How electric vehicle buyers and dealers can benefit from IRA clean energy tax credits

The Inflation Reduction Act of 2022 (IRA) added several significant new tax incentives for car buyers and dealerships who invest in certain types of clean vehicles or alternative fuel improvements to certain properties. Businesses and individuals may qualify for clean energy tax credits included in the IRA for tax years starting in 2023 if they:

• Install qualified vehicle refueling and recharging property in a home or business.
• Place in service a qualifying plug-in electric vehicle (EV) or fuel cell vehicle (FCV).

Both the individual and business tax credits have a variety of requirements that taxpayers must meet in order to benefit from these targeted tax incentives. (We provide a more in-depth discussion about business credits in this article.) 

Alternative fuel vehicle refueling property credit

Businesses and individuals are both able to claim clean energy tax credits related to the installation of equipment and land improvements used to store or dispense clean-burning fuel or to recharge electric motor vehicles. To qualify for this IRA tax credit, the property must be:

• Placed in service in the tax year.
• Have original use that began with the taxpayer.
• Be used primarily in the United States or U.S. territories.

If the equipment isn’t for business or investment use, a credit may be claimed on an individual’s return if it’s installed on property used as a main home.

Beginning in January 2023, the property where these facilities are installed must be located in an “eligible census tract,” to qualify for the IRA clean energy tax credit. These census tracts are described in the tax code and IRS regulations as low-income communities or nonurban areas. Eligible property for this credit includes clean-fuel vehicle property that utilizes:

• Fuels composed of at least 85% ethanol, natural gas (including compressed and liquified), liquefied petroleum gas, or hydrogen.
• Mixtures including biodiesel, diesel fuel, or kerosene.
• Electricity.
• Certain low-emission transportation fuels defined in Section 45Z of the tax code.

Bonus credits available if certain requirements are met

Businesses that install property eligible for this IRA tax credit can claim a credit for 6% of the costs up to a maximum of $100,000 for each single item of qualifying property in the year that the property is placed in service. If the business can show that the labor used in the installation process meets prevailing wage and apprenticeship (PWA) requirements set forth in the IRA tax credit rules, it may be eligible to increase that 6% to a bonus level of 30%.

These PWA requirements require thorough cost-benefit analysis for any car dealership or other business that plans to install credit-eligible property. It’s possible that by the time a business pays the additional wages, provides the necessary apprenticeships, and implements the expense-tracking procedures necessary to document compliance with the rules, the costs of compliance can all but eliminate the benefit of the credit. 

Also, given that many of the businesses looking to claim this credit will be relying on contractors to create the facilities, there could be an extra level of recordkeeping and documentation needed as well as adjustments to contracts in order to designate which business will be permitted to claim the credit. It makes sense to involve tax advisors in the planning process to make sure that the contractors know what documentation will be needed to support the bonus credit claim and to evaluate whether the benefits of the bonus credit outweigh the administrative costs of tracking the expenses.

Consumers who purchase and install qualified alternative fuel vehicle refueling property for their principal residence, including electric vehicle charging equipment, qualify for a tax credit equal to 30% of the cost with a maximum amount of $1,000 per item.

IRA clean energy tax credits for commercial vehicles

Businesses and tax-exempt organizations that buy a qualified commercial clean vehicle may qualify for a credit of up to $40,000 per vehicle. The tax laws don’t limit the number of credits a business can claim for qualifying vehicles, but they do impose certain requirements and thresholds that vehicles must meet to qualify for different levels of benefits. While businesses can get a credit of up to $40,000 per vehicle, the credit will be the lesser of:

• 15% of the taxpayer’s basis in the vehicle (30% if the vehicle isn’t powered by gas or diesel).
• The incremental cost of the vehicle. 

The IRA caps the credit at $7,500 for qualified vehicles with gross vehicle weight ratings under 14,000 pounds, while the full $40,000 credit is available to all other qualifying vehicles.

To be eligible for the commercial clean vehicle credit, the vehicle must:

• Be subject to depreciation, not including vehicles subject to a lease.
• Be made by a qualified manufacturer (included on this IRS list).
• Be for use in the taxpayer’s business, not for resale.
• Be for use primarily in the United States.
• Not have been previously allowed a Clean Vehicle Credit.
• Be a plug-in electric vehicle that utilizes a battery with the following capacity:
  • 7 kilowatt hours if the gross vehicle weight rating (GVWR) is under 14,000 pounds.
  • 15 kilowatt hours if the GVWR is 14,000 pounds or more.
  • A fuel cell motor vehicle that meets certain requirements under the tax laws.

The business tax credit for clean energy commercial vehicles is a nonrefundable credit, but unused amounts can be carried forward into future periods as part of the general business credit.

IRA tax credits for individual taxpayers buying clean energy vehicles between now and 2032

The 2022 Inflation Reduction Act also provided incentives to help individual taxpayers buy alternative-fuel automobiles. Certain taxpayers can qualify for a nonrefundable clean energy tax credit of up to:

• $7,500 for a new qualified plug-in EV or fuel cell electric vehicle (FCV). This credit is available for cars bought for personal use, not resale, and the vehicle must be used primarily in the United States. The credit is subject to income limitations; for example, it’s not available to married couples filing jointly with a modified adjusted gross income over $300,000. There are also limitations on the price of the vehicle: less than $80,000 for pickups and SUVs, and less than $55,000 for other vehicles. Taxpayers who purchase their vehicles after April 18, 2023 may also be subject to certain assembly and sourcing requirements that were added to the tax laws.
• $4,000 for a used electric vehicle. The used vehicle credit is 30% of the lesser of the vehicle’s purchase price or $4,000. To qualify for this credit, the vehicle must be at least two model years old, the selling price must be less than $25,000, and the purchaser is subject to modified adjusted gross income limitations such as $150,000 for couples filing jointly.

Special considerations for dealerships using electric vehicles

Car dealerships that transfer electric vehicles into fixed assets for use in a loaner or rental program can benefit from the IRA clean energy tax credits for commercial vehicles described above, but there are extra conditions to consider. First, if the dealer doesn’t take the credit at the time it capitalizes the vehicle into its loaner or rental fleet, it loses the ability to take it at a later time. Second, any vehicle only qualifies for a new vehicle clean energy credit one time. When the dealer returns the vehicle to its inventory, it will typically be sold as “used,” and the buyer won’t be able to claim the individual credit for a “new” vehicle. Commercial buyers looking to claim the credit for a vehicle purchased for business use won’t be able to claim the new vehicle credit at all, as each vehicle only qualifies for that credit one time.

Clean energy tax credits require careful analysis

Even since the enactment of the Inflation Reduction Act of 2022, some of the provisions relating to these credits have been modified. Clean energy tax credits and other types of incentives that encourage increased green energy use and decreased reliance on fossil fuels are likely to be essential parts of tax policy and legislation in the months and years ahead. Any plans to utilize these credits should include careful review of the most recent guidance available on the issue as well as a thorough cost-benefit analysis to weigh the effectiveness of the tax benefit against the costs of complying with the requirements.