Ryan J. McDonell, CPA, MSA
Tax Manager

If you’re seeing a lot more electric vehicles on the road, there’s good reason. Tax incentives for buying EVs have never been higher than they are right now, and millions of Americans are cashing in on the opportunity to leave the gas pump in the rearview mirror. 

The Inflation Reduction Act of 2022 contained, among other provisions, nearly $800 billion in environmental measures and represented the largest U.S. investment in curbing climate change in history. Independent analyses estimate that the legislation could drive greenhouse gas emissions to 40% below 2005 levels by 2030.

Included in the legislation are significant tax incentives for consumers and businesses to purchase new EVs. And for the first time, reduced tax incentives are available to consumers who buy used EVs, as well. The tax incentives for EVs are significant enough to constitute a major down payment if you sign the credit over to the dealership, or to defray the cost of installing a home charging station.

But the tax incentives are plugged in to some strict rules that buyers need to be aware of. The credits are limited to consumers with incomes below $300,000 (married filing jointly) or $150,000 (single). Additionally, qualified EVs must be assembled in North America and must have electrical battery components with 50% or more content made in North America.

However – and this is a big however – it is important to note that these limitations on the tax credits do not apply if an EV is leased rather than purchased. This is because a leased vehicle is considered to be a commercial vehicle. More on that below.

The EV market in the U.S. is projected to reach $82.2 billion in 2024, and is forecast to rev up to an annual growth rate of 18% between now and 2028. Urban drivers account for 83% of EV owners, due primarily to consumers’ concerns about EV range. As the charging infrastructure grows nationwide, sales are expected to pick up in more rural areas.

If you are considering buying an EV this year for personal use, or for a business, consider the following details:

How the EV tax credits work

Taxpayers who purchase a “new clean vehicle” in 2024 are potentially eligible to receive a federal tax credit of $7,500. As of January 1, 2024, consumers can sign the credit over to a dealer as a down payment on a vehicle. However, it is up to the consumer to ensure that the amount of the tax credit is credited against the cost of their purchase.

Definition of new clean vehicle:

• The original use of the vehicle commences with the buyer.
• The vehicle is purchased for use and not for resale.
• The vehicle is made by a qualified manufacturer, with final assembly in North America.
• The vehicle is treated as a motor vehicle.
• The vehicle has a gross weight of less than 14,000 pounds.
• The vehicle is primarily powered by an electric motor which draws electricity from a battery with a capacity of not less than 7 kilowatt hours, and is capable of being recharged from an external source of electricity.
• 50% or more of the electrical battery components must be made in North America
• The seller of the vehicle must furnish a report to the purchaser and the U.S. Secretary of the Treasury.

Special rules

The tax basis of the vehicle must be reduced by the amount of the credit allowed, so no “double benefit” is allowed.

Moreover, if the vehicle ceases to be eligible for the credit, the credit must be repaid.

Income limitations

There is an income limitation for claiming the new clean vehicle credit based upon the lesser of a taxpayer’s modified adjusted gross income (MAGI) for the current year or the preceding year.

• Married filing jointly MAGI cannot exceed $300,000.
• Head of Household MAGI cannot exceed $225,000.
• Single or filing Married filing separate MAGI cannot exceed $150,000.

Clean vehicle price caps

In the case of a van, pickup truck or sports utility vehicle the manufacturer’s suggested retail price shall not exceed $80,000. For all other vehicles, the maximum MSRP is $55,000.

Clean vehicle credit for used vehicles

An individual can get a credit of $4,000 or 30% of the sales price, whichever is lower.

Criteria:

• The model year must be two years earlier than when acquired.
• The purchase price cannot exceed $25,000.
• The vehicle identification number must be reported on the buyer’s tax return.
• The vehicle does not need to be assembled in North America.
• The vehicle must be purchased from a licensed auto dealer.
• The credit can only be claimed on the first sale of the vehicle after 12/31/22.

Income limitations for claiming the credit on a used vehicle are lower than those applied to new clean vehicles, as follows:

• Married filing jointly MAGI cannot exceed $150,000.
• Head of Household MAGI cannot exceed $112,500.
• Single or Married filing separately MAGI cannot exceed $75,000.

Leased vehicles not subject to limitations

A leased new clean vehicle is considered to be a commercial vehicle and, as such, there is no limitation as to where the battery is assembled or its components. In addition, there is no income limitation for the buyer, as the credit goes to the dealer. The consumer will need to make sure that that credit is applied as a reduction in the sale price. Additionally, the limits on vehicle list prices do not apply when the vehicle is leased.

Commercial clean vehicle credit

Businesses and tax-exempt organizations that buy qualified commercial vehicles may qualify for a clean vehicle tax credit of up to $40,000 under IRC 43W. The credit equals the lesser of:

• 15% of your basis in the vehicle (30% if the vehicle is not powered by gas or diesel)
• The incremental cost of the vehicle

The maximum credit is $7,500 for qualified vehicles with gross vehicle weight rating of under 14,000 pounds and $40,000 for all other vehicles.

Under a safe harbor, the incremental cost for a qualified vehicle placed in service during 2024 is greater than $7,500, 1) if the vehicle has a GVWR of less than 14,000 pounds, and 2) it is not a compact plug-in or hybrid electric vehicle.

The credit is not refundable, but can be carried forward as part of the general business credit. There is no limit on the number of credits a business or tax-exempt organization can claim.

Vehicles that qualify

To qualify for the Commercial Clean Vehicle Credit, a vehicle must:

• Be subject to a depreciation allowance
• Be made by a qualified manufacturer
• Be for use in a business, not for resale
• Be for use primarily in the United States
• Not have been allowed a credit under sections 30D Clean Vehicle Credit or 45W Credit for Qualified Commercial Clean Vehicles

In addition, the vehicle must either be:

• Treated as a motor vehicle for purposes of Title II of the Clean Air Act and manufactured primarily for use on public roads; or
• Mobile machinery

Further requirements may apply.

Additional state tax benefits for EVs

In addition to the federal tax incentives, several states have enacted tax credits or rebates for the purchase of EVs, including:

• Massachusetts – Bay State residents can get a state tax rebate of up to $3,500 for buying or leasing an eligible zero-emission EV or fuel cell vehicle. The maximum price of the vehicle cannot exceed $55,000, and consumer income limits apply. Buyers also may get a state tax rebate of up to $3,500 for the purchase of a used EV with a maximum price of $40,000. Any used EV must be purchased from a licensed dealership.
• Rhode Island – Rhode Island provides tax rebates of up to $1,500 for the purchase or lease of new battery EVs and fuel cell EVs, and up to $1,000 for new plug-in hybrid EVs. The state also offers rebates of up to $1,000 for the purchase or lease of used battery EVs and fuel cell EVs, and up to $750 for used plug-in hybrid EVs.
• Connecticut – Connecticut residents may qualify for state incentives of up to $7,500 for the purchase or lease of an eligible batter EV, plug-in hybrid EV or fuel cell EV.

If you would like further information about the tax benefits of purchasing or leasing an EV, contact your GT Reilly advisor.