Maximizing New-Vehicle Purchases Via IRA Tax Credit
The IRS has scaled back the number of available vehicles qualifying for the clean-vehicle tax credit. But as manufacturers push to satisfy the new requirements, there is hope that the list will get longer.
May 5, 2023
The Inflation Reduction Act (IRA) includes provisions expanding the affordability of greener vehicles for U.S. consumers and adjusting the existing tax credit for eligible all-electric cars and plug-in hybrids.
The $7,500 credit was previously authorized in 2008 and 2009 and has now been extended through 2032, with a separate credit of up to $4,000 for used models of eligible vehicles. The credit must be taken in the first year that the buyer takes delivery of the vehicle.
When the clean-vehicle provision was met with criticism over the limited number of vehicles that would qualify for the credit, taxpayers awaited further guidance from the IRS.
Recently the IRS issued more detailed guidance surrounding the credit and which vehicles are eligible. Here are some things to keep in mind when shopping for a new vehicle if you plan to utilize the clean-vehicle credit:
Price Limitations
The IRA includes price limitations for eligible vehicles, and that is the first thing buyers should keep in mind when shopping.
Cars must have a manufacturer’s suggested retail price of less than $55,000 to qualify. Vans, pickup trucks and SUVs must have an MSRP lower than $80,000.
Know the Income Thresholds to Qualify
There are different income thresholds for buyers of new and used electric vehicles. For a new electric vehicle, the buyer’s modified adjusted gross income (MAGI) cannot be higher than $150,000 ($300,000 married filing jointly, $225,000 head of household).
For used electric vehicles, the buyer’s MAGI cannot exceed $75,000 ($150,000 married filing jointly, $112,500 head of household).
Different Levels of the Clean Vehicle Credit
The credit tops out at $7,500, but it has been split into two parts based on satisfying source requirements for critical minerals and battery components.
To qualify for the $7,500 credit, the vehicle must meet both the critical-mineral and battery-component materials requirements. This means an “applicable percentage” of the value of both the origin of the critical minerals contained in the battery and the battery components must be extracted or processed in the U.S. or in a country with which it has a free-trade agreement or be recycled in North America.
The “applicable percentage” requirement is currently 40% for critical minerals and 50% for battery components and will increase each year before reaching values of 80% for critical minerals and 100% for battery components in 2028.
If the vehicle meets only one of the requirements, the buyer may still qualify for a $3,750 credit.
Final Assembly Requirement
Qualified vehicles also must undergo final assembly in North America. NHTSA’s VIN decoder can verify the location of final assembly and is publicly accessible at vpic.nhtsa.dot.gov/decoder.
Leasing Loophole to Avoid All Requirements
The credit is broken down into the clean-vehicle credit (intended for individuals) and the commercial clean-vehicle credit. The former is meant to stimulate personal vehicle purchases, while the latter is intended to stimulate large commercial EV purchases ranging from large vehicles such as buses and dump trucks to smaller vehicles for use in commercial fleets. Consumers are also indirectly benefiting from a loophole in the commercial clean-vehicle credit as it applies to leasing.
Under the commercial clean-vehicle credit, commercial buyers of a qualifying clean vehicle are eligible for the federal tax credit – but without the same vehicle assembly, income and other restrictions of the consumer EV tax credit. The commercial-vehicle tax credit is available to businesses that lease vehicles to consumers. As a result, many manufacturer-affiliated lenders are now passing on the $7,500 commercial-vehicle tax credit as a $7,500 lease incentive to support sales.
In this situation the buyer would receive the credit indirectly in the form of reduced lease payments for the vehicle, without having to worry about all of the paperwork or strict requirements.
Claiming the Credit for an Eligible Used Vehicle
The IRA also provides a credit for the purchase of a clean used vehicle.
Tom Alongi_UHY
A qualified buyer who places a previously owned clean vehicle in service after 2022 is eligible for the lesser of $4,000 or 30% of the vehicle’s sale price provided that the vehicle is acquired in a qualified sale; the original use starts with someone other than the new buyer; has a model year of two years earlier than the calendar year in which it is acquired; and generally meets the requirements applicable to vehicles eligible for the clean-vehicle credit for new vehicles.For now, fewer vehicles available qualify for the clean-vehicle credit, but as manufacturers push to satisfy the new requirements and maximize savings for their customers, there is hope that the list will get longer.
Tom Alongi (pictured, above left) is national manufacturing practice leader for the UHY accounting firm and hosts UHY’s annual manufacturing and automotive outlooks.
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