The IRS recently issued proposed regulations regarding electric vehicle (EV) tax credits, which are anticipated to take effect January 1, 2024. As part of the Inflation Reduction Act, the new regulations allow eligible taxpayers to claim a clean vehicle tax credit at the point of purchase of a qualifying vehicle rather than waiting to claim the credit on their income tax return. Tax preparers need to be familiar with these changes and make the appropriate updates before the 2024 tax season.
What are the Electric Vehicle Tax Credits?
The proposed regulations update the electric vehicle credits under IRC §§30D and 25E. The IRC §30D credit applies to new electric or fuel cell vehicles purchased for personal use (not resale) and primarily used in the United States. Vehicles are required to meet specific qualifications to be eligible. The maximum credit amount is $7,500.
The §25E credit is for previously owned qualifying electric or fuel cell vehicles that meet specific qualifications. Taxpayers claiming this credit must purchase the car for personal use, not be the original owner of the vehicle, not be claimed as a dependent on another person’s tax return, and not have claimed another used clean vehicle credit in the three years before the purchase date. The credit is for 30% of the sale price with a maximum dollar amount of $4,000.
The proposed regulations allow taxpayers purchasing a new or used electric vehicle to elect to receive the clean vehicle credit as an advanced payment when they purchase the automobile. Before these regulations, taxpayers claimed the tax credit on their income tax returns, which potentially meant waiting months between buying the vehicle and receiving the credit.
The advanced payment is optional for taxpayers. However, if the taxpayer chooses to make the election, it must be for the entire amount of the eligible credit. Taxpayers can only make this election twice a year and cannot transfer two used vehicle credits in a tax year.
How It Works
Taxpayers making the election transfer the EV credit to the car dealers and receive the equivalent amount in return from the dealer, either as cash or a partial down payment. The IRS will then reimburse the dealers for the credit within 72 hours.
Car dealers must register with the IRS through the IRS Energy Credits Online Portal to participate. The dealers must also provide the taxpayers with a written disclosure, including the total credit amount and confirmation of the vehicle’s eligibility.
How to Qualify
To claim the advanced tax credit payment, taxpayers must do so by the time of the vehicle sale. The vehicle must also meet the requirements for each credit outlined in the instructions for the credits. Used vehicle purchases under the §25E credit can only be claimed on one tax return and only on the first transfer of the vehicle. For the advanced credit, taxpayers can rely on the dealer’s representation of its history to determine if the credit applies.
Additionally, there are income limits for claiming both credits. Taxpayers will be responsible for determining if they are eligible based on the required income levels and informing the car dealers accordingly. The dealers will not be verifying this information. Taxpayers can determine if they meet the income requirements by analyzing either their expected income for the year the vehicle is placed in service or the prior year’s income. To be conservative, taxpayers are encouraged to make the determination based on their prior year’s income. The limits are based on modified adjusted gross income and differ for both EV credits.
For the new vehicle credit, modified adjusted gross income may not be more than:
- $300,000 for married couples filing jointly
- $225,000 for heads of households
- $150,000 for all other filers
For the used vehicle credit, modified adjusted gross income may not be more than:
- $150,000 for married filing jointly or a surviving spouse
- $112,500 for heads of households
- $75,000 for all other filers
Taxpayers must also file an income tax return for the year they make the election for the clean vehicle credit and include a completed Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit. If taxpayers learn they are not eligible for the credit when filing their tax return, they must repay the amount they received in advance back to the IRS.
Tips for Tax Practitioners
The advanced EV credits will not start until 2024, so tax practitioners don’t need to panic about how this will affect the upcoming tax season. However, there are a few things to keep in mind for when (or if) they come into effect.
Similar to the advanced child tax credits and Economic Impact payments, tax preparers must ask taxpayers if they received the payments in advance to ensure the credit isn’t double-counted on the tax return. If the credit is duplicated, the IRS will probably issue a notice to the taxpayer, resulting in potential refund delays or additional balances due. To avoid this, tax preparers should update their current tax return questionnaires to include a question about the advanced EV credits. Tax preparers should also ask taxpayers for copies of the documentation provided by the dealers to ensure the taxpayer is eligible for the advanced tax credit they received and to report the required information on Form 8936.
Making the electric vehicle credit available at the time of sale will be a welcome change for most taxpayers as it will allow them to receive the credit sooner and reduce the upfront cost of the vehicle. However, it will create additional concerns for tax preparers as they will need to ask further questions to ensure accurate tax returns.
The IRS is asking for comments on the regulations, which are due December 11.
By Ashley Aiken, CPA