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Tweaks to Tax Credits Give EVs a Shot at Succeeding

   Tweaks to Tax Credits Give EVs a Shot at Succeeding

With electric vehicle inventories approaching 100 days' supply for certain automakers, the Department of Treasury is looking to put another jolt into EV adoption.

The EV credit program has encountered headwinds, including complexity and uncertainty around eligibility requirements. Certain consumers with no or too low of a federal income tax liability are not being able to utilize the credit fully and have to wait to get the benefit of the credit until after their tax return is filed the following year.

The Inflation Reduction Act included provisions expanding the affordability of greener vehicles for U.S. consumers and adjusted the tax credit for all-electric cars and hybrid plug-ins. The $7,500 credit was authorized in 2008 and 2009 and has been extended through 2032, with another credit of up to $4,000 for used models of the eligible vehicles. The credit must be taken in the first year that the buyer takes delivery on the vehicle.

In late April, the IRS issued additional guidance surrounding the credit and vehicle eligibility in hopes of expanding opportunities for consumers.

The most recent release from the IRS and Treasury in early October contained additional information on clean vehicle registration and how it will work for consumers and dealerships. The guidance also included proposed regulations on the transferability of tax credits for new and previously owned electric vehicles. Most importantly, the proposal looks to clarify that dealers can offer the credit regardless of the buyer's federal tax liability starting Jan. 1. The big question will be, are these changes enough to bring more buyers into dealer showrooms?

Expanding access

Beginning in January 2024, consumers can transfer their new or previously owned clean vehicle credit to a car dealer so long as both the purchaser and vehicle meet certain requirements. The credit can be used as a cash payment, down payment or partial down payment, effectively lowering the purchase price and creating value for the customer at the point of sale instead of receiving the credit after filing next year's tax return. Only vehicles purchased under the consumer clean vehicle credit are eligible for this benefit.

The credit transfer eligibility depends on both the consumer and vehicle eligibility, which includes income and price thresholds. Cars must have a sticker price of less than $55,000 to qualify. Vans, pickups and SUVs must have a sticker lower than $80,000. For used vehicles, the price must be less than $25,000.

For a new electric vehicle, the purchaser's modified adjusted gross income cannot be higher than $150,000 ($300,000 married filing jointly, $225,000 head of household). For used electric vehicles, the buyer's adjusted income cannot exceed $75,000 ($150,000 married filing jointly, $112,500 head of household).

In addition to the income and price thresholds, there are also critical mineral and battery component materials requirements attached to the clean vehicle credit. An "applicable percentage" of the value of both the origin of the critical minerals in the battery and the battery components must be extracted or processed in the United States or a country with which it has a free trade agreement or be recycled in North America.

Proposed rules

According to the proposed guidance from the Treasury, dealers would register with a new website, IRS Energy Credits Online (which should be live later this month), to be eligible to offer buyers clean vehicle tax credits for qualifying electrified products.

Starting in January 2024, in coordination with the credit transferability effective date, previously registered dealers would be able to use Energy Credits Online to submit clean vehicle sales information and "time of sale" reports, which confirm the vehicle's eligibility, to the IRS and promptly receive payment for transferred credits.

Under the proposed guidance, when a purchaser chooses to transfer the credit, registered dealers would reduce the vehicle's purchase price or provide cash to the buyer. The amount provided must equal the full amount of the credit available for the eligible vehicle. Upon completion of the sale, the dealer would electronically submit information regarding the transfer to receive an advance payment, which could be expected within 72 hours, per the IRS.

Dealers would provide purchasers with required disclosures as part of the credit transfer and electronic time-of-sale submission process, and written confirmation that the vehicle they are buying is eligible for a credit and the credit amount.

Advanced payments would not be treated as a tax credit to the dealer, would not be limited to the dealer's tax liability, and are not to be included in the dealer's gross income. Additionally, the payment made to the customer for the credit transfer would not be deductible by the dealer and is not to be included in the gross income of the customer.

The public commentary period for the proposed regulations closes Dec. 11, and we would expect more clarification on the final rules before or around that time.

Impact, opportunities

Suppliers must consider a dual strategy whereby they maximize profits under their combustion platforms and position themselves to take advantage of the growth opportunities associated with battery-electric vehicles. We see a world in the near and midterm where EVs and combustion vehicles coexist, even if industry pundits would disagree.

Automakers are facing tremendous pressure from government regulations and trying to please consumers not entirely sold on the EV revolution. There are hurdles to overcome to win over consumers, which include range anxiety, charging infrastructure and, as simple as it sounds, dealing with the inconvenience of the current vehicle charge time. All these hurdles will be overcome, and consumers will be the ultimate winners with more vehicle platforms to choose from.


Written by Tom Alongi. Originally published by Automotive News.

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