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IRS Releases Guidance on New Electric Vehicle Tax Credit

IRS Releases Guidance on New Electric Vehicle Tax Credit

*Updated on April 14, 2023

The Internal Revenue Service (IRS) published new information on the clean vehicle tax credits that were issued under the Inflation Reduction Act of 2022. The new clean vehicle credit is claimed in the same tax year that the taxpayer takes delivery of the vehicle. A vehicle’s eligibility for the credit might change if that vehicle is placed in service after it was ordered.

Qualifications for the Credit

If an individual or business buys a new, qualified plug-in electric vehicle (EV) or fuel cell electric vehicle (FCEV), they can qualify for a credit up to $7,500 under IRC Section 30D. An individual’s modified adjusted gross income (AGI) may not exceed $300,000 for married couples filed jointly, $225,000 for heads of households and $150,000 for all other filers. The AGI is taken from the year the individual takes delivery of the vehicle or the year before, whichever is the lesser amount.

Vehicle Qualifications

To qualify, the new vehicle cannot be acquired for resale purposes and must:

  • Be purchased for use and be primarily used in the U.S.
  • Be manufactured by a qualified manufacturer (FCEVs do not need to be made by a qualified manufacturer to be eligible)
  • Meet the definition of a motor vehicle under Title II of the Clean Air Act
  • Have a gross vehicle weight rating of less than 14,000 pounds
  • Be powered to a significant extent by an electric motor with a battery capacity of 7 kWh or more and be capable of being recharged from an external source of electricity
  • Have final assembly in North America

To figure out if a specific model meets the requirements for final assembly, individuals can go to the U.S Department of Energy’s Electric Vehicles with Final Assembly in North America. There, individuals can use the VIN Decoder tool to confirm the assembly location as well as checking a list of qualifying Model Year 2022 and early Model Year 2023 electric vehicles.

Sale Qualifications

The sale of a new vehicle only qualifies for the credit if the vehicle is bought new and if the seller reports required information to the customer at the time of sale. Sellers are also required to report the name and taxpayer identification number to the IRS.

The Vehicle’s manufacturer suggested retail price (MSRP) cannot exceed $80,000 for vans, sport utility vehicles and pickup trucks, as well as $55,000 for other vehicles. The MSRP is not necessarily the price the customer pays but is the retail price of the automobile suggested by the manufacturer, including options, accessories and trim.

Details on Critical Mineral and Battery Component Requirements

Electric Vehicles placed in service on or after April 18, 2023, are required to meet at least one critical mineral or battery component requirement that is mandated by the Inflation Reduction Act to qualify for the full $7,500 tax credit. Electric vehicles that meet only one of the two requirements are eligible for $3,750.

Critical Mineral Requirement

The Treasury Department has stated that a percentage of the value of the critical minerals contained in the battery must be extracted or processed in the U.S. or a country with which the U.S. has a free trade agreement or be recycled in North America. There is a three-step process to determine the percentage of the value, which is to:  determine procurement chains, identify qualifying critical minerals and calculate qualifying critical mineral content. For 2023, the applicable percentage is 40% with the percentage rising 10% each year.

Battery Component Requirement

To qualify for half the credit, a percentage of the value of the battery components must be manufactured or assembled in North America. There is a four-step process to determine the value: identify battery components manufactured in North America, determine the incremental value of each battery component including North American battery components, determine the total incremental value of the battery components, and calculate the qualifying battery components by the total incremental value of all battery components. For 2023, the applicable percentage is 50% with the percentage increasing 10% each year. Beginning in 2024, eligible clean vehicles cannot contain any battery components that are manufactured by a foreign entity of concern.

Vehicles Purchased Before 2022

The credit for qualified two-wheeled plug-in electric vehicles expired in 2022. However, there is a new  . If the vehicle was purchased in 2021 but placed in service during 2022, individuals may still be able to claim the credit for 2022. They may also still be able to claim the credit if they missed claiming a credit for an electric vehicle purchased before 2022 by filing an amended return for the tax year when they took possession of the vehicle. Customers who purchased a new clean vehicle in 2022, on or after August 16, 2022, but took delivery of the vehicle in 2023, must meet the income and MSRP limits to claim the tax credit.

What Information is Needed to Claim the Credit?

A seller must provide the taxpayer purchasing a new clean vehicle information on a report and to the IRS for them to claim the credit. This report must be given to the taxpayer no later than the date the vehicle is purchased. The following information must be provided:

  • Name and taxpayer identification of the seller and the taxpayer
  • Vehicle identification number of the new clean vehicle
  • Battery capacity of the new clean vehicle
  • The date of the sale and the sales price of the vehicle being sold
  • A declaration under penalties of perjury from the seller

Sellers must file reports within 15 days after the end of the calendar year for vehicle sales occurring in 2023. To claim the credit for a vehicle that was taken into possession in 2022, taxpayers need file Form 8936 with their 2022 tax return and will need to provide the VIN.

Looking Ahead: Credit Rules for 2024

Beginning in 2024, buyers will be able to transfer clean vehicle credits to dealers at the time of sale and use the credit amount as a down payment at the time of sale. Dealers will need to register with the IRS in the future to participate. More details of this transfer credit will come out later in 2023 from the IRS.

With all the changes and questions on the electric vehicle tax credit, the IRS has released a fact sheet for frequently asked questions related to new, previously owned and qualified commercial clean vehicle credits. If you have any further questions on the EV tax credit, do not hesitate to reach out to your Brown Plus advisor.

Posted In: Auto Dealers | Commercial Truck Dealerships | Dealerships | Insights

About the Author - Ryan Harshman, CPA

Ryan is an Audit Senior Manager at Brown Plus. He has been a part of our team since 2014. He has experience with many facets of accounting, including audit, review and compilation services for nonprofit organizations, governmental entities and for-profit businesses, plus the preparation of tax returns for all types of entities.

Ryan graduated from the University of Maryland with a Bachelor of Science degree in Accounting and Finance. Ryan is a licensed Certified Public Accountant (CPA) in Maryland.

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