The Clean Vehicle Credit and You

The Clean Vehicle Credit and You

The Inflation Reduction Act of 2022 may or may not have reduced inflation, but it did introduce a streamlined clean vehicle credit for qualifying clean energy vehicles placed in service from April 18, 2023, through to 2032. Since this new version of the credit is slightly less complicated than it was in prior years, and since it will be in effect for the better part of another decade, it’s worth taking a few minutes to understand it.

The Clean Vehicle Credit includes three different types of credit: one for new clean vehicles, another for previously owned clean vehicles, and yet another for “qualified commercial clean vehicles.” Let’s look first at the credit for new vehicles.

Credit for New Clean Vehicles 

To take the credit for a new clean vehicle, the vehicle must:

• • • Have at least four wheels.
    • Be EITHER an electric vehicle (EV) with a battery capacity of at least 7 kilowatt hours capable of being recharged from an external source of electricity OR a fuel cell vehicle (FCV). Note that hybrids that are not plug-in will not qualify.
    • Have been manufactured primarily for use on public streets, roads, and highways.
    • Be placed in service by you in 2023 or later.
    • Be for your own use or for lease to others, not for resale.
    • Be used primarily in the United States.
    • Have undergone final assembly in North America.
    • Meet either mineral or battery component requirements, or both.
    • Have a gross vehicle weight rating (GVWR) of less than 14,000 lbs.
    • Have a manufacturer-suggested retail price (MSRP) of less than $55,000 ($80,000 for vans, SUVs, and pickup trucks).
    • EVs (but not FCVs) must be manufactured by an IRS-designated “qualified manufacturer.” An updated list can be found here.

The value of the credit for a new vehicle is:

• • • $3,750 if it meets the critical minerals requirement, and
    • $3,750 if it meets the battery components requirement,

for a total of $7,500 if it meets both. Don’t worry, you don’t need to start studying up on minerals and battery components. Sellers of qualifying vehicles should be licensed dealers who are required to provide you with information you will need to claim the credit, including the credit value of the vehicle. This information will be linked to the car’s vehicle identification number (VIN). You will include the VIN on your tax return, and if it matches, the IRS should allow you the credit.

The credit is non-refundable, meaning the amount of the credit you can take is limited to your tax liability in the year you take it. An unused amount of the credit cannot be carried forward or back.

The credit is also limited by your income. If your modified adjusted gross income (MAGI) is over the limit, you are not eligible for any credit. There is no phase-out. Rather, the credit completely disappears if you earn even one dollar over the limit. For this purpose, MAGI is your adjusted gross income plus any excluded foreign income.

The one saving grace is that you can choose to use your MAGI from either the year you take delivery of the vehicle or the year before. As long as one of them is below the threshold, you can take the credit.

The most recent MAGI limits provided by the IRS for the Clean Vehicle Credit are as follows:

• • • $300,000 for married couples filing jointly or a surviving spouse
    • $225,000 for heads of households
    • $150,000 for all other filers

These numbers are likely to be adjusted for inflation.

If you receive any Clean Vehicle Credit through a passthrough entity such as a partnership, S-corporation, or trust, then the income limit applies to your MAGI, not the entity’s.

A new vehicle that was used partly for business and partly for personal use must be prorated so that part of the credit is a business credit and part is personal credit.

Credit for Previously Owned Clean Vehicles

To get the credit for a used vehicle, the vehicle must:

• • • Have a model year at least two years earlier than the calendar year you bought the vehicle
    • Have had a sales price of less than $25,000
    • You must not have taken the credit for a previously owned clean vehicle in the last three years
    • The used vehicle must meet all the remaining requirements for new vehicles.

The value of the credit for a used vehicle is the lesser of:

• • • $4,000 or
    • 30% of the purchase price of the vehicle.
    • Like the credit for new vehicles, it is non-refundable.

Like the credit for new vehicles, the used vehicle credit will not be allowed if your MAGI exceeds certain limits in either the year you take delivery of the vehicle, or the year before. The current income limits for the used vehicle credit are:

• • • $150,000 for married filing jointly or a surviving spouse
    • $112,500 for heads of households
    • $75,000 for all other filers

As with the new vehicle credit, you must buy the vehicle from a licensed dealer who will provide you with a report on the value of the tax credit for the vehicle and you will need to enter the VIN on your tax return in order to get the credit.

The used vehicle credit cannot be taken as a business credit.

Qualified Commercial Clean Vehicle Credit

Businesses cannot take the credit for a used vehicle. However, businesses can take the credit for a “qualified commercial clean vehicle,” the most valuable and least restrictive type of the Clean Vehicle Credit.

Unlike the credit for individuals, it is not subject to an income limitation or to an MSRP cap, it has no mineral or battery component requirement or assembly in North America requirement.

It can also be taken for vehicles that weigh more than 14,000 lbs. In this case, if the vehicle is an EV, it must have a battery capacity of at least 15 kilowatt hours. For a qualifying heavier vehicle, the maximum credit is $40,000 instead of $7,500.

The only catch is that the vehicle must be a depreciable asset used for business or for lease.

The Qualified Commercial Clean Vehicle Credit is also more complex to calculate. It is the least of:

• • • 30% of the vehicle’s cost (15% if the vehicle is a plug-in hybrid) or
    • $7,500 ($40,000 for vehicles weighing more than 14,000 lbs) or
    • The “incremental cost” of the vehicle, which is the cost of the clean vehicle over the cost of a comparable gas or diesel-powered vehicle.

While you cannot take the Qualified Commercial Clean Vehicle Credit on a car for your personal use, this credit may mean it is cheaper for you to lease a qualifying vehicle if the leasing company is able to take the credit. This option also allows you to benefit from the credit if your income is too high to allow you to take the Clean Vehicle Credit in your own name.

Transferring the Credit to the Seller

If you are buying a new or used vehicle that you intend to use for personal use and that qualifies for the Clean Vehicle Credit, you may arrange at the time of sale to sign your Clean Energy Credit over to the seller in exchange for a reduction in the sale price. This may allow you to receive the full value of the credit regardless of your tax liability. However, this does not exempt you from the income limitation. You must still apply for the credit on your tax return and include the vehicle’s VIN. If you do not qualify, for example, because your income is too high, the amount you received from the seller will then be added to your tax. In this case, you do not need to repay the seller, the IRS will consider the amount to be repaid as part of your tax liability for the year.

The option to transfer the credit to the seller must be for the entire credit amount and not just part of it. The option to transfer may be chosen for the Clean Vehicle Credit for either a new or used vehicle, but not for more than a total of two vehicles in the same year.

Transfer of the credit is optional. The buyer is not required to elect it and the seller is not required to offer it.

In Closing

The Clean Energy Credit is a potentially valuable credit available from now until 2032. If you are considering buying an EV or FCV, look into the credit before you decide to buy. Not all vehicles you think of as “clean” vehicles necessarily apply. Not all taxpayers may take the credit or your benefit from the credit may be limited.

A good place to begin researching the eligibility of particular models can be found here.

When you buy a qualifying vehicle, make sure you get a time-of-sale report from the seller that includes all the information you will need to claim the credit.

Finally, you must reduce the cost basis of a vehicle you buy by any amount of the credit you are able to claim on it.