Are you considering purchasing an electric vehicle for your business or personal use? You may be eligible for a substantial federal tax credit! Recently, the Internal Revenue Service (IRS) announced a change to its standard it will use to determine the classification of a vehicle for the Clean Vehicle Tax Credit, also known as Section 30D. The change will allow more vehicles to qualify for the credit.

This post will provide an overview of the Clean Vehicle Tax Credit so you can decide whether buying a qualifying vehicle can benefit you and your bottom line.

What Is the Clean Vehicle Tax Credit?

The Clean Vehicle Tax Credit is worth up to $7,500 to taxpayers who buy a new, qualified plug-in electric vehicle (EV) or fuel cell electric vehicle (FCV).

The credit isn’t new—it was originally enacted under the Energy Improvement and Extension Act of 2008. However, the Inflation Reduction Act modified and expanded the credit.

The credit is available to individuals and businesses, but to qualify, you must buy the vehicle for your own use (not for resale) and use it primarily in the US.

There are also income limitations. You cannot claim the credit if your modified adjusted gross income (MAGI) is greater than:

• $300,000 for married couples filing jointly
• $225,000 for heads of household
• $150,000 for all other filers

You can use either your MAGI from the year you take delivery of the vehicle or the year prior—whichever is less. So as long as your MAGI is below the threshold in one of the two years, you can claim the credit.

The Clean Vehicle Tax Credit is non-refundable, meaning if it reduces the tax you owe below zero, you can’t get a refund or apply any excess credit to a future tax year.

Which Vehicles Qualify for the Clean Vehicle Tax Credit?

To qualify for the tax credit, the vehicle you purchase must:

• Have a battery capacity of at least 7 kilowatt hours
• Have a gross vehicle weight rating (GVWR) of less than 14,000 pounds
• Be made by a qualified manufacturer if it’s an EV (FCVs don’t have to be made by a qualified manufacturer)
• Undergo final assembly in the US.
• Have a manufacturer’s suggested retail price (MSRP) of no more than $80,000 for vans, SUVs, and pickup trucks or $55,000 for other vehicles

So What Changed?

In the IRS’s notice of intent to propose regulations (Notice 2023-1), the agency said it would use the existing EPA Corporate Average Fuel Economy (CAFE) standards to determine whether a vehicle is a pickup, van, SUV, or other vehicle and subject to the $55,000 or $80,000 MSRP limitation.

However, in Notice 2023-16, the IRS changed its stance, saying it would instead use the consumer-facing EPA Fuel Economy Labeling Standard (40 CFR Section 600.315-08).

While that may sound like a highly technical change, it should actually make it easier for individuals and business owners to know which vehicles qualify under the MSRP cap because vehicle classifications for the credit will align with the classification displayed on the vehicle label and on FuelEconomy.gov.

For example, under the old rules, the Cadillac Lyriq would be classified as a sedan and subject to the $55,000 MSRP limitation. Because the MSRP for the 2023 Lyriq is $61,795, the vehicle wouldn’t qualify for the credit under the old rules. However, because of the change, the Lyriq is classified as an SUV, subject to the $80,000 MSRP cap and now qualifies for the credit.

This change will grant more vehicles eligibility for the credit and make it easier for taxpayers to understand which vehicles qualify. If you’re in the market for a new car, truck, van or SUV and wondering whether you can benefit from the Clean Vehicle Tax Credit, contact NewWay Accounting. We can help you run the numbers to figure out how this tax credit may impact your purchase.