Demistifying the Electric Vehicle Credit for 2023

If you’re a successful real estate investor and made it big by following our advice, then you’re probably in a great position to buy yourself an expensive electric vehicle (EV). Whether it’s a Tesla Model S, a Lucid Air (my personal favorite), or any of the other numerous EVs out there on the market. Part of this consideration is how to defray the very high cost of acquiring an EV, and the most popular method of doing so is utilizing the tax credit for electric vehicles under IRC 30D.

Under old law prior to 2023, nearly every electric vehicle qualified for a $7,500 tax credit, regardless of the income level earned by the taxpayer. The credit used to be based on how many cars the manufacturer sold. Once they sold 200,000 vehicles, the tax credit began to phase out, which is what happened to Tesla and GM.

In 2022, the Inflation Reduction Act was passed and revised the rules to make it way more complicated. Here are the key issues:

Credit Calculation

The way the credit is calculated is changing later this year. We do not know when the rules are changing yet, but it will be as soon as the IRS issues regulations implementing the new rules. Under the previous rules, the base amount of the electric vehicle credit is $2,500 per vehicle. The allowable credit increases to $7,500 per vehicle based on a formula which increases the credit by $417 for every kilowatt hour of battery capacity in excess of five.

Under the new rules, the amount of the credit will be based on two separate requirements, each one based on where the vehicle's battery is sourced:

• Taxpayers get a $3,750 credit for meeting the critical minerals requirement (which requires that a minimum percentage of the minerals contained in the battery be sourced in the United States or a country with which the United States has a free trade agreement in effect).

• Taxpayers also can get a $3,750 credit for satisfying the battery component requirement (which requires that a minimum percentage of the value of the components of the battery be manufactured or assembled in North America.

Taxpayers can satisfy either or both requirements, for either a $3,750 credit (if only one requirement is satisfied) or a $7,500 credit (if both requirements are satisfied).

Fuel Cell Vehicles

The credit will also be available for new qualified fuel cell motor vehicles. New qualified fuel cell motor vehicles are vehicles propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel, and that meets certain additional requirements. New qualified fuel cell motor vehicles have to meet the North American final assembly requirement. They can qualify for either a $3,750 or $7,500 credit based on whether they satisfy one or both of the critical minerals requirement and battery components requirements.

Income Limitations

Sadly, there are income limitations that will dramatically reduce the availability of the credit to most taxpayers. Your ability to take the electric vehicle credit will be limited based on your modified adjusted gross income (MAGI). MAGI is adjusted gross income (AGI) with adjustments for income received from U.S. territories. For most taxpayers, MAGI will be equal to AGI. You may not take the credit if your MAGI exceeds the threshold amount. The threshold amount is $300,000 for joint returns, $150,000 for Single taxpayers, and $225,000 for Head of Household.

Price Limitation

Since we all know electric vehicles can be quite costly, it will also come to a surprise that the law also limits the credit based on the MSRP of the car or truck. $80,000 for vans, pickup trucks, and sport utility vehicles; $55,000 for other vehicles. This is probably the reason you’re seeing Tesla aggressively cutting back on the pricing of their models in order to hit these EV credits and incentivize buyers. So as of the time of this writing, my favorite Lucid Air (which starts around $90K) is currently ineligible for the credit since it’s well above the $55,000 limitation per the new law.

If you’re interested in acquiring a new vehicle and need some guidance on how to navigate the new law, reach out to us here!

-Stephen Morris, CPA, MBT, CCIM