The 2022 Inflation Reduction Act (IRA) includes extension and modification to clean vehicle tax credits. The credit for the purchase of new clean vehicles (which includes both plug-in electric vehicles and fuel cell vehicles) is extended through 2032, and modified, under the 2022 Inflation Act.
Clean Vehicles Purchased in 2022
Many factors contribute to whether an electric vehicle qualifies for federal tax credits or not. Many electric vehicles purchased before August 16th, 2022, qualify for a tax credit of up to $7,500. However, the 2022 Inflation Act adds a new requirement. Vehicles purchased after August 16th, 2022, generally, must have their final assembly occurring in North America. The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement. Because some models are built in multiple locations, there may be vehicles on the Department of Energy list that do not meet the final assembly requirement in all circumstances. As a second step, the vehicle’s 17-character vehicle identification number (VIN) may be entered into the National Highway Traffic Safety Administration’s VIN Decoder tool and the “Plant Information” field may be viewed at the bottom of the results page, which will identify where the searched vehicle was built. The final assembly requirement applies to vehicles purchased after August 16, 2022.
Vehicles manufactured by Tesla or General Motors purchased in 2022 are not eligible for tax credits, as Tesla and GM have exceeded the 200,000-vehicle threshold that limits the number of tax credits that can be claimed for vehicles made by a manufacturer.
Clean Vehicles Purchased after 2022
The 2022 IRA implements some new qualifying factors that go into effect beginning in January of 2023. The battery of the electric vehicle must meet certain conditions. The critical mineral amount and the battery component amount are taken into consideration. If the battery meets each requirement, a portion of the maximum potential credit is qualified.
Critical Minerals ($3,750)
In 2023, at least 40% of the value of the battery’s applicable critical minerals must have been extracted or processed in the United State or in a country with which the US has a free trade agreement. If the vehicle’s battery meets this requirement, a $3,750 credit is applicable.
Battery Components ($3,750)
In 2023, at least 50% of the value of the battery’s components must have been manufactured or assembled in North America. If the vehicle’s battery meets this requirement, a $3,750 credit is applicable.
If both requirements are met, then the vehicle may be eligible for the full $7,500 credit.
New 2023 Tax Credits
The 2022 Inflation Reduction Act also enacted two new tax credits for clean vehicles that are effective starting in 2023. One of these credits is the IRC Section 25E credit for previously owned clean vehicles. This tax credit is 30% of a used EVs’ sales price, up to $4,000. It can be claimed by taxpayers for used EVs with a purchase price of $25,000 or less and with an income of less than $150,000 for joint filers; $75,000 for single filers.
The second new credit is the IRC Section 45W tax credit for commercial clean vehicles. This tax credit is 15% of a qualifying vehicle’s cost (30% if the vehicle does not have a gas- or diesel-powered internal combustion engine), limited to the incremental cost of the vehicle relative to a solely gas or diesel-powered vehicle. The credit for light-duty vehicles is limited to $7,500, while heavy-duty vehicles can qualify for tax credits of up to $40,000. This credit could help support the deployment of electric or hydrogen trucks and buses.
For more information about these clean vehicle tax credits and guidance on other tax changes implemented by the 2022 Inflation Reduction Act, contact the accountants at The Innovative CPA Group or fill out our contact form.
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