The Inflation Reduction Act of 2022 amended the Clean Vehicle Credit, and added a new requirement for final assembly in North America that took effect on August 17, 2022. Three major things to know about this new law when it relates to tax planning for your business and buying an electric vehicle:
Tax Planning: Buying an Electric Vehicle in 2022
Electric Vehicle Tax Breaks for the Remainder of 2022?
Here’s what you need to consider for the remainder of 2022:
- The 200,000-vehicle cap on electric vehicles qualifying for tax credits remains in place until January 1, 2023. If you want the tax credit on a Tesla or a Chevrolet, both of which are over the cap, you should wait and buy on January 1 or later.
- The new law applies to certain so-called North American assembly rules that immediately destroy electric vehicle credits for models made by Hyundai, Kia, Porsche, and Toyota.
- According to the U.S. Department of Energy, there are 21 car and truck models that may meet the North American assembly rules and qualify for the credit if you buy before January 1.
- If you ordered an electric vehicle that qualified for the credit before August 16, 2022, your 2022 credit is safe and secure.
Personal-Use Electric Vehicles—Buying Now
The Transition to the Way It Is
For the past several years, there has been a single tax credit for fully electric cars or plug-in hybrid electric vehicles that applied to both business and non-business vehicles. This changes starting in 2023. The $7,500 non-refundable credit for personal-use electric vehicles remains in place through 2032, but in greatly altered form.
New income limit. Now referred to as the “clean vehicle credit,” starting in 2023, it will be available only to taxpayers whose adjusted gross income is no more than $300,000 (married, filing jointly) or $150,000 (single).
New cost limits. For the 2023 personal-use electric vehicle credit, you need the manufacturer’s suggested retail price to be:
- below $80,000 for vans, SUVs, and pickup trucks; and
- below $55,000 for other vehicles.
Moreover, for personal-use electric vehicles, the full credit will be available only for electric vehicles assembled in North America and largely sourced with materials from countries with which the U.S. has a free trade agreement, and not from countries such as China that are “foreign entities of concern.” Due to these restrictions, it’s possible that relatively few electric vehicles will qualify for the personal-use clean vehicle credit for several years.
Better Electric Vehicle Tax Rules for Business
If you purchase or lease an electric vehicle for business use in 2023 or later, none of those rules discussed immediately above apply. With business, you travel a new road to the commercial clean vehicle tax credit. This credit is available for depreciable business-use vehicles that are used primarily on public streets or that qualify as “mobile machinery” (such as self-propelled construction equipment). The business electric vehicle must be propelled to a significant extent by a rechargeable electric motor with a capacity of not less than 7 kilowatt hours for vehicles with a gross vehicle weight rating (GVWR) of less than 14,000 pounds, or 15 kilowatt hours for vehicles with a GVWR of 14,000 pounds and over. The credit is also available for fuel cell vehicles.
Calculating the Business Credit
Before considering limits, the credit is equal to the lesser of:
- 15 percent of the vehicle’s basis (30 percent if the vehicle is fully electric—that is, not partly powered by a gasoline or diesel engine), or
- the incremental cost of the vehicle.
The “incremental cost” is the excess of the vehicle’s purchase price over the price of a comparable vehicle.
For example, if an electric vehicle costs $80,000 and a comparable internal combustion vehicle costs $50,000, the incremental cost is $30,000. Here, the tax credit would be the lesser of $24,000 ($80,000 x 30 percent) or $30,000 (the incremental cost).
It is unclear how to determine what is a comparable vehicle for these purposes. The statute simply says it should be comparable in size and use with the electric vehicle. That’s pretty broad. It’s likely that the IRS will step in and provide guidance.
Maximum Business Credit
There is a maximum credit allowed. The amount depends on an electric vehicle’s GVWR—this is the maximum loaded weight of a vehicle as determined by the manufacturer. The maximum credit is $7,500 for electric vehicles with a GVWR of less than 14,000 pounds and a whopping $40,000 for electric vehicles with a GVWR of 14,000 pounds or more.
For example, if you purchase an electric motor home or, say, a Tesla Semi in 2023, which is expected to list for $150,000 and to have a GVWR well over 14,000 pounds, the $40,000 credit would bring the cost down to $110,000.
Per Vehicle: The credit is for each vehicle you purchase and is not limited to one credit per taxpayer. Thus, you can claim multiple credits if you purchase multiple electric vehicles in the same year.
New Disclosure Requirement: To be eligible for the credit, you must include the electric vehicle’s identification number (VIN) on your business tax return.
Depreciable Property Requirement: The electric vehicle must be depreciable property to qualify for the commercial clean vehicle credit, but you need not use it solely for business.
- Sole proprietor. The sole proprietor’s business basis equals the business-use component of the electric vehicle. Proprietors determine that basis using the business percentage from their mileage logs.
- Corporations. The corporation does not reduce the basis of the vehicle for personal use. It uses 100 percent of the cost and then uses IRS regulations to allocate personal use to the employees. (See How Your S Corporation Gets Tax Deductions for the Corporate Car.)
If you claim the commercial vehicle credit for an electric vehicle, you can’t also claim the clean vehicle credit for the same vehicle—in other words, no double benefit is allowed.
Planning tip. With the right income and the right vehicle, the sole proprietor with, say, 60 percent business use should consider using the personal-use electric vehicle credit to get a 100 percent credit and then converting the vehicle to business use at its credit-reduced basis.
The downside to this strategy: no Section 179 deduction. But bonus and MACRS depreciation are available.
General Business Credit
The clean commercial vehicle credit is a non-refundable credit that is part of the general business credit.10 There is an overall limit on all the non-refundable business credits you may claim per year. If you exceed the limit, you can carry the credit back one year and forward for 20 years until it is used.11 The credit is reported on IRS Form 3800, General Business Tax Credit.
Tax Credit for Electric Vehicles: Tax Planning
If you are thinking of claiming a tax credit on your purchase of an electric vehicle, you need to ask:
- Does the vehicle I want qualify for the credit in 2022 and not in 2023?
- Does the vehicle I want qualify for the credit in 2023 and not in 2022?
The North American assembly requirement that applies after August 16, 2022, makes it more difficult to identify vehicles that qualify for credit. But remember, the assembly requirement does not apply to business vehicles beginning in 2023.
The new law created (beginning in 2023) a commercial clean vehicle tax credit for fully electric cars, plug-in hybrid electric vehicles, and fuel cell vehicles. The credit is available for any electric vehicle that constitutes depreciable property—because it is used for business.
The maximum credit is $7,500 for electric vehicles with a GVWR of less than 14,000 pounds, and $40,000 for electric vehicles with a GVWR of 14,000 pounds or more.
If you claim the commercial vehicle credit for an electric vehicle, you can’t also claim the clean vehicle credit for the same vehicle—no double benefit is allowed.
- If you have back taxes and want to know the timeline and/or costs to get your back taxes resolved
- If you own a small business and want to discuss tax reduction strategies for the self-employed
- If you’re worried your last tax expert wasn’t doing the best they could have and want a second opinion…
Contact Ken Weinberg to set up a free consultation by filling out the form on this page.