Clean vehicle tax credits and electrification incentives

The Inflation Reduction Act (IRA) of 2022 was signed into law on August 16, 2022, a scaled back version of the Biden Administration’s famed Build Back Better bill. Embedded in the IRA is a $369 billion package that among other things, contains incentives for the adoption of electric vehicles (EVs).

At our 2022 EV Summit, Matt Patterson, LeasePlan general counsel, discussed the EV tax credits embedded in the IRA. Here are some of the key takeaways from his presentation.

The energy package in the IRA has three major objectives:

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  Incentivize and accelerate the build-out of renewable energy
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  Accelerate the adoption of EV technologies
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  Improve the energy efficiency of buildings in communities

Prior to the IRA, under Section 30(d) of the Internal Revenue Code, manufacturers could receive up to $7,500 per EV until they hit 200,000 qualifying vehicles. For context, both Tesla and GM have already hit this threshold, and Toyota is in a sunset period.

Additionally, under the old law, individuals could receive the tax credit to offset their liability, but it was non-refundable, meaning the amount they received could not exceed their liability. Generally, 78% of those tax credits were claimed by filers with a gross annual income of $100,000 or more.

The IRA has changed this system, reorganizing the EV tax credit into three separate categories for clean vehicles:

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  General clean vehicle tax credit, which is essentially an amendment of the Section 30(d)
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  Used clean vehicle tax credit
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  Commercial clean vehicle tax credit

All three of these credits became effective on January 1, 2023.

Let’s take a look at the three major aspects of the new law, starting with the general clean vehicle tax credit. Here are some notable changes from the previous law.

Purchaser income limits Although the same credit of $7,500 is in place, there are serious limitations put in place under the new IRA. The first is purchaser income limits, which did not exist in the prior Section 30(d). These are $80,000 for vans, SUVs, and pickup trucks, and $55,000 for all other vehicles.

Changes in how taxpayers receive the credit Another major difference is the fact that the dealer can elect to take the credit if they pay the taxpayer the credit amount up front, either as a cash payment or toward the down payment on the new EV. The dealer then receives advance payment from the IRS for this credit. This transfer becomes available on January 1, 2024.

Manufacturing requirements Effective immediately, at least 50% of the EV must be assembled in North America to meet the requirements. By 2028, this number rises to 100%. Additionally, half the credit is dependent on the vehicle meeting critical mineral requirements, or a portion of the battery minerals must be extracted or processed in the U.S. or countries where the U.S. has free trade agreements. Alternatively, the battery can be recycled in North America.

In January 2023, these requirements start at 40%, and increase to 80% after 2026. Critical minerals covered under this section are:

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  Lithium
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  Graphite
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  Nickel
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  Cobalt

The challenge is that the majority of EV battery production is happening in China. This new requirement, then, will limit the applicability of this new credit. We can expect to see some manufacturers push back on these rules, as under these rules, as 70% of EVs currently on the road wouldn’t qualify.

Another brand new provision in the law is the used clean vehicle tax credit. This particular credit is the lesser of $4,000 or 30% of the sales price of battery EVs, and 15% of plugin EVs. Additionally, to apply for this credit, the EV must be at least two years old and have a maximum sale price of $25,000. Vehicles only apply if they weigh less than 14,000 pounds.

Under this provision, vehicles are only eligible once every three years, and there are lower purchaser income limits compared to the general credit. For joint filers, the limit is $150,000, and for single filers it’s $75,000. Additionally, this credit can only be applied if sold at a dealership.

Under Section 45(w), businesses can receive commercial credits that may not exceed the lesser of 30% (BEV) or 15% (PHEV) of the purchase price of a vehicle or the incremental cost over a comparable internal combustion vehicle.

Qualified vehicles are those made by a manufacturer and acquired for use on public roads, have a battery capacity of at least 15 kilowatt hours for vehicles over 14,000 pounds, and 7.5 kilowatt hours for those under 14,000 pounds. Also, the vehicle has to be subject to depreciation allowance.

Some of the key differences with the other credits include:

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  No mineral component
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  No assembly requirements
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  No limitations on gross income or retail prices

However, there are caps on this tax credit: $7,500 for vehicles under 14,000 pounds, and $40,000 for vehicles over 14,000 pounds. It is not transferable or refundable, so it can’t exceed tax liabilities, and there’s no ability for the dealer to take the credit.

The commercial tax credit became available on January 1, 2023 and will sunset on December 31, 2032.

First, keep in mind that what we say here is not intended to be legal or financial advice. We recommend that you consult with your own counsel to determine the best path forward.

That said, there are a number of avenues available to your fleet and drivers if you want to make electrification a big push in the coming years. Considering the coming explosion in EVs in the commercial market, now is a great time to get started.

To move forward on your electrification journey with a trusted partner who has years of experience in this area, consider partnering with LeasePlan. We can provide the support you need to make the best decisions for your organization.