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The Inflation Reduction Act (IRA) extended and expanded the Section\u00a030D Clean Vehicle (CV) Credit, previously known as the Electric Vehicle (EV) Credit. The credit now covers \u201cclean vehicles,\u201d which include plug-in hybrids, hydrogen fuel cell cars\u00a0and\u00a0EVs.<\/p>\n
On April\u00a017, 2023, the IRS will publish proposed regulations to clarify how a CV can qualify for the credit. The proposed regs effectively limit the number of currently available models that qualify, due to strict sourcing requirements that will apply to CVs that buyers take delivery of on or after April\u00a018, 2023. The federal government is taking steps to help taxpayers identify eligible\u00a0vehicles.<\/p>\n
The previous EV Credit<\/strong><\/p>\n The Sec.\u00a030D EV Credit has been available since 2008. Prior to the IRA, it started at $2,500, with a maximum credit of $7,500. (Note that the EV Credit remains available for qualifying vehicles placed in service on or before April\u00a017, 2023.)<\/p>\n It was also subject to a cap based on the number of qualifying vehicles a manufacturer had produced. Because of this cap, some popular EVs \u2014 including those made by Tesla, Toyota and General Motors \u2014 were no longer eligible for the EV\u00a0Credit.<\/p>\n The extended and expanded CV\u00a0Credit<\/strong><\/p>\n The CV Credit continues to top out at $7,500, but the IRA splits it into two parts, based on satisfying new sourcing requirements for both critical minerals and battery components. Vehicles that meet only one of the two requirements are eligible for a $3,750\u00a0credit.<\/p>\n Specifically, an \u201capplicable percentage\u201d of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which it has a free trade agreement, or be recycled in North America. Similarly, an applicable percentage of the value of the battery components must be manufactured or assembled in North America. The IRA increases the applicable percentage for both requirements every year starting in 2023, with initial percentages of 40%\u00a0for critical minerals and 50% for battery components.<\/p>\n The IRA includes price restrictions, too. Vans, pickup trucks and SUVs with a manufacturer\u2019s suggested retail price (MSRP) of more than $80,000 don\u2019t qualify for the credit, nor do automobiles with an MSRP higher than $55,000. Qualified vehicles also must undergo final assembly in North\u00a0America.<\/p>\n The credit also is subject to income limitations. It\u2019s not available to taxpayers with a modified adjusted gross income (MAGI)\u00a0over:<\/p>\n In addition, the credit isn\u2019t allowed for vehicles with any critical minerals (after 2025) or battery components (after 2024) from a \u201cforeign entity of concern.\u201d The IRA doesn\u2019t define this term, but the IRS and U.S. Department of Treasury have stated that future guidance will address this\u00a0provision.<\/p>\n The credit isn\u2019t refundable and can\u2019t be carried forward if it\u2019s claimed as a personal credit. It can, however, be carried forward if claimed as a general business credit. If a taxpayer uses a qualified vehicle for both personal and business use, and the business use is less than 50% of the total use for\u00a0a\u00a0tax year, the credit must be apportioned accordingly.<\/p>\n Relevant proposed regs<\/strong><\/p>\n The sourcing requirements are intended to reduce manufacturers\u2019 reliance on suppliers in countries such as China. As a result, many of the proposed regs are of greater interest to manufacturers than consumers. They spell out, for example, processes for determining the percentages of value of critical minerals and of battery components. They also explain how to identify countries with which the United States has a free trade agreement.<\/p>\n But the proposed regs also include several provisions with useful information for taxpayers. For example, the regs define MSRP as the sum of 1)\u00a0the MSRP for a vehicle and 2)\u00a0the MSRP for each accessory or item of optional equipment that\u2019s physically attached to the vehicle at the time of delivery to the dealer. This information is found on the label affixed to the vehicle\u2019s windshield or side window. So adding optional equipment can result in losing out on the CV Credit in some\u00a0cases.<\/p>\n As far as the \u201cfinal assembly in North America\u201d requirement, the proposed regs provide that taxpayers can rely on the final assembly point reported on the label affixed to the vehicle. Alternatively, they can rely on the vehicle\u2019s plant of manufacture reported in the vehicle identification number. North America refers to the United States, Canada and\u00a0Mexico.<\/p>\n The proposed regs also discuss the treatment of the credit when a vehicle has multiple owners. They state that only one taxpayer can claim the credit; no allocation or prorating is permitted. In the case of married taxpayers filing jointly, either spouse may be identified as the owner claiming the credit on the seller\u2019s\u00a0report.<\/p>\n If a partnership or S corporation places an eligible CV into service, the credit is allocated among the partners or shareholders. They can claim their portion on their individual tax\u00a0returns.<\/p>\n The proposed regs also clarify the MAGI limit. The credit isn\u2019t available for any taxable year if the lesser of 1)\u00a0the taxpayer\u2019s MAGI for the year or 2)\u00a0the taxpayer\u2019s MAGI for the preceding year exceeds the applicable threshold. If a taxpayer\u2019s filing status changes (for example, from single to married) during this two-year period, the MAGI limit is satisfied if the MAGI doesn\u2019t exceed the threshold amount in either year based on the applicable filing status for that\u00a0year.<\/p>\n The MAGI limit doesn\u2019t apply to taxpayers other than individuals. If a qualified vehicle is placed in service by a partnership or S\u00a0corporation, though, the limit will apply to partners or shareholders who claim their portion of the\u00a0credit.<\/p>\n In the market for a CV?<\/strong><\/p>\n While the IRS has promised additional guidance on the CV Credit, taxpayers interested in taking advantage of the credit needn\u2019t wait. The U.S. Department of Energy has created a website<\/a> that includes a list of eligible clean vehicles. The list will be regularly updated as\u00a0manufacturers provide information on their vehicles that qualify for the credit. For additional information from the IRS, visit: \u00a0 target=”_blank”>https:\/\/bit.ly\/3mkTubh<\/a>. If you have questions regarding the CV Credit, please don\u2019t hesitate to contact\u00a0us.<\/p>\n\n
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