Clean Vehicle Tax Credit Guidance

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The Inflation Reduction Act (IRA) reintroduced and significantly expanded electric vehicle (EV) tax credits. This change means both individuals and businesses can realize increased savings on new and used EV purchases. The good news is that recently released IRS guidance for the credit applies to new plug-in EVs or fuel cell vehicles (FCVs) purchased in 2023 and beyond. What makes it better is that other clean energy tax credits can be used toward purchases of used EVs and other qualified commercial clean vehicles. In other words, there are savings abound. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.

Tax Credits for New Clean Vehicles Purchased in 2023

In January, the IRS released guidance highlighting credit requirements for new EVs purchased between 2023 and 2032. The credit, also known as Section 30D, goes up to $7,500 on new vehicle purchases. The vehicles must be purchased for use mainly by the taxpayer, not made available for resale, and must be used mainly within the U.S.

To claim the credit, taxpayers must meet certain income requirements. Modified adjusted gross income (MAGI) must fall below $300,000 for married filing jointly, $225,000 for heads of households, and $150,000 for all other filers. MAGI determination is made either the year the taxpayer got the EV delivered or the year before, whichever is less. Even if MAGI is above the limit in one of the years but not both, the taxpayer may still claim the credit.

The new clean vehicle tax credit cannot be carried forward and is nonrefundable, which means the taxpayer cannot get back more on the credit than you owe in current year taxes.

Eligible EVs must meet all requirements listed below.

• Battery capacity is at least seven kilowatt (kW) hours
• Gross vehicle weight rating is less than 14,000 pounds
• Final assembly in North America
• Purchased new
• Seller reports required information to the taxpayer and IRS when the EV is sold

Additionally, the EV must be included in an approved list of vehicles and manufacturers. Taxpayers must verify that their intended vehicle is on this list before buying it. Twenty-two manufacturers are currently listed, though not all companies have approved vehicles yet. Subaru and Toyota, for example, have entered into written agreements to become qualified manufacturers but haven’t yet provided a list of specific makes and models (as of January 27, 2023).

The manufacturer requirement doesn’t apply to FCVs.

The manufacturer suggested retail price (MSRP) must fall below $55,000 for cars and $80,000 for vans, SUVs, and passenger trucks. MSRP excludes destination fees. The window sticker has the vehicle’s weight, battery capacity, final assembly location, and VIN.

Used Clean Vehicle Tax Credit

Instead of buying a new EV, some may elect to purchase a used vehicle. If certain requirements are met, these buyers can claim a tax credit of 30 percent of the sale price, up to $4,000.

To qualify, the used EV or FCV must cost $25,000 or less, be at least two years old, and follow the same qualifying guidance listed above regarding weight, battery kW hours, and primary use location. It is also important to note that the credit is only available to those who purchase from an auto dealership.

Eligible taxpayers must purchase the used vehicle for their own use. They cannot be the original owner, a dependent on someone else’s return, or claim another used EV tax credit within three years of the purchase date.

MAGI income limits for the used EV tax credit are:

• $150,000 for married filing jointly or surviving spouse
• $112,500 for heads of households
• $75,000 for all other filers

Other MAGI rules for eligibility are the same as the new EV tax credit.

Commercial Clean Vehicle Tax Credit

Employers that buy qualified vehicles for business use can also claim certain tax credits. The commercial clean vehicle credit (Section 45W) is available to eligible businesses. A 45W credit is worth up to 15 percent of the employer’s basis in the vehicle (30 percent for vehicles that are not gas- or diesel-powered) or the vehicle’s incremental cost, whichever is less. The maximum credit is $7,500 for vehicles under 14,000 pounds or $40,000 for all other vehicles.

The 45W employer tax credits are nonrefundable but may be carried forward as a general business credit. There is no limit to how many clean vehicles tax credits an employer may claim.

Eligible vehicles are plug-in EVs with a battery capacity of at least seven Kw hours (14,000 pounds or less) or 15 kW hours (more than 14,000 pounds). Fuel cell motors that meet requirements under IRC 30B(b)(3)(A) and (B). The vehicle(s) must be subject to a depreciation allowance except for exempt organizations not subject to a lease. The credit reduces the vehicle’s depreciable basis.

Like the individual clean vehicle tax credits, business tax credits only apply to vehicles on the approved list of manufacturers. Qualifying vehicles cannot be purchased for resale and are not approved for use outside the U.S. or allowed a credit under Sections 30D o 45W.

Future Guidance

For new EVs, taxpayers will need to verify certain information before purchasing if they intend to claim the tax credit, like:

• Approved make, model, and manufacturer.
• Vehicle requirements, which are found on the window sticker.

Taxpayers can claim clean vehicle tax credits on Form 8936 and the annual tax return. Starting in 2024, the tax credit will become available as a rebate at the point of sale.

We’re here to help

There are many opportunities for tax savings with new or used EVs starting this year. Proactive planning can help taxpayers take advantage of these opportunities on the next electric vehicle purchase. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.