Client Alert

Electrified Vehicle Development is “Supercharged” by the Inflation Reduction Act

Individuals interested in purchasing electrified vehicles as well as governmental entities and businesses that are considering electrifying their fleets should carefully consider the numerous benefits contained in the Inflation Reduction Act (the Act) that was signed into law by President Biden on August 16, 2022. In particular, Part Four of Subtitle D of the Act focuses on benefits afforded clean vehicles. These benefits are in addition to the $7 billion in benefits afforded state governments and private parties for developing charging infrastructure included in the November 2021 Infrastructure Law. The clean energy provisions of the Act contain over $350 billion of benefits. 

This newsletter will generally describe the benefits afforded interested parties in electrified vehicles and charging stations supporting those vehicles.

Below is a list of some of the opportunities for interested parties:

• Clean Vehicle Credit. Section 13401 of the Act includes the following:
  • Increases for the availability of the $7,500 tax credit for more manufactures of electric vehicles. The Act also eliminates the 250,000 production limitation under previous law.
  • The increased availability is tied into battery components made without using components manufactured by foreign entities of concern (i.e., China) after 2023.
  • The Act includes a requirement that at least 50% of the components in an electric car battery must come from the United States, Canada or Mexico by 2024. This restriction increases to 80% in 2027.
  • Imposes a new limit on the availability of the tax credits based upon a taxpayer’s modified adjusted gross income ($300,000 for joint returns; $225,000 for head of household returns; and $150,000 for single and all other individual returns).
  • There is also a limitation of the credit based upon the price of the qualifying vehicle ($80,000 for vans, SUVs and pickup trucks; and $55,000 for other vehicles).
  • The Act allows the transfer of the credit to the dealer in exchange for payments from the dealer for vehicles acquired after 2023.
• Credits for Used Clean Energy Vehicles. Section 13402 of the Act includes the following:
  • A buyer of a used qualified electrified vehicle is eligible for an allowance credit in the amount of the lesser of $4,000 or 30% of the sale price of the qualified vehicle.
  • There are limitations placed on qualified taxpayers for this credit for buying used electrified vehicles ($150,000 for joint returns; $112,500 for head of household returns; and $75,000 for single and all other individual returns).
  • The sale price of the used vehicle cannot exceed $25,000.
• Qualified Commercial Clean Energy Vehicles. Section 13403 of the Act includes the following:
  • The amount of a credit for a qualified commercial vehicle is a lesser of 30% of the basis of the qualified electrified vehicle or the amount equal to the excess of the purchase price over the price of a comparable conventional vehicle.
  • The credit availability is further limited for such qualified commercial vehicles in the following manner: $7,500 for vehicles having a gross weight of less than 14,000 pounds and $40,000 for other commercial vehicles.
  • Governmental bodies, qualifying tax-exempt organizations, and Indian tribal governments are eligible to receive the benefit of this tax credit through a new direct pay election.
• Alternative Fueling and Property Credit. Section 13404 of the Act includes the following:
  • The Act extends the existing 30% credit for electric vehicle charging stations located in eligible census tracts that are designated as being either low-income or non-urban.
  • However, the credit is lowered to 6% if the charging station does not meet wage and apprenticeship requirements.
  • Increases the 30% credit limit to $100,000 for such qualified charging stations.
  • Includes, for the first time, a bi-directional charging equipment for these tax benefits. Bi-directional is capable of charging the battery of the electrified vehicle and allows discharge from that battery to loads external to the battery.

There are several observations that can be made about these new provisions for the tax credits for qualified electrified vehicles:

• Many consumer electrified vehicles will not be covered given price limitations and taxpayer income limitations. These limitations are important given the high price for such electrified vehicles and the income of taxpayers that can afford such vehicles.
• The new credits favor companies that are investing in battery manufacturing facilities and using components that are not manufactured in foreign countries of concern. GM and Tesla are two electric vehicle manufactures that come to mind that will benefit from these restrictions since they have invested in United States battery manufacturing.
• The tax benefits available for commercial vehicles favor smaller commercial vehicles given the $40,000 cap on the price differential between conventional and qualified clean energy vehicles.

To discuss the above and other opportunities, please contact Art Harrington. Because of the length and complexity of the Act and the numerous underlying requirements that are applied to it, whether the above programs are applicable to your organization and your projects is based on a number of factors in addition to those outlined in this summary update. Therefore, it is important to make sure that all relevant factors are considered as you proceed to determine whether you can take advantage of these benefits contained in the Act.