In early August, the Inflation Reduction Act (IRA) was enacted providing significant tax law changes. The IRA is estimated to raise over $700 billion in revenue mainly from corporate tax increases and increased funding for IRS collection efforts. Some key features of the IRA are:
- 15% corporate minimum tax on financial statement income for corporations with at least $1 billion in income.
- $80 billion in increased IRS funding earmarked for enforcement activities and modernization.
- 1% tax on corporations’ net repurchase of stock.
- Tax incentives for energy production including credits and sustainable energy usage incentives.
- Reinstatement of Superfund taxes, certain extensions of the Affordable Care Act and prescription drug reform.
Although the IRA provides for several energy tax incentives, this article will focus on the energy credits related to vehicles.
IRC Section 30D Clean Vehicle Credit
Prior to the IRA, this credit was named the new qualified plug-in electric drive motor vehicle (NQPEDMV). This credit, at a maximum amount of $7,500, was based on certain requirements, phasing out after a manufacturer sold its 200,000th NQPEDMV for use in the United States.
The IRA renames this credit the Clean Vehicle Credit and eliminates the manufacturer limitation on the number of vehicles eligible for the credit for vehicles sold after December 31, 2022. To qualify for the credit the taxpayer must commence original use of the vehicle, cannot acquire it for resale and the vehicle must be made by a qualified manufacturer. The calculation of the credit is revised dividing the credit into two parts: $3,750 for meeting the critical minerals requirement and $3,750 for meeting the battery component requirement. In addition, a final assembly requirement has been added to the IRA, requiring the final assembly of the vehicle occurs in North America.
The IRS must issue proposed regulations no later than December 31, 2022, regulating the new critical mineral and battery component requirements of the credit. These requirements apply once the IRS issues the regulations. The clean vehicle credit is set to expire for vehicles placed in service after December 31, 2032.
IRC Section 25E Previously Owned Clean Vehicle Credit
The IRA introduces a new credit for individuals, the Credit for Previously Owned Clean Vehicles effective for vehicles acquired after December 31, 2022, and before January 1, 2033. This credit equals the lessor of $4,000 or 30% of the sales price (limited to $25,000). No credit is allowed when prior year’s modified AGI exceeds $150,000 (joint returns), $112,500 (head of household), or $75,000 (single). Previously owned is defined as a used clean vehicle which is at least two years old.
IRC 45W Qualified Commercial Clean Vehicle Credit
Another new credit is the qualified commercial clean vehicle credit (QCCV) which is effective for vehicles acquired and placed in service after December 31, 2022. A QCCV must be acquired for use or lease by the taxpayer, and not for resale and it must be manufactured for use on public streets or considered mobile machinery (ITC 4053(8)). The vehicle must be depreciable property and have a battery capacity of not less than 15 kilowatt hours (7 kilowatt hours for vehicles weighing less than 14,000 pounds).
The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight of less than 14,000 pounds, or $40,000 for heavier vehicles. The IRS will have to issue regulations to carry out the new credit including the definitions of the calculation.
IRC 30C Alternative-Fuel-Refueling-Property Credit
The original credit expired for property placed in service after December 31, 2021. The IRA extended the credit on the original definition of qualified alternative fuel vehicle refueling property placed in service before January 1, 2023. This credit is equal to 30% of the cost of the property, limited to $30,000 for qualified property at a given location subject to an allowance of depreciation or $1,000 for property at a personal residence for personal use.
For eligible property placed into service after December 31, 2022, the IRA modifies the definition of eligible property to include bidirectional charging equipment and allows the credit for electric charging stations for two- and three- wheeled vehicles that are intended for public road use. The credit limit applies per single item of property instead of all such property at a location. This expands the amount of credit taxpayers can claim. The credit is 30% of the qualified property cost if certain wage and apprenticeship requirements are met (limited to $100,000), if not the credit equals 6% of the cost of the qualified property (limited to $1,000).
The IRA established some new credits and revised some current credits. Many of these credits are effective for tax years beginning in 2023 and more IRS guidance will be issued. Taxpayers, both individuals and businesses, should take note if any of these credits may apply to their future purchases.
If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.