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Tax Credits and Incentives

Guidance, List of Eligible Cars Issued for Revised Electric-Vehicle Credits

Joseph Boris  

Joseph Boris  

On its website, the IRS has issued guidance on tapping the Inflation Reduction Act of 2022’s tax credits for electric vehicles (“Plug-in Electric Drive Vehicle Credit at a Glance”), while the Energy Department listed credit-eligible cars, trucks, and SUVs on August 16, hours after President Joe Biden signed the law.

The Act introduces a $4,000 tax credit for the purchase of used electric vehicles (EVs) and updates the $7,500 credit for new ones, with a major change: There are now caps on the price of new vehicles, based on the buyer’s income, that qualify for that credit. The caps imposed are $55,000 for electric cars and $80,000 for SUVs and pickup trucks.

The legislation also requires that, as of August 17, EVs undergo final assembly in North America in order to qualify for the new-vehicle incentive. The Act also provides manufacturing incentives to encourage onshoring of supply chains for critical minerals and batteries. The final-assembly requirement is the only change under the Act that takes effect immediately after August 16, the Treasury Department said in a list of frequently asked questions on the credits. Most of the law’s changes “will phase in over time,” starting next year, it said.

Starting January 1, 2023, consumers may be eligible for a tax credit for used or previously owned cars and businesses may qualify for a new commercial clean-vehicle credit, according to a Treasury statement.

Describing the Act as the biggest investment in clean energy in U.S. history, a Treasury official told reporters on a call that the “significant tax incentives … will make green energy a more affordable choice for families and businesses alike.” The law puts “within reach” the Biden administration’s goals for cutting greenhouse gas emissions by 2030 while strengthening energy security and lowering costs for consumers, the official said.

According to Treasury’s FAQs and the IRS guidance, buyers and auto dealers should check the vehicle identification number on an EV to determine whether it qualifies for the Act’s “clean vehicle credit.” (It had been labeled the Qualified Plug-In Electric Drive Motor Vehicle Credit in previous versions of the legislation, to match existing IRS guidance under Code Sec. 30D.) This will help consumers determine the eligibility of vehicles whose manufacturers build the same model in different countries, the Treasury official said.

As specified in the legislation’s text, the clean vehicle credit under an amended Code Sec. 30D(f)(10) won’t be allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the current or preceding year exceeds the threshold amount: $300,000 for taxpayers filing joint returns or surviving spouses, $225,000 for heads of household, or $150,000 for other taxpayers. MAGI is the sum of adjusted gross income augmented by any amount excluded from gross income under Code Sec. 911 (foreign earned income and housing exclusions), Code Sec. 931 (income from Guam, American Samoa, or the Northern Mariana Islands), and Code Sec. 933 (income from Puerto Rico).

The Treasury FAQs said an individual who entered into a purchase contract before August 16 but didn’t take possession of the vehicle until that date could claim the credit “based on rules that were in effect before the Inflation Reduction Act’s enactment.”

In listing EVs that currently qualify for either credit, the Energy Department said it would modify its list in 2023, when further changes prescribed by the law are set to take effect, such as the new income caps and a requirement that components of vehicle batteries be extracted or processed domestically or in a country with a free trade deal with the U.S.

Buyers who signed a binding agreement to purchase a qualifying car before August 16 could also be eligible for the credits as they existed before the Inflation Reduction Act went into effect, the IRS said in the guidance that included a separate list of cars that are newly eligible for the credit, assuming they were bought on or before August 16. These include high-end, foreign-made models that wouldn’t meet the vehicle price caps under the Act.

The electric vehicle tax credit in effect before the Inflation Reduction Act was enacted was valued between $2,500 and $7,500, depending on battery capacity. Credits were no longer available for purchases made after the manufacturer reached a limit of 200,000 vehicles sold—a cap that will remain in place until the start of 2023.

The heads of the four biggest U.S. automakers—General Motors, Ford, Toyota Motor North America, and Chrysler parent Stellantis—had urged Congress to raise the limit on tax credits for building EVs and to phase it out only when the market had matured. The companies’ chief executives said consumers would have greater choice if manufacturers didn’t lose the incentive once they hit 200,000 vehicles in sales.

Autos Drive America, an industry lobbying group that represents foreign automakers with U.S. operations, said it was disappointed that Congress added the North American assembly mandate to the final version of the Act. In a statement on August 12—issued after the House passed the bill but before the Senate voted—the group’s president, Jennifer Safavian, noted concerns expressed by South Korea and the European Union over the requirements.

“Many of our strongest allies … have already raised concerns that the Clean Vehicle Credit may violate international trade rules,” Safavian said. “At a time when countries and industry are investing together towards more resilient supply chains, we should not limit the partners that can help advance the transition towards cleaner transportation.”

 

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