This article serves as follow-up to an article previously released about the Qualified Plug-In Electric Motor Vehicle Credit, now known as the Clean Vehicle Credit. Readers are encouraged to review that article prior to reading this one for sufficient context regarding the topics discussed below. The original article can be viewed here. Continue reading to learn more about the recent updates.
Since the passing of the Inflation Reduction Act (IRA) of 2022, rules and limitations surrounding the Clean Vehicle Credit have become more complex.
Some base requirements for the credit remain the same. Eligible vehicles must:
- Be purchased for use and not resale
- Be made by a qualified manufacturer
- Meet the definition of a “motor vehicle” under Title II of the Clean Air Act (4 wheels, primarily for use on public streets, roads, and highways)
- Have a gross vehicle weight of less than 14,000 pounds
- Be rechargeable from an external source of electricity
Despite the IRA’s removal of the 200,000 unit-cap for manufacturers (which previously limited qualifying models), other changes now make it challenging for electric vehicles (EVs) to qualify for the full $7,500 credit. Fortunately, the IRS maintains a full list of credit eligible EVs, which can be found here.
The credit is still nonrefundable and does not carry forward, meaning that it can only be applied against tax liability in the year it is claimed, and no refund if offered for any excess “unused” credit amounts. Taxpayers can claim the credit on IRS Form 8936, filed with their federal income tax return. The EV’s Vehicle Identification Number (VIN) must be provided. More details about new requirements for the Clean Vehicle Credit are discussed below.
The Clean Vehicle Credit is only available to taxpayers below certain income thresholds. Taxpayers are eligible for the credit if their modified adjusted gross income (MAGI) is:
When determining income eligibility, the IRS allows taxpayers to use the lesser of MAGI in the year the EV was placed in service or MAGI in the year before the EV was placed in service. For the purposes of this credit, the IRS treats “date in service” as synonymous with “date delivered”.
Qualified EVs must also fall below certain price thresholds to remain eligible for the tax credit. For cars, the vehicle’s manufacturer suggested retail price (MSRP) must be $55,000 or less. For vans, pickup trucks, and SUVs, MSRP must be $80,000 or less. Since the IRA’s passing, the IRS uses the Environmental Protection Agency’s Fuel Economy Labeling Standards in determining whether a vehicle should be categorized as a car or SUV for credit purposes. This means that some SUVs that were ineligible for the credit prior to the IRA’s passing are now eligible.
All eligible EVs must now incur final assembly in North America, and the new minimum battery capacity for eligible vehicles has increased from 4 kwh to 7 kwh. Additionally, two new key credit requirements are discussed below.
Critical Mineral Components:
In 2023, 40% of critical mineral components contained in a credit-eligible EV must be extracted or processed in the United States or a free trade country or recycled in North America. The applicable percentage will increase by 10% each year until 2027, where it will cap at 80%.
In 2023, 50% of battery components contained in a credit-eligible EV must be sourced in North America. The applicable percentage will increase incrementally until it reaches 100% in 2029.
Vehicles that meet neither of these requirements will be ineligible for the credit if they were delivered on or after April 18, 2023. $3,750 of the credit is available for vehicles that meet one of the two requirements. If a vehicle meets both requirements, it may be eligible for the full $7,500 credit.
Timing and Application
EVs purchased before the IRA’s effective date of August 16, 2022 that were otherwise eligible for the old tax credit can claim the credit based on pre-IRA rules, even if the EV was not delivered until on or after that date. In this case, the North American final assembly requirement does not apply. Taxpayers must possess a written, binding sales contract to substantiate their claim. For EVs purchased and delivered between August 16, 2022, and December 31, 2022, the old rules can be used to claim the credit, but the new North American final assembly requirement and 7 kwh battery capacity limit apply. The same goes for vehicles purchased and delivered between January 1, 2023, and April 17, 2023. In these scenarios, the old credit calculation is used but must factor in the 7 kwh base capacity instead of the old 4 kwh minimum.
Credit for Used EVs
Some used EVs may qualify for a separate credit if they meet the Clean Vehicle Credit criteria. The Used Clean Vehicle Credit can be claimed on the Form 8936 as well, filed with a federal tax return in the year the vehicle was delivered and with VIN provided. The vehicle must be at least 2 years old, purchased for use and not resale, with an MSRP of $25,000 or less. The credit amounts to 30% of sales price up to a maximum of $4,000. This credit is also nonrefundable and does not carry forward to future years. No purchases made before 2023 qualify, regardless of delivery date. Income limitations apply:
Please contact the professionals at Gilliam Bell Moser if you have any questions.