Article Highlights:
- Tax Credit
- Credit Phase-Out
- Determining the Credit
- Off-Road Vehicles and Golf Carts
- Allocation Between Business and Personal Use
- Credit Reduces Basis
- Business Standard Mileage
If you are considering purchasing an electric vehicle and expect to receive a federal tax credit along with the purchase, you better do your homework first. There is a phaseout that is based on a manufacturer’s sales of electric vehicles that impacts the credit available to the purchasers of the vehicles.
Many of the more popular manufacturers have been phased out of the credit, including Tesla and General Motors.
Here Is How That Phaseout Works
The credit phases out for manufacturers beginning in the second calendar quarter following that in which a manufacturer sells its 200,000th plug-in electric drive motor vehicle for use in the U.S. The applicable percentage phase-out is:
- 50% for the first two calendar quarters of the phaseout period,
- 25% for the third and fourth calendar quarters of the phaseout period, and
- 0% for each later calendar quarter.
Example: Here is how the phaseout worked for Tesla, Inc., one of the more popular electric vehicles, once it sold its 200,000th vehicle back in 2018. The 200,000th vehicle was sold in the third quarter of 2018. Thus, a phase out of the tax credit available for purchasers of Tesla plug-in electric vehicles was triggered beginning Jan. 1, 2019. That meant the maximum credit available for the purchase of a Tesla, which was $7,500 before 2019, began to phase out and the maximum credits for 2019 were as follows for vehicles purchased:
- Jan 1, 2019 through June 30, 2019: $3,750 (50% of $7,500).
- July 1, 2019 through Dec 31, 2019: $1,875 (25% of $7,500).
- After 2019, Tesla vehicles no longer qualify for the credit.
This same phase-out scenario illustrated for Tesla will apply to any other manufacturer once it sells 200,000 electric vehicles.
While the credit for many popular models is beginning to phase out or has phased out already, some manufacturers are just beginning to offer electric vehicles and there are also new electric vehicle manufacturers coming online, so you still have multiple choices for an electric vehicle that comes with a tax credit.
Here are some things you should be aware of before making your decision to purchase an electric vehicle.
Not All Electric Vehicles Qualify for the Full Credit
The credit is not a flat $7,500; it is actually made up of two elements, a $2,500 per vehicle credit plus an additional $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours, but not in excess of $5,000, resulting in an overall credit of up to $7,500.
The amount of credit available for any qualifying vehicle, listed by manufacturer, is available on the IRS website. Although most salespeople will know the amount of credit that is available for the vehicle you are interested in purchasing, you sometimes run into an overzealous one that might mislead you a bit. So, it is good practice to double check for yourself and that is quite easy to do on the IRS Website.
The following requirements must be met to qualify for the credit.
- You must be the owner of the vehicle. If the vehicle is leased, only the lessor and not the lessee, is entitled to the credit.
- You placed the vehicle in service during your tax year.
- The vehicle is manufactured primarily for use on public streets, roads, and highways.
- The original use of the vehicle began with you.
- You use the vehicle primarily in the United States.
Credit for Multiple Vehicles
The credit is a per vehicle credit, thus if you purchase multiple plug-in electric drive motor vehicles you can claim the credit for each one.
Off-Road Vehicles & Golf Carts
Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for the credit.
Allocation Between Business and Personal Use
If you use a qualified plug-in electric drive motor vehicle both personally and in your business, the credit is divided (allocated) between personal use and business use and creates two separate credits, with the tax treatment of the two being quite different.
- Personal Credit – The personal portion of the credit is non-refundable, meaning the personal portion of the credit can only offset your tax liability and any excess not used in the year of purchase is lost. Thus, you need to be mindful of just how much benefit the credit provides and not necessarily expect to benefit from the full amount of credit for the vehicle.
- Business Credit – The business use portion of the credit, on the other hand, becomes a business credit and any unused portion for the current year can be carried back to the prior tax year where it can offset tax liability in that year and result in a refund. If there is still unused credit it can carry forward for up to 20 years to offset future tax liabilities.
Credit Reduces Basis
For both the personal and business credit, the basis of the vehicle is reduced dollar for dollar by the amount of the credit. For a taxpayer claiming just the personal credit, this only becomes an issue when the vehicle is subsequently sold, since when determining the gain or loss on the sale, the cost of the vehicle is reduced by the amount of any credit claimed. If the sale of a personal vehicle results in a loss, no loss is deductible, but if there’s a gain, the gain is taxable. This has rarely been an issue in the past since vehicles were seldom subsequently sold for a profit. However, recently the used car market has been turned on its head, with many used cars selling for as much or more than the original cost, which could result in a taxable capital gain for the seller. For a vehicle used for business, the credit reduces the depreciable basis of the vehicle. Also, no credit is allowed for any portion of a business vehicle expensed under Sec 179.
Business Standard Mileage
If a taxpayer uses a vehicle for business, they can choose between deducting actual expenses such as fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. The IRS does not distinguish between fuel powered cars and electric cars, and both are allowed to use the same standard amount, even though the rate includes fuel costs. The business mileage rate for 2022 is 58.5 cents per mile, up from 56 cents per mile for 2021.
What the Future Holds
President Biden’s Build Back Better Act included a new round of electric vehicle credits. But that Act appears to be dead in the water and whether Congress will authorize those credits in a separate bill is yet to be seen.
Call this office to determine how much benefit you will derive from the plug-in electric drive motor vehicle credit based upon your specific use of the vehicle, whether it is personal, business or a combination of the two.
If you have any questions, please contact our office at (503) 224-5321. Isler Northwest LLC is a firm of business advisors and CPAs in Portland, Oregon. Our service goal at Isler Northwest is to earn our clients’ trust as their primary business and financial advisor.
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