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Inflation Reduction Act of 2022: Vehicle Related Credits

Clean Vehicle Credit

Under the Inflation Reduction Act of 2022, (the Act), the qualified plug-in electric drive motor vehicle (“NQPEDMV”) credit has been retitled the Clean Vehicle Credit. While the discussion is based on the initial language of the Act, the Act requires that the IRS issue proposed guidance no later than December 31, 2022. We will update the outlined provisions as guidance becomes available.

Effective date: Except as provided below, the outlined provisions apply to vehicles placed in service after December 31, 2022.

Key provisions:

  1. The limitation on the number of vehicles eligible for the credit has been eliminated for vehicles placed in service December 31, 2022.
  2. Buyers get a $3,750 credit if the vehicle meets the critical minerals requirement and a $3,750 credit if the vehicle meets the battery component requirement for vehicles placed in service after the date the proposed guidance is issued.
  3. For vehicles placed in service after December 31, 2022, the final assembly of the vehicle must occur in North America. Final assembly is defined as the process by which a manufacturer produces a new clean vehicle at a location from which the vehicle is delivered to a seller with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.

New clean vehicle defined:

  1. The minimum battery capacity is increased from four to seven kilowatt-hours.
  2. The seller of a new clean vehicle is required to furnish a report to the buyer and the IRS (the "report requirement") containing:
    1. The name and identification number (Social/ITIN) of the buyer
    2. The vehicle identification number (VIN) of the vehicle
    3. The battery capacity of the vehicle
    4. Verification that the original use of the vehicle commences with the buyer
    5. The maximum Clean Vehicle Credit allowable to the buyer with respect to the vehicle
  3. The vehicle may also be any new qualified fuel cell motor vehicle that also meets the final assembly and report requirements.
  4. The credit may only be claimed for vehicles made by a qualified manufacturer defined as a manufacturer that has entered into a written agreement with the IRS under which the manufacturer agrees to make periodic reports to the IRS providing VINs and other information related to each vehicle it manufactures that is required by the IRS.
  5. The vehicle meets the critical mineral requirement.
  6. The vehicle meets the battery component requirement.
  7. The clean vehicle credit is not allowed for a vehicle with a manufacturer's suggested retail price in excess of the applicable limitation. For vans, sport utility vehicles, and pickups, the applicable limitation is $80,000. For any other vehicle, the applicable limitation is $55,000.

Other credit factors:

1. Modified gross income limit of the buyer: No clean vehicle credit is allowed for any tax year if the modified adjusted gross income (MAGI) of the buyer for the current or preceding tax year exceeds the threshold amount currently written as $300,000 for married filing jointly or surviving spouses, $225,000 for head of households, or $150,000 for other taxpayers.

2. Transfer of credit: Beginning January 1, 2024, the buyer who places a new clean vehicle in service can elect, on or before the purchase date, to transfer the clean vehicle credit to the dealer who sold the vehicle in return for full payment of the credit amount. Making the election cannot limit the use or value of any other dealer or manufacturer incentive to buy the vehicle, nor can the availability or use of the incentive limit the ability of the buyer to make the election. Dealers must register with the IRS and meet other requirements to offer the election to their purchasers. The dealer's payment to the purchaser is not income to the purchaser, nor deductible by the dealer. A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received a payment from the dealer in return but whose MAGI exceeds the applicable limit discussed above is required to recapture the amount of the payment. The buyer's income tax for the tax year in which the vehicle is placed in service is increased by the amount of the payment received by the buyer from the dealer.

Other rules:

1. Only one clean vehicle credit is allowed per vehicle.

2. No clean vehicle credit is allowed with respect to any vehicle unless the buyer includes the VIN on the buyer's return.

3. No clean vehicle credit will be allowed with respect to any vehicle placed in service after December 31, 2032.

4. A buyer who, after December 31, 2021, and before August 16, 2022 (the date of enactment of the Act), purchased or entered into a written binding contract to purchase, an NQPEDMV and placed the NQPEDMV in service on or after the date of enactment, may elect to treat the NQPEDMV as being placed in service before the date of enactment of the Act. In other words, the buyer may elect to apply the old rules under Code Sec. 30D to the vehicle.

Credit for Previously Owned Clean Vehicles

Under the Inflation Adjustment Act of 2022, a qualified buyer who acquires and places in service a previously owned, clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price.

Definitions:

Previously owned clean vehicle: A motor vehicle that meets the following:

  1. The model year of the vehicle is at least two years earlier than the calendar year in which the buyer acquires it.
  2. The original use of which starts with a person other than the buyer.
  3. The vehicle was acquired in a qualified sale defined as the dealer price of $25,000 or less and the first transfer since the Act’s enactment.
  4. The vehicle meets the requirements applicable to vehicles eligible for the Clean Vehicle Credit for new vehicles or is a clean fuel-cell vehicle with a gross weight rating of less than 14,000 pounds.

Qualified buyer: A qualified buyer is an individual who purchases the vehicle for use and not for resale, who is not a tax dependent of another buyer, has not been allowed a credit for a previously owned clean vehicle during the three-year period ending on the sale date, and does not exceed the modified adjusted gross income limits defined for a previously owned vehicle.

Transfer of credit: For vehicles acquired after 2023 the same transfer credit rules apply as for new clean vehicles.

Effective date and termination of credit: The previously owned clean vehicle credit applies to vehicles acquired after December 31, 2022 but will not be allowed for any vehicle acquired after December 31, 2032.

If you would like more information on the Inflation Reduction Act of 2022, please contact Steven Poliseo at spoliseo@citrincooperman.com.

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