2022 Inflation Act: Electric Vehicle Tax Credits

Preface: Californians can keep driving and buying gas-powered vehicles after 2035, but no new models will be sold in the state thereafter.

2022 Inflation Act: Electric Vehicle Credits

SACRAMENTO, Calif. (AP) [August 26, 2022] — California set itself on a path Thursday to end the era of gas-powered cars, with air regulators adopting the world’s most stringent rules for transitioning to zero-emission vehicles.
The move by the California Air Resources Board to have all new cars, pickup trucks and SUVs be electric or hydrogen by 2035 is likely to reshape the U.S. auto market, which gets 10% of its sales from the nation’s most populous state.
But such a radical transformation in what people drive will also require at least 15 times more vehicle chargers statewide, a more robust energy grid and vehicles that people of all income levels can afford.

“It’s going to be very hard getting to 100%,” said Daniel Sperling, a board member and founding director of the Institute of Transportation Studies at the University of California, Davis. “You can’t just wave your wand, you can’t just adopt a regulation — people actually have to buy them and use them.”
Other states are expected to follow, further accelerating the production of zero-emissions vehicles.

Washington state and Massachusetts already have said they will follow California’s lead and many more are likely to — New York and Pennsylvania are among 17 states that have adopted some or all of California’s tailpipe emission standards that are stricter than federal rules.

The 2022 Inflation Act signed into legislation includes extension and modification to tax credits for electric vehicles.

The credit for the purchase of new electric vehicles (which includes both plug-in electric vehicles and fuel cell vehicles) is extended through 2032, and modified, under the 2022 Inflation Act. The 2022 Inflation Act eliminates the current credit’s limitation on the number of vehicles produced by a specific manufacturer.

A new credit of up to $4,000 is also available for the purchase of a previously owned clean vehicle, subject to income limitations, through 2032. The 2022 Inflation Act also includes a new credit for up to 30 percent of the basis of a qualified commercial clean vehicle acquired after 2022 and before 2033.

New Clean Vehicle Credit

The credit for new qualified plug-in electric drive motor vehicle credit is restructured as a maximum credit of $7,500 for a new clean vehicle. The new clean vehicle credit generally applies to vehicles placed in service after December 31, 2022. Only one credit is allowed once with respect to any vehicle, as determined based on its vehicle identification number (VIN), including any vehicle with respect to which the taxpayer elects to transfer the credit to an eligible entity.

The credit imposes sourcing requirements on the critical components of the vehicle and battery systems. The maximum amount of the credit remains at $7,500, but includes income limitations, as well as limitations on the manufacturer’s suggested retail price.

Taxpayer adjusted gross income price caps.
The threshold amounts are:

        •  $300,000 for a joint return filer or a surviving spouse;
        • $225,000 for a head of household; or
        • $150,000 for any other taxpayer (an unmarried taxpayer or a married taxpayer filing a separate return).

The credit also is not allowed if the manufacturer’s suggested retail price (MSRP) for the vehicle exceeds:

        •  $80,000 for a van,
        • $80,000 for a sports utility vehicle (SUV),
        • $80,000 for a pick-truck, or
        •  $55,000 for any other vehicle.

Credit Amount.

The new clean vehicle credit has two components:

      • A $3,750 credit applies if the vehicle satisfies domestic content requirements for critical minerals in the battery
      • A $3,750 credit applies if the vehicle satisfies domestic content requirements for battery components

Previously Owned Clean Vehicle Credit

A tax credit of up to $4,000 is available for the purchase of certain used clean vehicles. A qualified buyer who places in service a previously owned clean vehicle during a tax is allowed as a credit the lesser of:

        • $4,000, or
        • 30 percent of the vehicle’s sale price.

The credit is not allowed if the lesser of the taxpayer’s modified adjusted gross income for the tax year or the preceding tax year exceeds $75,000 ($150,000 for married couples filing jointly and $112,500 for head of household filers).

A “previously owned clean vehicle” is a motor vehicle whose model year is at least two years earlier than the calendar year in which the taxpayer acquires the vehicle. It must have been used originally by a person other than the taxpayer. The taxpayer must have acquired the vehicle in a qualified sale. The vehicle must have a gross vehicle weight rating less than 14,000 pounds.

A qualified sale is a sale of a motor vehicle by a dealer for a sale price that does not exceed $25,000. The sale must be to a qualified buyer. The sale must be the first transfer since the date the enactment of this provision. The sale may not be to the original user of the vehicle.

Commercial Clean Vehicle Credit

The qualified commercial clean vehicle credit for any tax year is an amount equal to the sum of the credit amounts determined with respect to each qualified commercial clean vehicle placed in service by the taxpayer during the tax year.

Per vehicle amount- The credit amount is equal to the lesser of:

      • 15 percent of the basis of the vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel internal combustion engine), or
      • the incremental cost of the vehicle.

The amount is limited to $7,500 for a vehicle having a gross vehicle weight rating of less than 14,000 pounds, and $40,000 for other vehicles. A qualified commercial clean vehicle’s incremental cost is the excess of the vehicle’s purchase price over the price of a comparable vehicle. A comparable vehicle is any vehicle powered solely by a gasoline or diesel internal combustion engine and comparable in size and use to the vehicle.

Please contact us if you would like to discuss tax reporting requirements and help to determine if you qualify for the clean vehicle credits.

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