The Inflation Reduction Act (“IRA”) enacted August 16, 2022 includes a number of provisions addressing the tax credit for new and used electric vehicles. The IRA provides significant changes to the existing tax credit under section 30D and two new “clean” vehicle credits – section 25E (for used vehicles) and section 45W (commercial vehicles). For an easy introduction to these provisions, let’s start with an overview via the following diagram:
Changes to New Vehicle Purchases Provided Under Section 30D
- Before IRA of 2022: Section 30D provides a credit for qualified plug-in electric drive motor vehicles including passenger and light trucks for vehicles purchased after December 31, 2009.
- Tax credit structure: base credit of $2,500 and $417 for each kilowatt hour of battery above 5 kilowatt hours allowing an additional max credit of $5,000. No critical component or battery sourcing requirement.
- 200,000 limit for vehicles. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009).
- No income threshold for EV tax credit eligibility. Even if your taxable income is $1,000,000, you are eligible for a EV tax credit.
- No price cap for vehicles that qualified for EV tax credit upon purchase.
- Changes under the IRA to Section 30D:
- New tax credit structure for “clean” vehicles: two-part credit up to max of $7,500 (Part 1 = new critical minerals requirement; Part 2 = new battery component requirement). 40-50% of the critical minerals and battery components cannot be sourced from a foreign covered nation, such as China and Russia.
- Eliminates the 200,000 qualifying vehicle limit
- New income threshold for eligibility to obtain the clean vehicle tax credit. Based on filing status, any taxpayer with MAGI exceeding a threshold amount cannot qualify for an EV tax credit under section 30D:
- MFJ filers – MAGI >$300,000,
- HH filers – MAGI > $225,00, or
- Single filers – MAGI >$150,000.
- New car price cap – If a manufacturer’s suggested retail price exceeds a threshold amount, then the vehicle is not eligible for tax credit under section 30D.
- Vans, SUVs and pick-up trucks – retail price cannot exceed $80,000
- Any other vehicle – retail price cannot exceed $55,000.
- New “final assembly” requirement must occur in North America. This provision applies after August 16, 2022. The U.S. Department of Energy provided a list of 2022 and early 2023 models that meet the “final assembly” requirement here: https://afdc.energy.gov/laws/inflation-reduction-act. And, you can go to the following U.S. Department of Transportation link to search by VIN to determine the final assembly status for a new car: https://vpic.nhtsa.dot.gov/decoder/
- New transferability of tax credit to dealers who are registered with the Treasury Department so taxpayers who otherwise would not have enough tax liability to fully utilize the credit can take advantage of the credit. The credit is transferred to the dealer, and the dealer lowers the selling price to the buyer. But, check the effective date in the diagram above for this new transferability of the tax credit.
- Effective Date: applies to vehicles acquired 2023 thru 2032. However, the “final assembly” requirement for application of section 30D applies after August 16, 2022
Let’s try a scenario to test our understanding of these new rules:
Scenario: On August 1, 2022, you visited a Tesla showroom in Walnut Creek, CA and put a $250 nonrefundable deposit for a new Tesla Model Y with a suggested retail price of $67,000. Tesla tells you that the car may be delivered to you anytime from October 2022 thru February 2023. Your MAGI is $350,000 and your filing status is “married filing joint.” Since you put the deposit down before IRA 2022 was enacted and effective, can you still qualify for the credit?
Answer: No. First, the 200,000 vehicle limit for the Model Y Tesla was exceeded before Aug. 1, 2022 under the old version of Sec. 30D. Second, what if the vehicle limit wasn’t exceeded for the Model Y? Here is the transition rule that addresses this situation per the IRS: “If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022 (for example, because the vehicle has not been delivered), you may claim the EV credit based on the rules that were in effect before August 16, 2022.” Because your $250 deposit was likely not a “written binding contract,” you probably don’t qualify for the EV credit under the old rule. OK, what’s with the hedging language on “written binding contract”? The IRS stated in its website (nonbinding source) that “a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit)….if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract.” With this explanation, it’s uncertain whether a $250 non-refundable deposit qualifies as a “written binding contract.” So, if you put down a non-refundable deposit for an EV in effect before August 16, 2022 that did not exceed the vehicle limit, look for IRS guidance with more precision on what constitutes a “written binding contract.”
New Section 45W Creates Business Tax Credit for Commercial Clean Vehicles
- Effective 2023 thru 2032.
- Limited to commercial use, placed in service 2023 thru 2032, purchase or lease
- No “final assembly” in North America required as in amended section 30D(d)(1)(g) for new, non-commercial vehicles.
- (*) No income limits as in 30D and 25E
- Limit of tax credit:
- Lesser of: (1) 15% of cost basis; 30% if 100% EV, not hybrid; or (2) incremental cost of the vehicle – increased cost between the “qualified commercial clean vehicle” and a “comparable vehicle” (gas/diesel only vehicle that is similar in size and use). Gray area: Since this is a “lesser of” test for the tax credit, you have to determine the “comparable vehicle”. Section 45W(f) provides that the Treasury “shall” issue regulations relating to determination of the incremental cost of any qualified commercial clean vehicle. But who knows when such regulations will be issued.
- Limit for tax credit:
- $7,500 if GVW < 14,000 lbs, or
- $40,000, if GVW 14,000 lbs or greater.
- Commercial EV credit can apply to new and used cars.
- Sec. 45W cannot apply if the car already received the EV credit earlier. E.g., the original buyer claimed the credit, now the new commercial buyer buys the car.
New Section 25E creates a tax credit for previously-owned clean vehicles
- Effective starting in 2023 – 2032.
- Limited to individuals (no entities) to qualify for credit.
- MAGI limits to eligibility for this vehicle tax credit ($75,000 for single; $150,000 for joint filers).
- Sale price cannot exceed $25,000.
- Limited to the first transfer since enactment date of 25E (no resellers).
- Credit is lesser of: $4,000 or 30% of vehicle sale price.
- Model year is at least 2 years earlier than the purchase year.
- GVW < 14,000 lbs.
- Limit of using this credit 1 time within a 3-year period for each buyer.
- A sale to a spouse or dependent does not qualify for this vehicle tax credit.
- Purchased from a dealer (a person licensed to engage in the sale of vehicles) – so sales of used vehicles owner to owner doesn’t count.
- Qualified buyer can transfer the credit to the selling car dealer, but only starting in 2024, not 2023.
- Question: is this credit available if the original buyer received an EV tax credit? There is no double benefit prohibition as in section 45W.
 GM stated that this new requirement for sourcing included in the IRA will be “challenging.” However, on Aug. 29, 2022, CNN Business reported that Honda struck a deal with Korean battery giant LG Energy Solution to build a $4.4 billion U.S. factory to supply its electric vehicles. In May 2022, Hyundai announced that it was building a battery plant in Georgia. Earlier in 2022, Mercedes-Benz opened a battery plant in Alabama, as reported by CNN Business.