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Tax Credits for EVs: What’s New?

Congress enacted the Inflation Reduction Act 2022 and expanded the tax credit for electric vehicles (EVs). The new tax credit regime came into effect in 2023. There are four ways you can benefit from a federal tax credit for an EV:

  1. Purchase an EV and claim the clean vehicle credit
  2. Lease an EV and benefit from an EV dealer discount
  3. Purchase a used EV that qualifies for the previously owned clean vehicle credit
  4. Purchase an EV for business use and claim the commercial clean vehicle credit

Only one credit per vehicle is allowed. Among these, the most popular method is leasing an EV. Here is how these methods work:

Clean Vehicle Credit:

This credit may be claimed whether a qualifying EV is used for personal driving, business driving or both. The maximum credit is $7,500. The credit is available for new EVs assembled in North America with a gross vehicle weight rating (GVWR) of less than 14,000 pounds. They may be pure EVs or plug-in hybrid EVs (PHEVs). The clean vehicle credit is equal to the largest tax credit you can get for a passenger EV. However, the clean vehicle credit is subject to many restrictions from which many people can’t benefit much.

Income Caps: Income caps highlight who can qualify for the clean vehicle credit. These are not adjusted for inflation, so they have not changed for 2024. The clean vehicle credit may not be claimed by taxpayers whose modified adjusted gross income (AGI) is more than

    • $300,000 for joint return filers and surviving spouses
    • $225,000 for heads of household, or
    • $150,000 for unmarried taxpayers and married taxpayers filing separately
  • Modified AGI can be used for the previous year if it is lower.

    Credit may be claimed at the point of sale: From 2024, the EV dealer will determine credit criteria and the amount at the time of sale. The dealer submits a time-of-sale report to the IRS online, and it is accepted or rejected in real-time. The dealer must provide you with a copy of the report.

    If the vehicle qualifies for a credit, there are two options:

      1. You can claim the credit on your tax return for the year in which you placed the vehicle in service using IRS Form 8936.
      2. You can elect to transfer the credit to the dealer so they can apply the credit amount to your final purchase cost. This allows you to receive credit benefits at the time of sale.

    You can elect to transfer the credit to the dealer so they can apply the credit amount to your final purchase cost. This allows you to receive credit benefits at the time of sale. The IRS will reimburse the dealer, but you must still fill out Form 8936 to report your eligibility for the credit and your decision to transfer the credit to the dealer. The credit should be claimed at the time of sale; there is a possible bonus, too.

    Bonus: Suppose you transfer the credit to the dealer. You could get a huge additional bonus: you avoid the rule that personal credit is non-refundable.

    The IRS announced that if you don’t owe enough tax for the year to qualify for the full $7,500 credit, neither you nor the dealer will have to repay any part of the credit. Even if you transferred the clean vehicle credit to the dealer, you must file Form 8936, Clean Vehicle Credit, when you file your tax return.

    Limit: If you purchase multiple EVs in the same year, you may elect to transfer the credit to the dealer only two times.

    Leasing an EV

    If you can’t find a qualifying new EV to purchase, you should consider leasing. You are not alone when you lease. Leasing EVs is more popular than purchasing them. During the first quarter of 2024, 63.6 percent of all EVs were leased.

    EV leasing works like this: the dealer claims $7,500 commercial clean vehicle credit for the EV and passes the savings to you in the form of lower monthly lease payments, small down payments, or rebates. You do not apply for any tax credit. The IRS says it is fine as long as the transaction is a true lease and not a disguised sale.

    The commercial clean vehicle credit is not subjected to most of the restrictions that apply to the clean vehicle credit. So many more EV models are available for lease that can benefit from the credit. If you lease, you will likely have far more EVs to choose from than buying an EV and seeking clean vehicle credit.

    Furthermore, the monthly payments to lease an EV can be much lower than the payments on a loan.

    Caution: No law requires the dealer to pass on any part of the commercial vehicle to the leasing customer, and deals vary from dealer to dealer, so shop around. Leasing an EV has other benefits, too. EV technology is rapidly improving. You may prefer to lease an EV for two to three years and then discard it and get a new EV with the latest battery technology.

    Previously owned clean vehicle credit

    The third way to claim a tax credit for an EV is to purchase a used one. Tax credits for used EVs are not subjected to the North American assembly, critical minerals or battery component rules. As a result, more used EV models qualify for credit than new ones. Carmakers provide a warranty for EV batteries that last eight years or 100,000 miles, whichever is earlier. A used EV can be the best option if there is still time and miles to go for the battery warranty.

    Clean vehicle credit for previously owned vehicles is limited. You can obtain the credit only if you purchase a used EV from a dealer, not from a private party.

    The income caps are 50 percent lower than when you buy a new EV. The purchaser’s AGI for the year the vehicle was placed in service, or the prior year must be less than:

    • $150,000 for joint vehicle filer and surviving spouses
    • $112,500 for heads or household, or
    • $75,000 for single taxpayers and married taxpayers who file separately.

    The credit is limited to EVs that are at least two years old. The model year must be at least two years earlier than the calendar year when you buy it. Thus, in 2024, the credit is available for EVs with model years 2022 and earlier.

    The previously owned credit is available only for EVs sold for $25,000 or less. Sales price includes all dealer-imposed costs and fees not required by law. It doesn’t include costs or fees required by law, such as taxes, title and registration fees.

    The credit equals 30 percent of the purchase price, up to a maximum credit of $4,000. You can claim the used EV credit only once every three years.

    You can transfer the previously owned credit at the point of sale to the dealer, the same as for the new EV clean vehicle credit. Like with new EVs, if you transfer the credit to the dealer, you won’t have to repay any part of the credit if it exceeds your year’s tax liability.

    If you do not transfer the credit, it is non-refundable when you file your taxes, so you can’t get back more on the credit than you owe in taxes. You also can’t carry over any unused, clean vehicle credit to future tax years.

    The dealer should give you a time-of-sale report when you complete your purchase, which you should keep in your tax records. Even if you transferred the credit to the dealer, you must file Form 8936, Clean Vehicle Credits, when you file your tax return.

    Commercial Clean Vehicle Credit

    If you purchase an EV for business driving, you can qualify for the commercial clean vehicles tax credit. This credit is available for battery electric vehicles or PHEVs with four wheels that have their final assembly in the United States. The EV must be acquired for use or lease, not resale.

    This commercial credit is not subject to most of the restrictions that apply to the clean vehicle credit, including income caps, price caps, or domestic sourcing requirements. Thus, far more EVs qualify for the commercial credit than for the clean vehicle credit.

    For EVs with a GVWR of less than 14,000 pounds, the credit is equal to the lesser of

    • 15 percent of the vehicle’s basis or
    • The incremental cost of the vehicle

    The incremental cost is the excess of the EV’s purchase price over the price of comparable non-EV. The IRS accepts $7,500 as the incremental cost of all EVs upto 14,000 pounds other than compact car PHEVs. For compact care PHEVs, the incremental cost is $7,000.

    The maximum credit is $7,500, the same as the clean vehicle credit. Thus, the commercial clean vehicle credit can never be larger than the full clean vehicle credit, but it can be smaller depending on the cost of the EV and the percentage of business use.

    If you claim the commercial clean vehicle credit, you can’t also claim the clean vehicle credit for the same vehicle.

    One good thing about the commercial clean vehicle credit: it is part of the general business credit. Any amount that can’t be used to reduce the current year’s tax liability can be carried forward 20 years or carried back three years.

    You can’t claim this credit at the point of sale by transferring it to the dealer like you can with the clean vehicle credit and the previously owned clean vehicle credit. You must claim the commercial credit on your tax return. Partnerships, multi-member LLCs taxed as partnerships, and S corporations must file IRS Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit. All other taxpayers report this credit on line 1y in Part III of Form 3800, General Business Credit.

    While several tax credits are available for use of EVs that can potentially be a big gain for you, it is not easy for a  layman to decipher the intricacies. You may well need the expert advice of an advisor as ‘Berger CPAFirst’.

    BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximising tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.

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