The Inflation Reduction Act (IRA) provides taxpayers many new options for clean energy tax credits while also extending and modifying existing incentives.
The IRA significantly modified the New Clean Vehicle Credit (formerly known as Plug-In Electric Drive Vehicle Credit) criteria by including new requirements for North America final assembly, taxpayer income thresholds, vehicle sales price thresholds, critical mineral requirements, and battery component requirements. These changes take effect in 2023.
Credit for vehicles purchased in 2022
Shortly after enactment of the IRA, the Internal Revenue Service (IRS) released information to help taxpayers navigate credit eligibility based on immediate changes that were effective for vehicles purchased before January 1, 2023.
Credit for vehicles purchased in 2023
Beginning January 1, 2023, the credit contains several new terms and qualifications. Although taxpayers need familiarity with these terms to make informed buying decisions, manufacturers have the responsibility to certify with the IRS that a vehicle qualifies for the credit. The IRS maintains a list of qualifying vehicles for reference.
- What is the impact of the clean vehicle credit on dealerships? We broke down what dealers need to know.
What you need to know about the Clean Vehicle Credit
To help taxpayers determine eligibility, the IRS released Frequently Asked Questions (FAQs) to clarify key revisions under the new legislation.
Below is a summary of some of the terms and key credit criteria (be sure to review the full FAQ document for complete information).
Claiming the credit
- The credit amount remains $7,500 in 2023. The modified law requires vehicles to meet new critical mineral and battery component requirements. These requirements are effective beginning April 18, 2023. Prior to April 18, the credit is calculated using the same battery capacity criteria of the original credit.
- To be eligible, taxpayers must fall under specific income limitations for the current or preceding tax year. The modified AGI thresholds are:
- Married filing jointly or filing as a qualifying surviving spouse or a qualifying widow(er) - $300,000
- Head of household - $225,000
- All other taxpayers - $150,000
- Taxpayers purchasing qualifying vehicles will receive a sellers’report from the dealer at the time of purchase. This report is required for taxpayers to complete Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, and claim the credit.
- Taxpayers with zero federal tax liability will not benefit from the credit because it is nonrefundable and cannot be carried forward.
- Taxpayers may claim the credit in the year the vehicle is delivered, which may not be the same year the vehicle is ordered, or payment is made.
- New plug-in electric and fuel cell vehicles may be eligible if the vehicle’s electric motor is mainly powered by a battery with capacity of at least seven kilowatt hours. The battery must be capable of being recharged from an external source of electricity.
- The vehicle must have a gross vehicle weight rating of less than 14,000 pounds (vans, sport utility vehicles, pickup trucks, and sedans).
- To be eligible, vehicles must fall under specific manufacturer’s suggested retail price (MSRP) limitations:
- Vans - $80,000
- Sport Utility Vehicles - $80,000
- Pickup Trucks - $80,000
- Other - $55,000
- MSRP is the base retail price suggested by the manufacturer, not the actual price paid for the vehicle.
- The vehicle must have four wheels and have been manufactured primarily for use on public streets, roads, and highways.
- The vehicle’s final assembly must be in North America (the 50 states, the District of Columbia, and Puerto Rico, Canada, or Mexico). Final assembly information is listed on the vehicle’s information label or can be found using the VIN Decoder tool.
- Vehicles must be manufactured by a qualified manufacturer and purchased from a licensed dealer. Qualified manufacturers must enter into a written agreement with the IRS certifying their vehicles meet the credit criteria.
- Vehicles must be purchased from a licensed dealer. Licensed dealers have new IRS reporting requirements for sales beginning January 1, 2023.
- The vehicle’s purchase must be for original use, not resale. In the case of a leased vehicle, the lessor is the original user and eligible for the credit. In other words, the vehicle’s first owner may claim the credit.
Next steps for utilizing the Clean Vehicle Credit
While the IRS has recently released information to help clarify the new Clean Vehicle Credit requirements, the responsibility falls to the manufacturer to certify a vehicle’s eligibility. This means taxpayers are not directly responsible for determining if a vehicle qualifies for the credit. Instead, the taxpayer’s responsibility is to determine if they meet appropriate AGI thresholds and if the credit is beneficial to their unique tax situation.
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