On August 16, 2022, the Treasury and IRS issued guidance in the form of frequently asked questions (FAQs) on changes regarding which vehicles qualify for the new EV credits under the Inflation Reduction Act of 2022 (IRA), which was enacted the same day.

The only change that goes into effect immediately is the IRA's new requirement that the EV tax credit can only be used for electric vehicles "for which final assembly occurred in North America." Thus, certain electric vehicles are newly eligible for the tax credit while others are no longer eligible. Tax credits for pre-owned and commercial clean vehicles take effect in 2023 and more guidance will be released in the coming months, according to the FAQs.

The guidance listed a two-step process to check whether a vehicle's final assembly occurred in North America. First, consumers and dealers can check the Department of Energy's Alternative Fuels Data Center (AFDC) to see a list of Model Year 2022 and 2023 electric vehicles that likely meet the North America final assembly requirement. Second, they can enter the Vehicle Identification Number (VIN) into the National Highway Traffic Safety Administration's VIN Decoder tool and refer to the "Plant Information" field, which lists the build plant and country for the vehicle.

Background

The IRA enacted several provisions concerning electric vehicles (see Tax Alert 2022-1236 for a discussion of all the energy-related provisions in the IRA).

IRC Section 30D credit for clean vehicles

The IRA changed the IRC Section 30D "new qualified plug-in electric drive motor vehicles credit" to a "clean vehicle credit." The clean vehicle credit is a dollar-for-dollar reduction of federal income taxes by up to $7,500 for new clean vehicles placed in service by a taxpayer during the tax year before January 1, 2033.

To claim the credit, (1) the taxpayer must commence original use of the clean vehicle, (2) the taxpayer cannot acquire the clean vehicle for resale, (3) the clean vehicle must be made by a qualified manufacturer and (4) the final assembly of the clean vehicle must occur in North America.

The IRC Section 30D credit can reach $7,500, so long as the sourcing requirements are satisfied for each of the critical minerals contained in the clean vehicle's battery and its components. The credit is broken down into two parts. Taxpayers may be eligible for up to $3,750 of the credit for the critical minerals, with the credit value depending on the percentage of the critical minerals that were either extracted in the US (or extracted or processed in any country with which the US has a free trade agreement in effect) or recycled in North America. The applicable percentage is 40% for vehicles placed in service before 2024, with the percentage increasing over time. Taxpayers may also be eligible for up to $3,750 of the credit for the battery components, depending on the applicable percentage of the value of the battery components that were manufactured or assembled in the US. The applicable percentage is 50% for clean vehicles placed in service before 2024, with the applicable percentage increasing over time.

To qualify for the credit, price caps on the retail price of vehicles (e.g., $80,000 for vans, SUVs and pickup trucks, $55,000 for sedans and others), as well as limitations on taxpayer's adjusted gross income apply, along with exclusions for vehicles that source battery components or critical minerals from foreign entities of concern. Further, taxpayers can elect to transfer credits to an eligible dealer subject to certain requirements. Additionally, certain recapture rules apply.

IRC Section 25E credit for previously owned clean vehicles

The IRA added IRC Section 25E to allow taxpayers who acquire a used clean vehicle (i.e., at least two years old) before January 1, 2033, to claim a federal tax credit during the tax year the vehicle is placed in service. The credit would be equal to the lesser of (1) $4,000 or (2) 30% of the sales price. The credit can be used once every three years for clean vehicles sold for $25,000 or less and would be based on the taxpayer's adjusted gross income.

IRC Section 45W credit for qualified commercial clean vehicles

The IRA created IRC Section 45W to provide a new credit for qualified commercial clean vehicles acquired before January 1, 2033. The credit is the lesser of (1) 30% of the basis of a vehicle not powered by a gasoline or diesel internal combustion engine, or (2) the incremental cost of such vehicle (i.e., the excess of the purchase price of such vehicle over the price of a comparable vehicle). The IRC Section 45W credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for other vehicles.

Implications

The quick release of this information is welcome. The list of eligible vehicles allows buyers to find out if the vehicle they are looking at is eligible for the EV credits. While the IRA could be extremely helpful in the transition to renewable energy, more guidance is needed on the implementation of the IRA's provisions.

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