Thanks to the newly enacted Inflation Reduction Act, there is much to consider when buying an electric vehicle or a plug-in hybrid.

Significant Changes in the Electric Vehicle Credit for 2022

Applying to both business and non-business vehicles, the $7,500 maximum credit for fully electric cars or plug-in hybrid electric vehicles remains in place through December 31, 2022.

North America Assembly

Electric vehicles purchased and placed in service after August 16, 2022 qualify for the tax credit only if they are assembled in North America.

With the North American assembly requirement, the supply is cut, leaving only 23 qualifying electric models.  But buyers should verify the build location using the vehicle location number (VIN).  Some of the 23 qualifying vehicles are built in North America, but some are not which emphasizes the need to check the build location using the VIN.

Manufacturer’s Sales Cap

The manufacturer’s sales cap remains in place through December 31, 2022.  However, the credit is phased out once a manufacturer sells 200,000 electric vehicles.  This means that many of the most popular electric cars have been phased out of the credit, including vehicles manufactured by Tesla, GM, and Toyota.

Vehicles Purchased on or before August 16, 2022

The rules in effect before the enactment of the Inflation Reduction Act continue to apply if a written binding contract was entered into to purchase a new qualifying electric vehicle before August 16, 2022.

  • This is still the case even if the electric vehicle was placed in service on or after August 16, 2022, but before December 31, 2022.
  • This also means that the pre-ordered electric vehicle does not have to be assembled in North America.

A binding contract means that a formal purchase agreement was signed and at least a 5 percent non-refundable deposit was already made.  Having a reservation or being on a waiting list for an electric vehicle before August 16, 2022, is not included.

The Electric Vehicle Credit from 2023 Onwards

From 2023 through 2032, a new clean vehicle credit goes into effect.  The credit maximum remains at $7,500, but due to massive changes, many taxpayers will no longer be able to claim the credit and there will be fewer electric vehicles available that may qualify for the credit.

Business owners will have to make a decision between the new clean vehicle credit or the new qualified commercial clean vehicle credit when buying an electric vehicle in 2023 or later.

All About the New Credit

The 200,000 Cap Removed. The new credit eliminates the old credit which limited the sale per manufacturer to 200,000 electric vehicles.  This means that electric vehicles manufactured by GM, Toyota, and Tesla can again qualify for the credit if they meet the price cap and other requirements.

The Credit Amount Components.

The maximum credit amount remains at $7,500 for 2023 and later, but it now has two components:

  1. A $3,750 credit if the electric vehicle complies with the domestic sourcing requirements for critical minerals used in the battery, which will be explained later.
  2. A $3,750 credit if the electric vehicle satisfies domestic content requirements for battery components.

The Alliance for Automotive Innovation says that there are no electric vehicles currently available for purchase that will qualify for both components to get the full $7,500 credit by January 1, 2023.  Electric vehicle manufacturers are working to change this but find it difficult to comply with the critical minerals requirement compared to the domestic content requirement.

This means that a number of electric vehicle models will only qualify for a $3,750 credit.

Take note that the business buyer avoids the component problem when using the commercial clean vehicle credit.

Caps on Buyer Income

Taxpayers may not claim the credit when their modified adjusted gross income (AGI) is more than:

  • $300,000 for joint-return filers and surviving spouses,
  • $225,000 for heads of household, or
  • $150,000 for unmarried taxpayers and married taxpayers who file separately.

Adjusted gross income plus foreign earned income that is otherwise excluded from U.S. taxation makes up modified AGI.  Modified AGI for the prior year may be used if it is lower.

Take note that the business buyer avoids the AGI caps when using the qualified commercial clean vehicle credit.

Price Caps on Electric Vehicles

The new clean vehicle credit may not be allowed if the manufacturer’s suggested retail price (MSRP) for the vehicle exceeds

  • $80,000 for a van,
  • $80,000 for a sports utility vehicle (SUV),
  • $80,000 for a pickup truck, or
  • $55,000 for any other vehicle.

Note that these caps are cliffs, not phaseouts.  This means that the credit is totally eliminated if the applicable MSRP is even one dollar over the cap.  The IRS will further provide guidance on which electric vehicles fall within these categories.

Take note that the business buyer avoids the dollar caps when using the qualified commercial clean vehicle credit.

Electric Vehicle Batteries Domestic Content Requirement

This imposes domestic content requirements on critical minerals and components used in electric vehicle batteries.  The credit is designed to encourage the manufacture of electric vehicles in the United States.

The minerals include lithium, copper, cobalt, and nickel used in electric vehicle batteries.  The U.S. currently imports the vast majority of these critical minerals from China, Brazil, Chile, Australia, and South Africa.

The requirement will likely cause production bottlenecks because it requires that a specific percentage of crucial minerals be sourced in North America or from countries with which the U.S. has a free trade agreement.  The sourcing percentage rises from 40 percent in 2023 to 80 percent in 2027 and later, and this might eventually drive up the cost of electric vehicles.

To add to this, a specific percentage of battery components must be manufactured or assembled in North America.  This percentage also rises from 50 percent in 2023 to 100 percent in 2029 and later.

Starting in 2025, any electric vehicle with battery minerals from a foreign entity of concern will be excluded from the tax credit.  Starting in 2024, the same rule applies starting in 2024 for battery components.  These foreign entities include China, Russia, North Korea, and Iran.

Requirement for Domestic Assembly

The electric vehicle must have its final assembly within North America.  This means that the component parts of the vehicle must be put together at a plant or factory located in the U.S., Canada, or Mexico.  This is an easier requirement to meet for manufacturers of electric vehicles than the rules on battery sourcing.

Used Electric Vehicle Credit

Starting in 2023, a clean vehicle credit will now be available to individual buyers (not corporations) of used electric vehicles.  The credit is limited to electric vehicles that cost $25,000 or less and that are at least two years old.  Currently, there are very few used electric vehicles that come in under the $25,000 price cap.  This may change in the future.

The credit is the lesser of $4,000 or 30 percent of the purchase price.  The individual taxpayer must purchase the used electric vehicle from a dealer and not from a private party in order to claim the credit.  Also, the purchaser’s AGI must be less than

  • $150,000 for joint-return filers and surviving spouses,
  • $112,500 for heads of household, or
  • $75,000 for single taxpayers and married taxpayers who file separately.

This credit for used electric vehicles may be claimed only once, by the first purchaser of the used electric vehicle.  Also, the purchaser must not have claimed a used electric vehicle credit three years prior.

Used electric vehicles do not have to satisfy the domestic content requirement for batteries or the North American assembly rules for new electric vehicles.

New Rule for 2024 Onwards

Starting in 2024, one who purchases an electric vehicle may transfer their credit to the dealer, who may in turn offer up to a $7,500 cash rebate or price reduction.  The dealer may also treat the purchaser as having made a down payment in the amount of $7,500.  It allows electric vehicle purchasers to benefit from the credit immediately instead of having to wait until they file their tax returns.

This is beneficial to lower-income purchasers because the credit is non-refundable and some taxpayers may not owe enough tax to use the entire $7,500 credit when they file their taxes.

Qualifying for Both the Personal and Business Electric Vehicle Credits

A taxpayer can qualify for the electric vehicle tax credit using either the clean vehicle credit or the commercial clean vehicle credit.  It is either one or the other, but not both.

If one is able to find an electric vehicle that qualifies for the full $7,500 personal clean vehicle credit and is within the income limits, he or she should claim the personal credit.  The commercial clean vehicle credit can never be larger than the personal credit unless the electric vehicle weighs over 14,000 pounds, but it can also be smaller.

The commercial clean vehicle credit is equal to the lesser of

  • 15 percent of the vehicle’s basis or 30 percent if the vehicle is fully electric, or
  • the incremental cost of the vehicle which is the excess of the electric vehicle’s purchase price over the price of a comparable non-electric vehicle.

The maximum commercial clean vehicle credit is the same as the personal credit – $7,500.

For instance, if an $80,000 fully electric van is purchased and used 25 percent for business, its depreciable basis is $20,000.  The maximum commercial clean vehicle credit is $6,000 (30 percent of $20,000).

But if the personal clean vehicle credit is claimed, it is $7,500.  There is a need to allocate this, claiming 25 percent as a business credit, and 75 percent as a personal credit.

Take note that if a person has no taxable income, he or she would get zero benefit from the non-refundable personal tax credit.  But the person can carry the non-refundable business credit back one year and forward until used up for up to 20 years.

If the electric vehicle is purchased during 2024 or later, it is easier to transfer the personal clean vehicle credit to the dealer and get up to $7,500 in a price reduction or rebate at the time of purchase.  This is not possible with a commercial clean vehicle credit because it must be claimed when the tax return is filed.

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