767 / What tax credits are available for plug-in electric vehicles?

Editor’s Note: The Inflation Reduction Act expanded and extended the clean vehicle tax credit for tax years beginning after 2022. The rules discussed immediately below applied for vehicles placed in service during 2022.

The ARRA modified the credit for qualified plug-in electric drive vehicles purchased after December 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer’s vehicles after the manufacturer has sold at least 200,000 vehicles.¹

ARRA also creates a special tax credit for two types of plug-in vehicles—certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after February 17, 2009, and before January 1, 2014. The Protecting Americans from Tax Hikes Act extended this credit for two-wheeled vehicles through 2016, and BBA 2018 extended the credit through 2017. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.

Inflation Reduction Act

The Inflation Reduction Act expands the electric vehicle tax credit for electric vehicles placed into service after December 31, 2022 for ten years, through 2032. Taxpayers who buy qualifying vehicles will qualify for a tax credit of up to $7,500 for new vehicles.

For used electric vehicles, the maximum credit will equal $4,000 or 30% of the vehicle’s cost, whichever is less. Used electric vehicles only qualify if they’re purchased for personal use, rather than for resale.

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Planning Point: Not every electric vehicle will qualify for the clean vehicle credits—meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase.  Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies.

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The exact amount of the available credit will depend on various factors, including whether minerals in the vehicle’s battery are sourced from qualifying countries and where the vehicle is assembled. Taxpayers who purchase a vehicle where 40% of the critical minerals used in the battery are sourced from a qualifying country could be eligible for a $3,750 tax credit. Beginning in 2023, 50% of the battery’s components must be assembled or manufactured in North America to qualify for the remaining $3,750 credit.

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Planning Point: The percentage limitations will increase over time, which could make it more difficult to find a qualifying vehicle unless manufacturers modify their processes.

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The clean vehicle tax credit itself was also expanded so that it covers more types of vehicles, to include any new qualified fuel cell motor vehicle. The term “qualifying plug-in electric driver motor” in IRC Section 30D was replaced with the term “clean”. That means qualifying vehicles are expanded to include more than qualified plug-in electric drive vehicles, so that, for example, hydrogen cell fuel cars will qualify.

To claim the tax credit, the taxpayer must include the vehicle’s VIN number on their tax return for the year. The expanded tax credit applies to vehicles placed into service after 2022 (note that clients who have written binding contracts in 2022 will qualify if the vehicle is placed into service in 2023). If the vehicle was purchased in 2022, the old rules for claiming the credit applied.

Taxpayers must ensure that the vehicle was assembled by a qualified manufacturer. Qualified manufacturers are those that enter into approved agreements with the IRS and supply the IRS with VIN numbers that can be matched to the VIN reported on a taxpayer’s return.

Income Limits and Restrictions. The newly expanded electric vehicle tax credits are intended to provide benefits for lower- and middle-income clients. As such, they come with income restrictions and limitations. The credit is unavailable for single taxpayers who earn more than $150,000 per year, joint filers who earn more than $300,000 per year and heads-of-households who earn $225,000 per year or more.

Certain luxury electric vehicles are also excluded. If the manufacturer’s suggested retail price (MSRP) on an SUV, van or truck is over $80,000, the purchaser is not entitled to the credit. The credit is unavailable if the MSRP on a car is over $55,000. If the vehicle was used (defined as at least two years old), the cost of the pre-owned vehicle cannot exceed $25,000.

There are also restrictions on where the vehicle was manufactured. To qualify, final assembly of the clean vehicle must have occurred in North America. That requirement is effective as of August 16, 2022 (the date the Inflation Reduction Act was signed into law). Further, a certain amount of the minerals used in the vehicle’s battery must be sourced from North America or certain other countries that have free trade agreements with the U.S.

The term “final assembly” is defined to mean the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.

Starting in 2023, however, existing sales caps will be removed so that automakers who currently offer electric vehicles can produce more electric vehicles. Prior to the Inflation Reduction Act, manufacturers that produced more than 200,000 electric vehicles did not qualify for the credit.

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Planning Point: Not every electric vehicle will qualify for the clean vehicle credits—meaning that it might be confusing when clients attempt to purchase a clean vehicle. However, the Department of Transportation has provided an online tool so that consumers can enter the vehicle identification number (VIN) to determine whether they would be eligible to claim the credit after purchase. Sellers of clean vehicles will also furnish seller reports that provide information necessary to claim the credit and verify that the vehicle in question qualifies.

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