The Inflation Reduction Act of 2022 signed into law by President Biden on August 16, 2022 includes significant changes related to electric vehicle tax credits. The Act not only extends the electric vehicle credit but also removes the current phaseout of the credit for auto manufacturers making more than 200,000 electric vehicles and puts in place income limitations for taxpayers claiming the credit.
Even though Senator Joe Manchin was originally opposed to extending the credit, the denial of the credit based on taxable income limitations and the promotion of domestic assembly of clean vehicles, along with mineral and battery components, to be sourced from North America, ultimately resulted in his support.
But what may be most surprising for individuals and auto dealerships, are the options on how the individual may claim the credit. Depending on the auto dealership that is chosen, an individual may not have to wait until the filing of their income tax return to benefit from the credit.
Transfer of Clean Vehicle Credit to a Dealer
The legislation allows taxpayers to elect to transfer their eligible clean vehicle credit to the dealer which sold the vehicle to the taxpayer. Only auto dealerships registered with the Secretary of the Treasury would be eligible for this transfer.
Prior to the taxpayer electing to transfer their credit to the dealer, and no later than the time of sale, the dealer must disclose to the taxpayer the following items:
- The manufacturer’s suggested retail price (“MSRP”)
- The value of the credit allowed and any other incentive available for the purchase of such vehicle. The dealer must ensure the availability, use, and amount of other incentives are not limited by the taxpayer making the election to transfer their credit to the dealer.
- The amount provided by the dealer to such taxpayer for the transferred credit. The amount of payment by the dealership, whether in cash or in reduction of the down payment for the vehicle, must equal the credit otherwise allowed to the taxpayer.
If a dealer does not make the required disclosures, the Secretary can revoke their registration and customers will no longer be able to transfer their credits to the dealer.
Auto dealerships receive the cash for the amount of credit transferred from their customers to the dealership through either participating in the advance payment plan or offsetting their federal income tax liability by the transferred credits. Details surrounding the advance payment option will be provided by the Secretary after the program is established.
Alternatively, auto dealers can decrease their federal income tax payments based on the transferred credits. However, auto dealerships should pay close attention to the rules surrounding the credit, as well as the amount of credit they are claiming. Included in the bill is a penalty if the auto dealership designates a larger amount of deemed federal income tax paid related to the credit than the actual credit allowed. The penalty for such an error is not only the amount of such excessive payment claimed, but also an additional 20% of the amount claimed in error. For example, assume a dealership has represented a reduction in federal income tax liability of $750,000. However, upon examination, the allowable credit was limited to $680,000. The penalty assessed on the dealership would be $84,000 ((750,000-680,000) x 120%).
Auto dealers should be aware of the changes in the bill to ensure that the amount claimed is accurate. Some significant alterations to the current law are highlighted below.
What Is a Clean Vehicle for Purposes of the Credit?
The definition of a clean vehicle is comparable to the prior definition of a qualified electric plug-in. A clean vehicle is still required to have the original use begin with the taxpayer to receive the $7,500 credit but there is also proposed legislation offering a credit up to $4,000 for previously owned clean vehicles. The proposal also requires the clean vehicle to be purchased from a qualified manufacturer and have a gross vehicle weight of less than 14,000 pounds. However, while the proposed definition will require the vehicle to be propelled, to a significant extent, by an electric motor drawing electricity from a battery, the battery must have a capacity of not less than 7 kilowatt hours, increased from 4 kilowatt previously indicated in the law. In addition, the bill also requires that the final assembly of the client vehicle take place in North America.
The amount of the credit is now determined based on the critical minerals used and the battery components. The percentage of critical minerals and battery components required varies based on a vehicle’s placed in service date. Provided the appropriate percentages are met, a credit of $3,750 will be provided for property mineral and battery components, resulting in an overall credit of $7,500.
The electric motor must draw electricity from a battery that has a specific percentage of critical minerals, as indicated below, that are extracted or processed in a country with which the United States has a free trade agreement or were recycled in North America.
The battery component requirement establishes that the percentage of the value of the components contained in such battery be manufactured or assembled in North America is equal to or greater than the percentage provided in the table below.
|Placed in Service Date||Critical Minerals Requirement||Battery Components|
|Before January 1, 2024||40%||50%|
No credit is allowed for clean vans, sports utility vehicles, or pickup trucks with a manufacturer suggested price which is above $80,000. For any other clean vehicle, the MSRP cannot exceed $55,000.
The credit is not available for taxpayers once their modified adjusted gross income exceeds a designated amount. For taxpayers filing either a joint return or as a surviving spouse, modified adjusted gross income cannot exceed $300,000. For head of household filers, it decreases to $225,000, and for all other filers modified adjusted gross income cannot exceed $150,000.
The credit also allows taxpayers to utilize the lesser of the modified adjusted gross income in the current taxable year or for the preceding taxable year. Most dealers will need to rely on the prior year’s tax return filings to ensure the credit is allowable and therefore can be properly claimed by the dealership.