualify.
The old credit was limited to the sale of 200,000 electric vehicles per manufacturer. The new credit eliminates this cap but adds other requirements.
The maximum credit for 2023 and later remains at $7,500. But it has two components:
- A $3,750 credit for electric vehicles complying with the domestic sourcing requirements for critical minerals used in the battery
- A $3,750 credit for electric vehicles satisfying domestic content requirements for battery components
The critical minerals requirements will prove difficult to comply with in 2023 and for the next few years. The domestic content requirements should be easier. There may be a number of electric vehicle models that qualify for only a $3,750 credit.
The credit may not be claimed by taxpayers with modified AGI more than $300,000 for joint-return filers, $225,000 for head of household, or $150,000 for single/married filing separately. You can use your modified AGI for the prior year if it is lower.
The credit may not be claimed for vehicles with an MSRP exceeding $80,000 for a van, SUV, or truck, or $55,000 for any other vehicle. The IRS will provide guidance on which electric vehicles qualify. The credit is unavailable if the MSRP is even one dollar over the cap.
The new credit requires that 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 forward. In addition, battery components must be manufactured or assembled in North America. The percentage rises from 50 percent in 2023 to 100 percent in 2029 and forward.
The final assembly of the electric vehicle must be in 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.
Starting in 2024, a purchaser may transfer their credit to the dealer, who will in turn offer up to a $7,500 cash rebate or price reduction in the amount of the credit. Purchasers will benefit from the credit immediately rather than having to wait until they file their tax returns.
Business owners could qualify for a 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.
If you 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). This credit must be claimed on your tax return – transfer of the credit to the dealer (as with the personal credit) is not an option.
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 precent as a personal credit
If you have any questions about clean vehicle credits, please contact us or call our office at 951-633-1040.