And we explain the eligibility rules as they now stand
EV shoppers whose purchases are dependent on a substantial tax credit to help offset the high cost of some electric vehicles have been given some breathing room by the IRS.
Although purchased “clean vehicles” must be assembled in North America to be eligible under the new rules, the agency has ruled that hydrogen fuel cell and battery-electric and plug-in hybrid cars, SUVs and trucks leased for non-business use can be eligible for the federal credit of up to $7,500 regardless of where they were built.
Additionally, EV battery requirements that would have split the credit into separate $3,750 claims dependent on the origin and value of critical battery chemicals and “other” battery components – originally set to take effect on Jan. 1, 2023 – have been delayed until March.
Until official “guidance” on implementing the battery requirements is issued by the IRS, which is charged with formulating the specifies for how automakers must track and report battery content, any otherwise eligible clean vehicle can qualify for a full $7,500 tax credit regardless of battery origin.
In short, shoppers who purchase a qualified new clean vehicle and meet the applicable income and vehicle MSRP caps can claim the credit if the vehicle was assembled in North America, while those who lease or buy used don’t have to worry about the vehicle’s assembly point.
Until IRS guidance on battery content is issued, presumably in March, eligible new vehicles will have a full $7,500 tax credit. But for leased vehicles the credit goes to the owner – typically the leasing entity, or lessor – and there’s no requirement that it be passed through to the lessee. Market demand for individual models will likely be the determining factor on whether leasing companies pass the tax credit through to their customers, or keep it for themselves.
After the battery content issues are finalized, an otherwise eligible new clean vehicle will have a $3,750 credit if it satisfies either of the chemicals or “other content” rules and the full $7,500 if it satisfies both.
New or used, an eligible battery EV or plug-in hybrid must have a battery capacity of at least 7 kilowatt-hours and must be used primarily in the U.S.
Why the new Lease Ruling?
The new tax credit rules and restrictions were approved in August as part of the Inflation Reduction Act (IRA) of 2022. In addition to place-of-origin rules for new-vehicle assembly and battery content, they include buyer income and vehicle price caps, a first-time credit for used clean vehicles, and tax credit rules for commercial vehicles.
The IRS cited the commercial vehicle rules in determining that companies whose business is leasing vehicles to others are eligible for the full commercial vehicle tax credit on each qualified clean vehicle they acquire for that purpose.
The commercial rules don’t contain the same North American assembly requirement as the rules for individual purchases. That will enable the leasing companies to acquire otherwise qualified clean vehicles from any manufacturer and to pass all or part of the tax credit on to the lessor, even if the vehicle won’t be used for commercial purposes.
A similar credit pass-through for lease customers existed under the old EV and PHEV tax credit rules. While most leasing companies did use the credit to reduce monthly leasing costs, some did not apply to entire credit, holding back part – or in some cases all – of the $7,500 credit for each vehicle to pump up their own revenues.
The IRS decision to allow leasing companies to claim the credit came after lobbying by the South Korean government and several Asian and European auto makers with little or no EV assembly in North America.
They had claimed that the North American assembly requirement for vehicles sold to the public placed companies such as South Korea’s Hyundai and Kia at an unfair disadvantage to domestic automakers while they scramble to build clean vehicle assembly plants in the U.S,, Canada and Mexico. Making leased vehicles eligible would give them some relief until their new manufacturing plants come on line starting in 2025, they argued.
Toyota did not join in the request to modify tax credit requirements although it has no North American production for its EVs, PHEVs or fuel cell vehicles. The automaker said in a statement that the strict county-of origin rules are needed “to expand domestic production of EV batteries and maintain America’s energy independence.
The new leasing ruling was published just before the end of the year in an IRS-prepared “frequently asked questions” document and immediately drew condemnation from Sen. Joe Manchin, the West Virginia Democrat whose strong support of the fossil fuel industry has delayed and watered down federal efforts to jump-start EV sales with generous tax credits.
The IRA was approved along party lines without garnering a single Republican vote. In the Senate, which was split 50-50 when the act was passed, every Democrat’s vote was needed along with the tie-breaking vote of Vice President Kamala Harris – also a Democrat. That gave Manchin disproportionate power to dictate terms of the bill and he used it, including in fashioning the clean vehicles tax credit policies.
Manchin asked the IRS to delay implementing its ruling, calling it “disastrous” and claiming that it “bends to the desires of the companies looking for loopholes and is clearly inconsistent with the intent of the law. It only serves to weaken our ability to become a more energy secure nation.”
The agency so far has declined to make a change or impose a delay and it is unclear whether there’s more opposition in the new Congress, which now has a GOP majority in the House and where Arizona Sen. Kristen Sinema – a Manchin ally on many issues – has dropped out of the Democratic Party.
All the Rest of It
New clean vehicle tax credit eligibility requirements include buyer income and vehicle price caps in addition to the North American assembly rule.
Income caps for new vehicle purchases, based on buyers’ adjusted gross income either for the year in which they take delivery or the year before, are:
- $300,000 for married couples filing jointly,
- $225,000 for heads of households,
- $150,000 for all other filers.
Vehicle price caps are not based on the actual sales price but on the vehicle’s MSRP (located on the window sticker) including options, accessories and trim but excluding the destination charge. The caps are:
- $80,000 for vans, SUVs and pickups,
- $55,000 passenger cars.
Note – the price caps can be confusing because of how vehicles are classed. Some Volkswagen ID.4 models, for instance, are considered cars, with a $55,000 cap, while others are classed as trucks subject to the $80,000 price cap.
The clean vehicle, except for fuel cell vehicles, also must be made by a “qualified” manufacturer – one which has agreed to file regular reports with the IRS.
The IRS maintains an on-line list of qualified manufacturers that includes the clean vehicles they make in North America and the price caps to which they are subject.
The place of assembly is printed on a new vehicle’s window sticker, also called the Monroney Label.
It can also be determined by decoding the vehicle identification number, or VIN. Those beginning with 1, 4 or 5 show the vehicle was built in the U.S., while Canada-built vehicle VINs start with a 2 and those built in Mexico have VINs beginning with a 3.
VINs are stamped on metal plates usually visible through the lower portion of the driver’s side windshield or on a plate attached to the driver-side door frame. The federal Energy Department maintains an on-line VIN decoder for vehicles purchased after Jan. 1, 2023.
For used clean vehicles, the credit is figured at 30% of the sales pice up to a maximum of $4,000.
Income caps for buyers are:
- $150,000 for married filing jointly or a surviving spouse
- $112,500 for heads of households
- $75,000 for all other filers.
Sales prices for eligible used vehicles cannot exceed $25,000 and the vehicle must be at least two model years older than the calendar year in which it is purchased (a used vehicle bought in 2023 could be no newer than a 2021 model).
Used clean vehicles also must be purchased from a dealer – not an individual – to be eligible, and, except for fuel cell vehicles, must have been made by a qualified manufacturer. The IRS maintains an on-line list of qualified manufacturers and their eligible used models.
Used vehicle buyers can only claim the tax credit once every three years.