Insight Article

Updated guidance on the Clean Vehicle Tax Credit program

February 13, 2023 | by Kushner LaGraize, LLC

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law which included the Clean Vehicle Tax Credit program. Since the IRA was signed into law, there has been confusion surrounding some of the new requirements for the Clean Vehicle Credit. The IRS has recently issued guidance for those new requirements. This article will provide an overview of the Clean Vehicle Tax Credit program, including recent guidance from the IRS.

Background

The Clean Vehicle Tax Credit program modified the existing Electric Vehicle Tax Credit program by expanding the tax credits available to consumers. However, it also introduced new limitations on the credit.

The qualified Electric Vehicle Tax Credit was introduced in 2008 and offered up to $7,500 in tax credits for purchasing a qualifying electric vehicle. Unfortunately, the credits available for a manufacturer's vehicles were phased out once the manufacturer sold 200,000 qualifying cars. The Clean Vehicle Tax Credit program lifted the 200,000 vehicle cap and is effective for eligible vehicles placed into service after December 31, 2022.

For new vehicles, the maximum tax credit is $7,500. For used vehicles at least two years old, the maximum credit is the lesser of $4,000 or 30% of the vehicle's sale price.

Limitations

There are several limitations on which cars and individuals qualify for the Clean Vehicle Tax Credit.

Placed In Service Date

A new clean vehicle is considered to be placed in service on the date the taxpayer takes possession of the vehicle.

Final Assembly

Only cars where the final assembly is in North America (United States, Canada, and Mexico) are eligible for the Clean Vehicle Tax Credit. Since manufacturers may have multiple assembly plants, a purchaser should verify where the final assembly of a car occurred. You can check by entering a car's Vehicle Identification Number into the National Highway Traffic Safety Administration's VIN Decoder tool. The website will show where the vehicle was assembled at the bottom of the page.

The IRS has also created an index of vehicle makes and models that may qualify as “electric vehicles with final assembly in North America.” As of January 2023, eligible vehicles include:

Manufacturer’s Suggested Retail Price

There are limitations based on the total manufacturer's suggested retail price. New trucks, vans, and SUV models must have an MSRP less than $80,000. Other new cars, like coupes and sedans, must be less than $55,000. The IRS’s list of eligible makes and models identifies each vehicle's applicable MSRP limit. It’s important to note that certain customizations could cause an otherwise eligible vehicle to exceed the allowable MSRP. For this reason, it will be crucial for prospective buyers to ensure their purchased vehicle does not exceed the applicable MSRP, or they may become ineligible for the tax credit.

For used vehicles, the sale price must be $25,000 or less.

Battery Requirements

The IRA also included a complicated limitation based on the vehicle's battery. This provision specified that at least 40% of the minerals and 50% of the other components of the battery must come from North America or a country that has a free trade agreement with the U.S. These percentages were scheduled to increase in future years. Unfortunately, the current Notices from the IRS do not explain or clarify these percentage requirements (or specify whether any existing vehicles would be eligible under this provision). However, the IRS has indicated that proposed regulations for these requirements are forthcoming.

Income Requirements

While there are limitations based on the vehicle, there are also limitations based on the purchaser's income. The Clean Vehicle Tax Credit for new vehicles is only available to taxpayers whose modified adjusted gross income does not exceed $300,000 for married couples and surviving spouses, $225,000 for a head of household, and $150,000 for all other taxpayers. The modified adjusted gross income limits for purchasers of used vehicles are $150,000 for married couples, $112,500 for a head of household, and $75,000 for other taxpayers.

2022 Purchases

The Clean Vehicle Tax Credit program was signed into law on August 16, 2022, but applies to vehicles put into service after December 31, 2022. So what about cars purchased between August 16 and December 31 of 2022? Cars purchased between August 16 and December 31 fall under the original electric vehicle tax credit program, but the vehicle's final assembly must occur in North America to receive the tax credits.

Some consumers may have purchased a car before August 16 but had not taken possession by then. The IRS stated that if you had a binding written contract to buy a qualifying vehicle before August 16, but had not taken possession of the car by the 16th, then the purchase falls under the original electric vehicle tax credit program. This is important because the original tax credit program does not require final assembly in North America.

This article is intended to provide a brief overview of the Clean Vehicle Tax Credit and is not a substitute for speaking with one of our expert advisors. If you'd like to learn more about the Clean Vehicle Tax Credit, please contact our office.