What You Need to Know About the New Clean Vehicle Tax Credit

At a glance

• The main takeaway: The IRS recently published proposed guidance for the clean vehicle tax credit detailing how taxpayers could be eligible for a credit up to $7,500.
• Expanded eligibility tempered by new rules: The new credit expands eligibility and value but introduces new nuanced rules taxpayers must heed around price, income, and assembly.
• Next steps: This article dives into the new requirements under the Section 30D clean vehicle tax credit. For additional questions and information about other clean energy-related tax incentives, schedule a consultation with Jiyoon Choi, Senior Tax Manager, ESG.

The full story:

On March 31, 2023, the U.S. Treasury and the IRS  released new proposed regulations for taxpayers and manufacturers interested in the clean vehicle tax credits expanded by the Inflation Reduction Act (IRA) of 2022.

The proposed regulations clarify eligibility for the credit, building off the previously published white paper and FAQ sheet, and provide crucial information on the restrictions around battery assembly and critical mineral sourcing. Tax credit rules and regulations can be dense, so keep reading for a summary of the key requirements.

What’s Included in the Clean Vehicle Tax Credit

The clean vehicle tax credit under the Internal Revenue Code Section 30D, previously known as the electric vehicle (EV) tax credit, incentivizes taxpayers to invest in electric vehicles (EVs) and fuel cell vehicles (FCVs) while simultaneously motivating manufacturers to invest in domestic manufacturing and component-sourcing for new vehicles. The new clean vehicle tax credit expanded the credit value and eligible vehicles while also introducing new rules based on assembly location, income thresholds, and vehicle price. Under these new rules, taxpayers could receive a credit of up to $7,500 for purchasing a qualifying vehicle.

Beginning January 2023, here is what to expect from the new clean vehicle credit:

• Extended eligibility for a one-time credit per vehicle purchased until 2032
• Expanded eligibility to new types of new clean vehicles, including fuel cell vehicles (learn more)
• No manufacturing cap, meaning vehicle eligibility will no longer be restricted by the total number of qualifying cars sold by particular manufacturers
• Eligibility for the purchase of used vehicles, with additional qualifications (learn more)
• Capped manufacturers’ suggested retail price of $80,000 for new trucks, vans, and SUVs, $55,000 for all other new vehicles, and instituted a price cap of $25,000 for eligible used vehicles _[1]
• An income eligibility cap, varying for new and used vehicles and with limits based on a taxpayer’s modified adjusted gross income in the year the car is delivered OR the year prior to delivery (learn more) 
• Final assembly eligibility requirements, restricting the credit to vehicles that underwent final assembly in North America
• Battery and sourcing requirements for vehicles purchased and delivered after April 18, 2023 (learn more)
• Credit transfer options allow taxpayers to reduce the purchase price by transferring the credit to the dealer at the point of sale

Defining New Clean Vehicles

The IRA expanded the definition of eligible vehicles to “new clean vehicles,” which is much broader than the previous, more limited definition that only included plug-in electric drive vehicles. The new legislation sets forth eight requirements that a vehicle must satisfy to be considered a “new clean vehicle,” stating that:

1. The taxpayer must serve as the original user;
2. The vehicle must be purchased for use or lease by the taxpayer, not for the purpose of resale;
3. The vehicle must be made by a qualified manufacturer _[2];
4. The vehicle must be treated as a motor vehicle for purposes of title II of the Clean Air Act;
5. The vehicle must have a gross vehicle weight rating of less than 14,000 pounds;
6. The vehicle must be primarily propelled by an electric motor powered by a battery with a capacity of 7 or greater kilowatt hours that can be recharged from an external electricity source;
7. The final assembly of the vehicle must occur within North America; and
8. The vehicle seller must document and report the vehicles above eligibility to the Secretary of the Treasury.

By expanding the definition from plug-in electric drive vehicles, fuel cell vehicles are now eligible, as long as they also fully satisfy the eight criteria detailed above.

Defining Used Clean Vehicles

The IRA also expanded the tax credit opportunities to the purchase of used EVs and FCVs under Section 25E; however, additional restrictions do apply. Under Section 25E, taxpayers who purchased used vehicles are eligible for a credit up to $4,000, limited to 30% of the purchase price, if the purchase meets these qualifications:

• The vehicle is a plug-in electric or fuel cell;
• The purchase qualifies as the first transfer of the vehicle;
• The purchase price is $25,000 or less; and
• The vehicle model is two years or older.

Additionally, taxpayers are limited to only claiming this credit once every three years.

Understanding the Income Eligibility Cap

Under the IRA, taxpayers are restricted from claiming the credit if their income exceeds a defined threshold. The threshold varies for new and used cars and is based on the taxpayer’s modified adjusted gross income in the year the vehicle is delivered OR the prior year.

Tax-filing status	Modified Adjusted Gross Income
	New Cars	Used Cars
Single	$150,000	$75,000
Head of household	$225,000	$112,500
Married, filing jointly	$300,000	$150,000
Married, filing separately	$150,000	$75,000

Certain tax strategies can impact a taxpayer’s income in a given year, so discuss with your tax provider if you are concerned that your income could preclude you from claiming the credit.

How Battery and Sourcing Requirements Impact Credit Value

Vehicles purchased and delivered after April 18, 2023 must adhere to additional battery and mineral sourcing requirements, whereby the total $7,500 value of the credit is divided into two portions with different requirements. Half of the credit, or $3,750, is determined by the rules for battery assembly, and the other half of the credit is determined by the critical minerals sourcing.

• Battery requirements: the new credit rules require that a certain percentage of the battery be assembled or manufactured in North America, with that percentage increasing over time:
  • Placed in service after April 17, 2023, through December 31, 2023: 50%
  • Placed in service in 2024-2025: 60%
  • Placed in service in 2026: 70%
  • Placed in service in 2027: 80%
  • Placed in service in 2028: 90%
  • Placed in service in 2029-2032: 100%
• Critical minerals requirements: eligible vehicles must also adhere to the requirement that a percentage of the minerals composing the battery were extracted or processed within the U.S. or a country with a free-trade agreement with the U.S. _[3] Like the battery requirements, this percentage will increase over time:
  • Placed in service after April 17, 2023, through December 31, 2023: 40%Placed in service in 2024: 50%Placed in service in 2025: 60%
  • Placed in service in 2026: 70%
  • Placed in service in 2027-2032: 80%

Qualified vehicles purchased and delivered after April 17, 2023, are not required to adhere to these requirements and are instead eligible for a reduced credit of $2,500 or up to $5,000 based on the battery’s kilowatt-hour capacity.

The Bottom Line

When maximized under the new eligibility rules, taxpayers could benefit from a tax credit of up to $7,500 – this is a significant value and strong incentive to invest in a clean vehicle. However, the long list of eligibility requirements can complicate manufacturers’ and individuals’ ability to claim the credit. Aprio can help you navigate these credits and provide compliance and advisory services for other clean energy-related incentives under the Inflation Reduction Act, such as investment tax credit and production tax credit.

Schedule a consultation with Jiyoon Choi, Senior Tax Manager, ESG, to learn more about the ESG-related tax credit options available for you or your business.

Related Resources/Assets/Aprio.com articles/pages

Treasury Releases Proposed Guidance on New Clean Vehicle Credit to Lower Costs for Consumers, Build U.S. Industrial Base, Strengthen Supply Chains

Vehicle, Residential and Commercial Buildings Tax Credit Opportunities Available Under the Inflation Reduction Act

The Inflation Reduction Act – What U.S. Companies and Individual Taxpayers Need to Know

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[1] Under the Internal Revenue Code Section 25E

[2] A qualified manufacturer is any manufacturer that enters into a written agreement with the Secretary of the Treasury to report details on eligible vehicles sold, including vehicle identification numbers and eligibility details.

[3] As of April 17, 2023, Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore