First introduced in 2005, tax credits for clean vehicles (CV) have evolved significantly since inception. Originally developed as an incentive for the production and adoption of electric vehicles, the credit’s nuances regarding eligibility, amount, and availability have changed several times over the past 18 years.
Three credits are available for the purchase of new CV credit per Internal Revenue Code (IRC) §30D, used CV credit per IRC §25E and commercial CV credit per IRC §45W.
For 2023 and forward, individuals, sole proprietorships and other business entities who purchase new plug-in electric vehicles (EV) or new fuel cell vehicles (FCV) are eligible for the §30D tax credit. In addition, individuals who purchase certain used EV or FCV are eligible for the tax credit under §25E. Also, businesses and tax-exempt organizations can now claim an incentive via the commercial clean vehicle credit in §45W.
Smart Business spoke with Matt McKinnon, Director, Columbus Tax Practice Leader at Brady Ware & Company, about these credits and how to claim them.
What counts as qualifying purchases for the tax credits?
Qualifying vehicles for the new CV credit include purchases of certain EVs or FCVs. However, there are additional requirements. Those requirements include a limitation on a vehicle’s manufacturer suggested retail price, that the EVs are made by a qualified manufacturer with final assembly in North America, and that they meet critical mineral and battery component requirements.
There are also specific requirements to for used vehicles to qualify for credits, and for businesses and tax-exempt organizations to claim the §45W tax credit when purchasing commercial clean vehicles.
How much is available through the credits?
A tax credit of up to $7,500 is available for the new CV credit; $3,750 if the critical mineral requirements are met; and $3,750 if the battery components requirement is satisfied. If neither is met, no credit is available.
Used clean vehicles can generate a tax credit of 30 percent of the sale price, capped at a maximum of $4,000. However, there are two key limitations for the new and used clean vehicle credits:
- Both tax credits are nonrefundable, meaning they can only offset your tax liability to zero. If the CV is for personal use, any credit not fully utilized in a given tax year is lost. If the vehicle is claimed for business use, unused credits can be carried forward as a general business credit.
- Adjusted Gross Income (AGI) limits apply. To the extent a taxpayer is outside these limits, they will be ineligible to claim the credit. These limitations apply even if a passthrough entity (S corporation or partnership) purchases the new CV. The respective credit is allocated to the entity’s owner on a Schedule K-1, where the AGI limit is determined.
Businesses and tax-exempt organizations enjoy much more favorable credit amounts. The credit is the lesser of: - 15 percent of the basis in the vehicle (30 percent if not powered by gas or diesel), or
- The incremental cost of the vehicle, which is the excess of the purchase price of a qualified commercial clean vehicle over the price of a comparable vehicle.
The lesser of the above two numbers is capped at $7,500 per vehicle with a GVWR under 14,000 pounds and $40,000 per vehicle for all other vehicles. The credit is nonrefundable, but can be carried forward as a general business credit.
Why is this something businesses should take advantage of?
The tax incentives for CV purchases are helpful when businesses are considering replacing or adding additional vehicles. While the CV will likely reduce fuel costs due to increased efficiency, the CV is more expensive. The tax credits help to minimize this incremental cost between a CV and non-CV.
Businesses and their owners should have a conversation with their tax adviser if they’re considering the purchase of a CV. Knowing the limitations and nuances up front prevents any misunderstanding about eligibility for the tax credits. ●
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