Overview of the Clean Vehicle Credit
If you purchased an electric vehicle in 2023, you might be eligible for a Clean Vehicle Credit of up to $7,500 per qualified vehicle. The Clean Vehicle Credit, enacted as part of the Inflation Reduction Act of 2022, made significant changes to the original electric vehicle credit that had been around for years, both in terms of what vehicles qualify and what taxpayers qualify.
Clean Vehicle Credit eligibility information
The Clean Vehicle Credit is available for qualifying vehicles purchased after January 1, 2023, acquired by the taxpayer for original use. To qualify for the credit, the vehicle must meet the following requirements:
- Must not be purchased for resale
- Must be manufactured by a qualified manufacturer
- Must be manufactured primarily for use on public streets, roads and highways and must have four wheels
- Must have a gross vehicle weight rating of less than $14,000 pounds
- Must be powered to a significant extent by an electric motor with a battery capacity of seven kilowatt hours or more and must be capable of being recharged from an external source of electricity
- Must have final assembly in North America (US, Canada or Mexico)
- MSRP may not exceed the following:
- Vans/SUVs/Pick-Ups: $80,000
- Other: $55,000
In addition, your modified adjusted gross income (MAGI) may not exceed:
- $300,000/Married filing jointly
- $225,000/Head of household
- $150,000/All other filers
When applying the income limitation, you may use your MAGI for the tax year you take delivery of the vehicle or the preceding tax year, whichever is less. In other words, if your modified AGI is below the threshold in the current or prior year, you can claim the credit.
Clean Vehicle Credit: Original use definition
The IRS states in order to qualify for the credit, the clean vehicle must be acquired by the taxpayer for “original use”, meaning the first use to which the vehicle is put after it is sold, registered or titled. A clean vehicle is not original use if 1) another person has ever purchased, registered or titled the vehicle and 2) placed it in service for any purpose (including as a dealer demonstrator vehicle). However, it is noted that test drives by potential buyers to not disqualify the clean vehicle under the original use rules. Finally, where the vehicle is acquired for lease to another person, the lessor is the original user.
Important Clean Vehicle Credit qualification dates
While The Clean Vehicle Credit was enacted under the Inflation Reduction Act in August 2022, proposed guidance regarding the implementation and calculation of the credit was not issued by the IRS until March 2023. The IRS adjusted the calculation of the credit on a prospective basis, so the calculation of the credit for the period January 1, 2023-April 17, 2023, is different than the way the credit is calculated on or after April 18, 2023. It is expected that with these changes, fewer vehicles will qualify after April 17, 2023.
For vehicles purchased from January 1, 2023-April 17, 2023, the credit is calculated as a $2,500 base amount plus an additional $417 in credits for each kilowatt hour of battery capacity in excess of five kilowatt hours, up to an additional $5,000, for a total possible credit of $7,500.
After April 17, 2023, the credit amount will depend on whether the vehicle meets two separate requirements, the “critical minerals requirement” and/or the “battery components requirement”. For each requirement met, a credit of $3,750 is allowed, for a total credit of $7,500. The critical minerals requirement necessitates that a certain percentage of the minerals used in the battery must be extracted or processed in North America and the battery components requirement requires that a certain portion of the car’s battery must be assembled in North America.
For vehicles purchased in 2023, see if your electric vehicle qualifies for the credit.
Does the Clean Vehicle Credit apply for used electric vehicles?
Under the new Clean Vehicle Credit, used vehicles may now qualify for a reduced credit if the purchase price is less than $25,000, the model year is at least 2 years earlier than the year acquired, the vehicle is acquired from a dealer and is the first resale of the vehicle after December 31, 2022. Additionally, there are also income limitations to this credit. Your MAGI must be below the following thresholds (in the current year or preceding year):
- $150,000/Married filing jointly
- $112,500/Head of household
- $75,000/All other filers
If all of the above conditions are met, you may be eligible for a credit of up to 30% of the sale price for a maximum credit of $4,000. For additional information related to the credit for used electric vehicles please review the information provided by the IRS.
Coming in 2024: New option for claiming the credit
Currently all of these credits are not refundable, meaning you can only claim the credit up to the amount of your tax liability. In 2024, you will have the ability to transfer the credit to your dealer and reduce the purchase price. By doing this, you will not need to wait until you file your tax return to get the benefit and you can still reap a benefit even if your tax liability is such that you would not have been able to claim the full amount of the credit on your return. Be careful though, if your income is above the MAGI thresholds and you transfer the credit to the dealer, you will have to pay the credit back when you file your tax return.
We will continue to provide information on the Clean Vehicle Tax Credit and other new or changing tax legislation that may impact you and your business.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.