Three separate credits may now apply to electric or alternative motor vehicles. The credits apply to electric vehicles newly acquired for personal or nonbusiness use; electric vehicles newly acquired for business use; new qualified fuel cell motor vehicles; and used clean vehicles.
New qualified plug-in electric drive motor vehicles (section 30D)
Although the section 30d tax credit for newly purchased electric vehicles existed prior to the enactment of the Inflation Reduction Act (IRA), the IRA made changes to the credit. Vehicles placed in service prior to Jan. 1, 2023, are referred to as new qualified plug-in electric drive motor vehicles and those placed in service after Dec. 31, 2022, are referred to as new clean vehicles.
The tax credit under section 30D is calculated in one of two ways. The first method will apply to all cars purchased and placed in service prior to the date the Treasury Department and Internal Revenue Service (IRS) issue guidance regarding the critical mineral and battery component requirements. The Treasury and IRS anticipate issuing this proposed guidance in March 2023. Under the first method, which applies until guidance regarding the critical mineral and battery component requirements are published, there is a base credit of $2,500 plus an additional credit amount of $417 for a car with a battery capacity of at least 5 kilowatt-hours (kWh) and an additional $417 for each kilowatt- hour of capacity in excess of 5 kWh. The maximum credit allowed based on the battery capacity is $5,000 for a total maximum credit of $7,500. Any car placed in service after Dec. 31, 2022, must have capacity of at least 7 kWh so the minimum credit for a qualifying car after Dec. 31, 2022, will be $3,751 ($2,500 + 3 * $417).
Once critical mineral and battery component requirements are published, the credit equals $3,750 for a car that satisfies the critical mineral requirements plus $3,750 for a car that satisfies the battery component requirements. The critical mineral and battery component requirements will apply to vehicles acquired after the date guidance is published by the Treasury and IRS. If a vehicle is purchased prior to the guidance being issued and is received from the dealer after guidance is issued, the critical mineral and battery component requirements will apply to that vehicle.
An electric vehicle eligible for a credit if placed in service prior to Jan. 1, 2023, is defined as a new qualified plug-in electric drive motor vehicle. Generally, a vehicle is treated as placed in service on the date the taxpayer takes delivery of the vehicle. A new qualified plug-in electric drive motor vehicle is a motor vehicle:
the original use of which commences with the taxpayer,
which is acquired for use or lease by the taxpayer and not for resale,
which is made by a manufacturer,
which is treated as a motor vehicle for purposes of Title II of the Clean Air Act,
which has a gross vehicle weight rating of less than 14,000 pounds,
which is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 4 kWh, is capable of being recharged from an external source of electricity, and
the final assembly of which occurs in North America.
An electric vehicle eligible for a credit if placed in service after Dec. 31, 2022, is defined as a new clean vehicle. Parts 1, 2, 4, 5 and 7 of the definition of a new qualified plug-in electric drive motor vehicle are the same for the definition of a new clean vehicle. In addition, for a new clean vehicle, the vehicle must be made by a qualified manufacturer and is a vehicle which is propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 7 kWh and is capable of being recharged from an external source of electricity. Additionally, a new clean vehicle is a vehicle for which the person who sells any vehicle to the taxpayer furnishes a report to the taxpayer and to the Treasury Secretary containing specified information. Two items required to be in the report are the purchasing taxpayer’s taxpayer identification number and verification that the purchasing taxpayer is the original user of the new clean vehicle.
For any vehicle sold prior to Jan. 1, 2023, the eligible credit is phased out if the manufacturer of the vehicle sells at least 200,000 vehicles for use in the United States after Dec. 31, 2009. At a certain point the credit is completely phased out. This phase out rule applies only to vehicles purchased prior to Jan. 1, 2023. This rule is applied based on when the vehicle is purchased and not when the taxpayer takes delivery of the vehicle and places the vehicle in service.
Any taxpayer claiming the new clean vehicle credit for a vehicle placed in service after Dec. 31, 2022, will be subject to additional requirements. The taxpayer must report the vehicle identification number (VIN) on their tax return in order to claim the credit. The taxpayer may not claim the new clean vehicle credit if the taxpayer’s modified adjusted gross income (MAGI) for the taxable year in which the credit would be claimed or the immediately preceding taxable year exceeds a threshold amount (MAGI limitation). The threshold amount for taxpayers with a filing status of joint return or a surviving spouse return is $300,000. For taxpayers with a filing status of head of household, the threshold amount is $225,000, and for all other taxpayers, the threshold amount is $150,000. A new clean vehicle is not available for a credit if the manufacturer’s suggested retail price for the vehicle is in excess of the applicable limitation (MSRP limitation). The applicable limitation for vans, sports utility vehicles and pickup trucks is $80.000. The applicable limitation for any other vehicle is $55,000. The MSRP limitation is applied based on the manufacturer’s suggested retail price and is not dependent on the actual sales price.
The IRS issued frequently asked questions (FAQ) which can be found on the IRS’ website. The FAQ contains several helpful links, including: (1) a list of vehicles that manufacturers have indicated to the IRS meet the requirements to claim the new clean vehicle credit beginning Jan. 1, 2023, (2) a list of vehicles’ final assembly points that can be searched by VIN and (3) a list of qualified manufacturers.
The new clean vehicle credit may only be claimed to the extent of reported tax due by the taxpayer and cannot be refunded or carried forward. A taxpayer claiming the new clean vehicle credit must complete Form 8936 and attach the form to their federal income tax return. The VIN of the new clean vehicle must be included on Form 8936. The credit is available for vehicles purchased through the end of 2032.
A person selling a vehicle to a tax-exempt or governmental entity has the ability to claim a credit under section 30D. The seller will be treated as the taxpayer that placed the vehicle in service, but only if the seller clearly discloses to the tax-exempt or governmental entity the amount of any credit allowable with respect to such vehicle. The vehicle will be treated as of a character subject to an allowance for depreciation with regard to the seller. This rule applies only to vehicles placed in service before Jan. 1, 2024.
Credit for qualified commercial clean vehicles (section 45W)
A vehicle must be used in a trade or business to qualify as a qualified commercial clean vehicle. A qualified commercial clean vehicle is any vehicle which:
is made by a qualified manufacturer and is acquired for use or lease by the taxpayer and not for resale,
either: is treated as a motor vehicle for purposes of Title II of the Clean Air Act and is manufactured primarily for use on public streets, roads and highways, or is mobile machinery,
either: is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kWh (or, in the case of a vehicle which has a gross vehicle weight rating of less than 14,000 pounds, 7 kWh) and is capable of being recharged from an external source of electricity, or is propelled by power derived from one or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel and in the case of a passenger automobile or light truck, has received a certificate that the vehicle meets or exceeds certain emissions standards (new qualified fuel cell motor vehicle), and
is depreciable.
Generally, a car is depreciable if it is used in a trade or business. The credit for a qualified commercial clean vehicle is equal to the lesser of two amounts. First, 15% of the basis of such vehicle or 30% of the basis of such vehicle if the vehicle is not powered by a gasoline or diesel internal combustion engine. The second is the incremental cost of such vehicle. The overall credit cannot exceed $7,500 for a vehicle with a gross vehicle weight rating of less than 14,000 pounds or in the case of any other vehicle, the credit cannot exceed $40,000. The incremental cost of any qualified commercial clean vehicle is an amount equal to the excess of the purchase price for such vehicle over such price of a comparable vehicle. A comparable vehicle is any vehicle powered solely by a gasoline or diesel internal combustion engine and which is comparable in size and use to the qualified commercial clean vehicle. The Department of Energy analyzed the incremental cost for cars. Notice 2023-9 provides that the incremental cost of all street vehicles, other than compact car plug-in hybrid electric vehicles, that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2023. The incremental cost for compact car plug-in hybrid electric vehicles, which include minicompact and subcompact cars, is less than $7,500.
Several of the rules that apply to new clean vehicles also apply to qualified commercial clean vehicles. Exceptions are that the MAGI limitation and MSRP limitation do not apply to qualified commercial clean vehicles. No credit for a qualified commercial clean vehicle will be allowed for a vehicle acquired after Dec. 31, 2032.
Vehicles placed in service by a governmental entity, tax-exempt organization or an Indian Tribal government are eligible for the section 45W credit and do not need to be depreciable to qualify for the credit. The section 45W credit claimed by governmental entities, tax-exempt organizations or Indian Tribal governments are eligible for elective payment treatment. This means the credit will be treated as a tax payment by the entity to the federal government. This credit can also be transferred by the governmental entity or tax-exempt entity to the seller of the vehicle.
Previously owned clean vehicles (section 25E)
A previously owned clean vehicle is defined as a motor vehicle:
the model year of which is at least two years earlier than the calendar year in which the taxpayer acquires such vehicle,
the original use of which commences with a person other than the taxpayer,
which is acquired by the taxpayer in a qualified sale, and
which either: is made by a qualified manufacturer, is treated as a motor vehicle for purposes of Title II of the Clean Air Act, has a gross vehicle weight rating of less than 14,000 pounds, is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 7 kWh, and is capable of being recharged from an external source of electricity, and for which the seller provides the buyer a report; or qualifies as a new qualified fuel cell motor vehicle and has a gross vehicle weight rating of less than 14,000 pounds.
To be a qualified sale, the vehicle must be purchased from a dealer, for a sales price equal to or less than $25,000, and must be the first transfer since Aug. 16, 2022, other than to the original user of such vehicle. To be eligible for the previously owned clean vehicle credit, the buyer must:
be an individual,
purchase the vehicle for use and not for resale,
must not be claimed as a dependent on another taxpayer’s tax return, and
must not have been allowed a credit for a previously owned clean vehicle during the three-year period ending on the date the vehicle is purchased.
The credit allowed for the purchase of a previously owned clean vehicle equals the lesser of $4,000 or 30% of the sale price of the vehicle. Taxpayers are subject to a MAGI limitation similar to that for the purchase of new clean vehicles. If a taxpayer’s MAGI exceeds a threshold amount for the year of purchase or the immediately preceding tax year, then no credit for the purchase of a previously owned clean vehicle is allowed. The threshold amount for a taxpayer with a filing status of joint return or surviving spouse is $150,000. For a taxpayer with a filing status of head of household, the threshold amount is $112,500. For any other taxpayer, the threshold amount is $75,000.
In order to claim the previously owned clean vehicle credit, a taxpayer must attach Form 8936 to their tax return and include the VIN of the purchased vehicle on the form. The previously owned clean vehicle credit may only be used by a taxpayer to the extent the taxpayer has a reported tax due. The credit cannot be carried forward and the excess is not refundable.
To learn more about how these tax credits may affect you, please contact Chad Resner.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
