Consumer / 30D credit

IRA extends the consumer EV tax credit under Internal Revenue Code section 30D, to allow the credit for EVs placed in service through the end of 2032, and expands the credit to include fuel cell vehicles; however, it also guts the old credit requirements and formula, amending the section with requirements that are far more restrictive and complicated.  The highlights of the new credit formula and requirements (key terms in bold, key dates bold and underlined) related to EVs are as follows:

• EVs under ‘binding contracts’ for sale, entered into after 12/31/21 and before enactment (August 16, 2022) still qualify for the tax credit under the old 30D rules.

• Effective for sales after August 16, 2022, no EV sales in the US (other than those under binding contracts from pre 8/16/22) will qualify for 30D credits unless their ‘final assembly’ is in North America.

  • “Final assembly” in the bill is defined as “the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer 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.”

• Between August 16, 2022 and the day after Department of Treasury guidance is issued in 2022 as described below, the EV credit remains at $7,500 for EVs with batteries with minimum capacity that were made by OEMs not subject to phase-out for reaching their 200k limit, as under the old 30D rules, (and regardless of where the batteries are assembled or the source of critical minerals etc.) as long as such EVs have their final assembly in North America.

• Effective January 1, 2023, the old 200,000 per-OEM cap is repealed. (It remains in place through the end of 2022.)

• Effective January 1, 2023, EVs placed in service on or after this date are subject to AGI and MSRP caps:

  • Taxpayers with modified adjusted gross incomes (for the lesser of the year an EV credit would otherwise be claimed, or the previous year) exceeding $150,000 (individual), $225,000 (head of household) or $300,000 (married joint return) are ineligible to claim the credit

  • EVs with a manufacturer’s suggested retail price exceeding $80,000 (sport utility vehicles, vans, or pickup trucks), or $55,000 (all other vehicles) are ineligible for the 30D credit.

• Effective for EVs placed in service on or after January 1, 2024, EVs with a battery the components of which were manufactured or assembled by a “foreign entity of concern“ DO NOT qualify for any 30D tax credit.

• Effective for EVs placed in service on or after January 1, 2025, EVs with a battery the “applicable” critical minerals in which were extracted, processed or recycled by a “foreign entity of concern“ DO NOT qualify for any 30D tax credit.

  • “Foreign entity of concern” is defined in the Infrastructure Investment and Jobs Act of 2021, and includes any entity “subject to the jurisdiction or direction of a government of a foreign country that is a covered nation.”  Covered nations include China and Russia.

  • “Critical minerals” subject to this restriction are defined under new Internal Revenue Code section 45X, and include a long list of minerals, including lithium, nickel, and cobalt among many others.

• Effective for EVs placed in service the day after guidance is issued in 2022 by the Secretary of the Department of Treasury, (guidance must be issued no later than December 31, 2022), the IRA replaces the old 30D credit calculation (which was simply $7,500 for EVs with batteries meeting the minimum capacity level), with a new credit regime that allows the credit for EVs with batteries that meet minimum percentage thresholds (by dollar value) as follows:

  • Critical Minerals Value: ½ of the credit ($3,750) for EVs with batteries that meet the following percentage thresholds, depending on when the EV is placed in service, based on the percentage of the total value of the critical minerals in the battery that are recycled in the U.S.; or processed or extracted in the U.S. or from countries with which the U.S. has a Free Trade Agreement:

    • The day after guidance issued through 12/31/23, 40%;

    • In calendar year 2024, 50%

    • In calendar year 2025, 60%

    • In calendar year 2026, 70%

    • After 2026, 80%

• • Battery Components Value: The other ½ of the credit ($3,750) for EVs with batteries that meet the following percentage thresholds, depending on when the EV is placed in service, is based on the percentage of the total value of the battery components that are manufactured or assembled in North America:

    •  
    • The day after guidance issued through 12/31/23, 50%;
    • In calendar year 2024 or 2025, 60%
    • In calendar year 2026, 70%
    • In calendar year 2027, 80%
    • In calendar year 2028, 90%
    • After 2028, 100%

• Effective for EVs placed in service on or after January 1, 2024, consumers eligible for EV credits have the option of transferring such tax credits to a dealer from whom the vehicle is purchased, (in exchange for reducing the sales price of the vehicle) who in turn is eligible for a direct pay rebate from the Department of the Treasury.

Credit for used EVs

The IRA also creates a new tax credit – under new Internal Revenue Code section 25E – for previously-owned EVs (and other clean vehicles such as fuel cell vehicles), effective for sales after December 31, 2022 through the end of 2032.  The highlights of this credit provision are:

• Buyers can claim credits for used EVs of the lesser of $4,000, or 30 percent of the sale price.

• The used EV must meet eligibility requirements in the section 30D credit for new clean vehicles, and must be a model year that is at least 2 years earlier than the date of sale.

• The sales price cannot exceed $25,000.

• Taxpayers with modified adjusted gross income of more than $75,000 (individual), $112,500 (head of household) or ($150,000)  (married joint return) are ineligible for the credit.

• Buyers must purchase the vehicle from a dealership and cannot claim the credit more than once every 3 years.

• The credit only applies to the first resale of a used vehicle and includes restrictions on sales between related parties.

• The credit may be transferred to the dealer/seller of the vehicle and deducted from the sales price at the time of sale in the same way this is allowed under section 30D.

Business credit for commercial EVs

The IRA further creates a new commercial EV tax credit under new Internal Revenue Code section 45W.  This credit is effective for qualified commercial clean vehicles (EVs and fuel cell vehicles)   effective for sales on or after January 1, 2023 and before January 1, 2033.  The highlights of this credit provision are as follows:

• Purchasers of qualified commercial clean vehicles can claim a credit of 30 percent of the cost of the vehicle, up to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles.

• The tax credit amount also may not exceed the amount by which the EV exceeds the cost of a “comparable” (otherwise comparable in size and use) internal combustion powered vehicle.

• A qualified commercial clean vehicle is any vehicle:

  • the original use of which commences with the taxpayer,

  • which is acquired for use or lease by the taxpayer and not for resale,

  • which is made by a qualified manufacturer (an auto OEM under title II of the Clean Air Act, and that files required sales reports with the Secretary of the Treasury),

  • which is treated as a motor vehicle for purposes of title II of the Clean Air Act or mobile machinery

  • which is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kilowatt hours (7 kilowatt hours for vehicles that weigh less than 14,000 pounds) and is capable of being recharged from an external source of electricity, or is a fuel cell vehicle based upon the requirements of Internal Revenue Code section 30B, and

  • is of a character subject to the allowance for depreciation.

• Vehicles powered by an internal combustion engine in addition to an electric or fuel cell motor are eligible for a reduced credit of 15 percent.

EV and battery manufacturing incentives

Auto manufacturers are also eligible under the IRA for tax credits and funding programs designed to encourage US manufacturing of clean energy technology.  These are further detailed here.

Authored by Jamie Wickett, Lance D. Bultena, Michael J. Bell, Mary Anne Sullivan, and Joanne Rotondi.