The Inflation Reduction Act (IRA) extended and expanded the Section 30D New Clean Vehicle (CV) Credit, previously known as the Electric Vehicle (EV) Credit. The IRS explained that the purpose of these amendments is to promote the purchase and use of “clean vehicles” by lower and middle-income Americans, to promote resilient supply chains and domestic manufacturing, to strengthen supply chains with trusted trading partners, to protect against improper credit claims and to achieve significant carbon emissions reductions. “Clean vehicles” include plug-in hybrids, hydrogen fuel cell cars and EVs.
On April 17, 2023, the IRS published proposed regulations as part of an effort by the federal government to help taxpayers identify eligible vehicles. These proposed regulations provide clarity on the strict sourcing requirements and other requirements that must be satisfied for a CV to qualify for the credit.
The previous EV Credit
The Sec. 30D EV Credit has been available since 2008. Prior to the IRA, it started at $2,500, with a maximum credit of $7,500 (note that the EV Credit remains available for qualifying vehicles placed in service on or before April 17, 2023).
It was also subject to a cap based on the number of qualifying vehicles a manufacturer had produced. Because of this cap, some popular EVs—including those made by Tesla, Toyota and General Motors—were no longer eligible for the EV Credit.
The extended and expanded CV Credit
The CV Credit continues to top out at $7,500, but the IRA splits the qualification of the credit into two parts that are based on satisfying new sourcing requirements for both critical minerals and battery components. Vehicles that meet only one of the two requirements are eligible for a $3,750 credit.
Specifically, an “applicable percentage” of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which it has a free trade agreement, or be recycled in North America. Similarly, an applicable percentage of the value of the battery components must be manufactured or assembled in North America. The IRA increases the applicable percentage for both requirements every year starting in 2023, with initial percentages of 40% for critical minerals and 50% for battery components.
The IRA also includes price and manufacturing restrictions. Vans, pickup trucks and SUVs with a manufacturer’s suggested retail price (MSRP) of more than $80,000 do not qualify for the credit, nor do automobiles with an MSRP higher than $55,000. Qualified vehicles also must undergo final assembly in North America.
The credit also is subject to income limitations. It is not available to taxpayers with a modified adjusted gross income (MAGI) over:
- $150,000 for single filers;
- $300,000, for joint filers; or
- $225,000, for head of household filers.
In addition, the credit is not allowed for vehicles with any critical minerals (after 2025) or battery components (after 2024) from a “foreign entity of concern.” The IRA does not define this term, but the IRS and U.S. Department of Treasury have stated that future guidance will address this provision.
The credit is not refundable and cannot be carried forward if it is claimed as a personal credit. It can, however, be carried forward if claimed as a general business credit. If a taxpayer uses a qualified vehicle for both personal and business use, and the business use is less than 50% of the total use for a tax year, the credit must be apportioned accordingly.
Related Read: Clean Vehicle Credit Comes With Caveats
Relevant proposed regulations
The sourcing requirements are intended to reduce manufacturers’ reliance on suppliers in countries such as China. As a result, many of the proposed regulations are of greater interest to manufacturers than consumers. They spell out, for example, processes for determining the percentages of value of critical minerals and of battery components. They also explain how to identify countries with which the United States has a free trade agreement.
The proposed regulations also include several provisions with useful information for taxpayers. For example, they define MSRP as the sum of 1) the MSRP for a vehicle; and 2) the MSRP for each accessory or item of optional equipment that is physically attached to the vehicle at the time of delivery to the dealer. As such, the addition of accessories or optional equipment to a CV that otherwise qualifies may result in the loss of the CV credit. Information pertaining to MSRP is found on the label affixed to the vehicle’s windshield or side window.
As far as the “final assembly in North America” requirement, the proposed regulations provide that taxpayers can rely on the final assembly point reported on the label affixed to the vehicle. Alternatively, they can rely on the vehicle’s plant of manufacture reported in the vehicle identification number. North America refers to the United States, Canada and Mexico.
The proposed regulations also discuss the treatment of the credit when a vehicle has multiple owners. They state that only one taxpayer can claim the credit; no allocation or prorating is permitted. In the case of married taxpayers filing jointly, either spouse may be identified as the owner claiming the credit on the seller’s report.
If a partnership or S corporation places an eligible CV into service, the credit is allocated among the partners or shareholders. They can claim their portion on their individual tax returns.
The proposed regulations also clarify the MAGI limit. The credit is not available for any taxable year if the lesser of: 1) the taxpayer’s MAGI for the year; or 2) the taxpayer’s MAGI for the preceding year exceeds the applicable threshold. If a taxpayer’s filing status changes (for example, from single to married) during this two-year period, the MAGI limit is satisfied if the MAGI does not exceed the threshold amount in either year based on the applicable filing status for that year.
The MAGI limit does not apply to taxpayers other than individuals. If a qualified vehicle is placed in service by a partnership or S corporation, the limit will apply to partners or shareholders who claim their portion of the credit.
In the market for a CV?
While the IRS has promised additional guidance on the CV Credit, taxpayers interested in taking advantage of the credit need not wait. The U.S. Department of Energy has created a website that includes a list of eligible clean vehicles. The list will be regularly updated as manufacturers provide information on their vehicles that qualify for the credit.