In a flurry of last-minute publications, Internal Revenue Service (IRS) has published information to clarify new tax credits for the purchase of clean vehicles (trucks and cars) in 2023 through 2032. Much of this resulted from passage of the Inflation Reduction Act (IRA) in August.
IRA, which calls for some $400 billion in federal spending on climate change and energy issues, was a large legislative package based on the previously discussed Build Back Better bill. It includes a new minimum corporate tax, health care reforms and environmental investments.
A major section of IRA significantly expands the existing $7,500 electric vehicle (EV) tax credit for cars that had a per-manufacturer production limit. The new law eliminates the manufacturer production cap on credits for new passenger cars and creates new incentives for clean trucks and used clean vehicles. Caution — lots of restrictions apply.
First, the new tax credits apply differently to passenger cars versus commercial trucks. Second, the demarcation between car and truck incentive values is 14,000 pounds gross vehicle weight rating (GVWR). The used vehicle tax credit is limited to used vehicles less than 14,000 pounds GVWR. Also, the term “clean vehicles” refers to qualified plug-in EVs or fuel cell vehicles (FCV).
Truck tax credit
According to IRS, a business or tax-exempt organization that buys a qualified commercial clean vehicle may qualify for a clean vehicle tax credit of up to $40,000 under Internal Revenue Code (IRC) 45W.
The credit equals the lesser of_
- 15% of your basis in the vehicle (30% if the vehicle is not powered by gas or diesel)
- Incremental cost of the vehicle
The maximum credit is $7,500 for qualified vehicles with GVWRs of under 14,000 pounds and $40,000 for all other vehicles.
There is no limit on the number of credits your company can claim. For businesses, the credits are nonrefundable, so you can’t get back more on the credit than you owe in taxes. A 45W credit can be carried over as a general business credit.
To qualify, a vehicle must be subject to a depreciation allowance, with an exception for vehicles placed in service by a tax-exempt organization and not subject to a lease.
The vehicle must also:
- Be made by a qualified manufacturer as defined in IRC 30D(d)(1)(C)
- Be for use in your business, not for resale
- Be for use primarily in the United States
- Not have been allowed a credit under Sections 30D or 45W
In addition, the vehicle must either be:
- Treated as a motor vehicle for purposes of Title II of the Clean Air Act and manufactured primarily for use on public roads (not including a vehicle operated exclusively on a rail or rails); or
- Mobile machinery as defined in IRC 4053(8) (including vehicles that are not designed to perform a function of transporting a load over a public highway)
The vehicle or machinery must also either be:
- A plug-in electric vehicle that draws significant propulsion from an electric motor with a battery capacity of at least_
- 7 kilowatt hours if under 14,000 pounds GVWR
- 15 kilowatt hours if 14,000 pounds GVWR or more; or
- A fuel cell motor vehicle that satisfies the requirements of IRC 30B(b)(3)(A) and (B).
At time of publication, the IRS was still finalizing a form for claiming credit.
The vehicle’s depreciable basis is reduced by the amount of the commercial clean vehicle credit received.
EV and FCV cars
According to IRS guidance, a purchaser may qualify for a credit up to $7,500 if buying a new, qualified plug-in EV or fuel cell electric vehicle (FCV). The credit is available to individuals and their businesses.
To qualify, you must:
- Buy it for your own use, not for resale
- Use it primarily in the U.S.
In addition, your modified adjusted gross income (AGI) may not exceed:
- $300,000 for married couples filing jointly
- $225,000 for heads of households
- $150,000 for all other filers
You can use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less. If your modified AGI is below the threshold in one of the two years, you can claim the credit.
The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years.
To qualify, a vehicle must:
- Have a battery capacity of at least 7 kilowatt hours
- Have a GVWR of less than 14,000 pounds
- Be made by a qualified manufacturer. See the IRS index of qualified manufacturers and vehicles.
- FCVs do not need to be made by a qualified manufacturer to be eligible
- Undergo final assembly in North America
The sale qualifies only if:
- You buy the vehicle new
- The seller reports required information to you at the time of sale and to the IRS
Sellers are required to report your name and taxpayer identification number to the IRS for you to be eligible to claim the credit.
In addition, the vehicle’s manufacturer suggested retail price (MSRP) can’t exceed_
- $80,000 for vans, sport utility vehicles and pickup trucks
- $55,000 for other vehicles
To check if a specific vehicle meets the requirements for final assembly location, visit the Department of Energy’s page on Electric Vehicles with Final Assembly in North America and use the VIN Decoder tool under “Specific Assembly Location Based on VIN.”
To claim the credit, the purchaser must file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) with their tax return.
For tax credit rules on used clean cars, visit irs.gov/credits-deductions/used-clean-vehicle-credit.
EV manufacturers
Manufacturers should refer to IRS Bulletin Rev. Proc. 2022-42, which was issued Dec. 12, 2022, and the Clean Vehicle Credit Qualified Manufacturer Requirements issued Dec. 29, 2022, for more detailed guidance on how to enter into a written agreement with the IRS and provide periodic written reports containing specified information related to each clean vehicle manufactured.