The $40,000 electric vehicle business tax credit may be easy to get

Electric buses at a charging station.

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Plus, the tax credit for larger trucks is worth more money: up to $40,000 versus the $7,500 maximum for smaller passenger cars and commercial electric vehicles.

“I think it’s going to be much simpler and easier to take advantage of than the light vehicle tax credit,” said Ingrid Malmgren, policy director for Plug In America, of the commercial electric vehicle tax credit. “It really is a great opportunity for business owners to reduce emissions in a profitable way.”

Business owners can get the tax credit for new vehicles purchased beginning January 1, 2023. It’s available for 10 years, through the end of 2032.

The How and Why of the Commercial Vehicle Tax Credit

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Here are the basics of commercial vehicle credit.

The tax exemption is available to business owners who purchase an electric vehicle or electric “mobile machinery,” including for construction, manufacturing, processing, farming, mining, drilling, or logging.

The vehicle must be subject to a depreciation allowance, meaning it is for business use, according to the Congressional Research Service.

“If you had a flower shop, for example, and you wanted to get flower delivery vehicles, buy a bunch of vans, you would be the one claiming the tax credit,” Malmgren said.

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There are two thresholds for the business tax credit: vehicles weighing less than 14,000 pounds qualify for up to $7,500; those who weigh more than that qualify for up to $40,000.

The 14,000-pound demarcation line includes Class 4 and above commercial vehicles, or mostly medium and heavy-duty trucks and buses.

If you own a flower shop, for example, and you want to get vehicles for flower delivery, you buy a bunch of vans, you would be the one to claim the tax credit.

Ingrid Malmgren

Policy Director at Plug In America

Medium- and heavy-duty trucks “are the fastest growing fuel users and greenhouse gas producers in the United States,” according to a 2019 US Department of Energy report.

Class 3 through Class 8 trucks make up less than 5% of the total number of U.S. vehicles on the road, but account for 27% of annual highway fuel use, according to the report. Gasoline and diesel account for more than 90% of fuel use for medium and heavy vehicles, it added.

While the electric commercial vehicle market has “fallen far behind” light-duty vehicles, battery performance has improved and battery costs have dropped substantially over the past decade, making electrification of medium- and heavy-duty trucks and buses “more attractive. ”, according to the Department of Energy report.

Technically, the commercial vehicle tax credit is worth the lesser of: (1) 30% of the purchase price of the vehicle; or (2) the “incremental cost” relative to a similar gasoline-powered vehicle. (Incremental cost is the net difference in price between the clean commercial vehicle and a similar vehicle with an internal combustion engine.)

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Whatever the amount of this calculation, its final value is capped at $7,500 or $40,000, as noted above.

Some aspects of the tax break won’t be clear until the US Treasury Department and the IRS issue guidance on the new rules, experts said. For example, how will business owners determine the price of a comparable gasoline-powered vehicle to do an “incremental cost” analysis?

Because the financial benefit is structured as a tax credit, business owners must have a tax liability to benefit. One caveat: Tax-exempt entities can still get a financial benefit in the form of a direct check from the government, said Steven Schmoll, a director at KPMG.

In addition, business owners cannot invest twice in obtaining a tax exemption on the consumer side (tax code section 30D) and on the business side (code section 45W).

How consumer and commercial electric vehicle breaks differ

A key difference between the commercial and consumer tax credits for new clean vehicles is the absence of manufacturing and other requirements for the commercial credit.

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To be eligible for a “clean new vehicle” credit (ie, the one not for business owners), the car’s final assembly must now occur in North America. The Department of Energy has a list of vehicles that meet this standard.

Some additional rules will take effect in 2023.

First of all, there are income caps. A tax credit is not available to single individuals with modified adjusted gross income of $150,000 or more. The cap is higher for others: $225,000 for heads of households and $300,000 for married couples filing jointly. (The test applies to current or prior year income, whichever is less.)

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And certain cars may not qualify based on price. Sedans with a retail price of more than $55,000 are not eligible, nor are trucks, SUVs or vans over $80,000.

Two other rules apply to manufacturing: one involves sourcing requirements for critical automotive battery minerals; the second requires that a portion of the battery components be manufactured and assembled in North America. Consumers lose half the value of the tax credit, up to $3,750, if one of those requirements is not met; they would lose the entire $7,500 for failing to comply with both.

The five requirements were added by the Inflation Reduction Act, and none of them apply to the clean vehicle business credit, Schmoll said.

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