The Inflation Reduction Act extended and expanded the Internal Revenue Code (IRC) Section 30D clean vehicle credit, previously known as the electric vehicle (EV) credit. The credit now covers clean vehicles, which include plug-in hybrids, hydrogen fuel cell cars, and EVs.
The IRS published proposed regulations to clarify how a clean vehicle can qualify for the credit on April 17, 2023. The proposed regulations effectively limit the number of currently available models that qualify due to strict sourcing requirements applying to clean vehicles that buyers take delivery of on or after April 18, 2023. The federal government is taking steps to help taxpayers identify eligible vehicles.
Previous EV Credit
The Section 30D EV credit has been available since 2008. Prior to the Inflation Reduction Act, it started at $2,500, with a maximum credit of $7,500. 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 were no longer eligible for the EV credit.
Extended and Expanded Clean Vehicle Credit
The credit continues to top out at $7,500, but the Inflation Reduction Act splits it into two parts 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.
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 where 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 Inflation Reduction Act 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 Inflation Reduction Act includes price restrictions, too. Vans, pickup trucks, and sports utility vehicles (SUV) with a manufacturer’s suggested retail price (MSRP) of more than $80,000 don’t qualify, nor do other 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 and isn’t 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.
Relevant Proposed Regulations
The sourcing requirements intend to reduce manufacturer reliance on suppliers in countries such as China, making many of the proposed regulations 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 where the United States has a free trade agreement.
The proposed regulations also include several provisions with useful information for taxpayers. For example, the regulations define MSRP as the sum of the MSRP for a vehicle plus the MSRP for each accessory or item of optional equipment physically attached to the vehicle when delivered to dealer.
MSRP information can be found on the label affixed to the vehicle’s windshield or side window. Adding optional equipment can result in losing out on the clean vehicle credit in some cases.
Final Assembly in North America
Regarding 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 (VIN). North America refers to the United States, Canada, and Mexico.
The proposed regulations also discuss how to treat the credit for vehicles with multiple owners. 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 clean vehicle into service, the credit is allocated among the partners or shareholders. They can claim their portion on their individual tax returns.
Taxpayer MAGI Limits
The proposed regulations also clarify the income limit. The credit isn’t available for any taxable year if the lesser of taxpayer’s MAGI for the year or their 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 doesn’t exceed the threshold amount in either year based on the applicable filing status for that year.
The MAGI limit doesn’t 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.
Other Clean Vehicle Considerations
While the IRS has promised additional guidance on the credit, taxpayers interested in taking advantage of the credit needn’t wait. The US 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.
We’re Here to Help
If you have further questions about the clean vehicle credit, please contact your Moss Adams professional. You can visit our Tax Credits & Incentives Service page for more information.