Navigating the Updated Clean Vehicle Tax Credits

When President Biden signed the Inflation Reduction Act bill into law in August 2022, the Electrical Vehicle (EV) tax credit underwent immediate and long-term changes. Knowing what is coming and how to work with your clients under contract and future customers will be paramount to providing exemplary service and accurate information.

 

The new clean vehicle credit rules

Under the old EV tax credit, any electric vehicle could receive a tax credit of up to $7,500 if the manufacturer had not reached the 200,000-unit threshold. The new clean vehicle tax credit removes that cap and replaces it with others reliant on both the manufacturer and purchaser.

  • Changes taking place as of August 16, 2022
    • Only vehicles with a final assembly in the United States will qualify for the tax credit.
    • Fuel cell vehicles are now eligible vehicles.
  • Changes taking place as of January 1, 2023
    • New vehicle purchase price limits of $80,000 for SUVs, vans, and pickup trucks or $55,000 for other vehicles like sedans and hatchbacks.
    • Eligible used vehicles may qualify for a tax credit of up to $4,000. Vehicles purchased for resale do not qualify.
    • Income limits for purchasing a new, clean vehicle are $150,000 for single filers, $300,000 for married filing jointly, and $225,000 for head of household filers, using modified gross income.
    • Income limits for purchasing a qualified used clean vehicle are $75,000 for single filers and $150,000 for married filing jointly, using modified gross income.
    • At least 40% of the critical minerals used in the vehicle’s battery must be ‘extracted or processed in the U.S. or a U.S. free trade partner’ and recyclable in the United States.
    • A majority of the value of the battery components (50% or greater) must be manufactured or assembled in North America.
  • Changes as of January 1, 2024
    • Any electric or clean energy vehicles with parts sourced from a ‘foreign entity of concern’ will not qualify for any tax credits.
    • Tax credits can be transferred to the dealership and taken at point-of-sale.
  • Changes as of January 1, 2025
    • Any vehicle using a battery that uses critical minerals ‘extracted, processed, or recycled’ by a ‘foreign entity of concern’ will not qualify for the clean vehicle tax credit.
  • Changes in 2027
    • Critical minerals used in the vehicle’s battery must be 80% sourced in the US or an eligible free trade partner.
  • Changes in 2029
    • All battery components (100%) must be manufactured or assembled in North America.
  • Changes as of January 1, 2033
    • All electric vehicle tax credits are set to expire at the end of the year in 2032.

 

Dealership challenges to be aware of

Immediately upon the signing of the IRA bill, dealerships selling electric vehicles saw an impact on their sales processes. At the time of writing, approximately 20 vehicle models meet the requirement that electric vehicles must have their final assembly completed in North America. This includes some hybrid or plug-in models by Audi, BMW, Ford, Chrysler, Jeep, Lincoln, Nissan, Volvo, and Mercedes. However, many auto manufacturers have assembly plants worldwide, which makes the tax credits vehicle-specific and not model or manufacturer specific.

 

The National Highway Traffic Safety Administration (NHTSA) has a VIN decoder to help dealerships and customers determine if their vehicle is eligible for tax credits. According to the National Automobile Dealers Association (NADA), automakers are expected to provide the VINs and their related eligibility.

 

After January 1, 2023, when more stringent sourcing requirements come into play, no models currently manufactured will be eligible for the new clean vehicle tax credits, reports the Alliance for Automotive Innovation. Car manufacturers will have to adjust their current processes if they wish to use the tax credits as a selling point for their vehicles.

 

Handling existing sales or cars on order

With supply chain challenges that stemmed from COVID-based manufacturing interruptions, many consumers are putting down deposits on vehicles that have yet to be manufactured. If those vehicles were previously eligible for the tax credit, they might be able to receive the tax credit if they are grandfathered in under the old rules.

 

According to the IRS, the customer and dealership must be entered into a ‘binding contract’ as defined by the Treasury Department before August 16, 2022. Further IRS guidance shows that a binding contract must contain either a non-refundable deposit or a down payment of 5% or greater of the total purchase price of the vehicle.

 

For now, we are waiting to see how auto manufacturers adjust their manufacturing and sourcing process so their vehicles can remain eligible for the clean vehicle tax credits. Additional information is available from the IRS website, here. If you need any clarification, please reach out to your Suttle & Stalnaker representative or contact our office at 304-343-4126.