The recently proposed Congressional Inflation Reduction Act of 2022 includes significant changes related to electric vehicle credits. The proposal includes not only expanding the electric vehicle credit, but phasing out the credit for auto manufacturers making more than 200,000 electric vehicles and applying income limits for taxpayers claiming the credit. Even though Senator Joe Manchin was originally opposed to expanding the credit, denying the credit based on taxable income limits and promoting the final assembly of clean vehicles with mineral and battery components, sourced from North America. As a result , he was eventually supported .
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What may come as a surprise to individuals and auto dealerships are the options on how one can claim the credit. And surprisingly, depending on the auto dealership chosen, an individual does not have to wait till he/she files his/her income tax return to avail the credit.
Transfer or clean vehicle credit to dealer
The proposed law allows taxpayers to elect to transfer their eligible clean vehicle credits to the dealer who sold the vehicle to the taxpayer. Only auto dealerships registered with the Secretary will be eligible for this transfer on the basis of the way they will provide in future.
Before the taxpayer transfers his credit to the dealer, and not after the time of sale, the dealer must disclose the following items to the taxpayer:
1. Manufacturer’s Suggested Retail Price (“MSRP”)
2. The value of the credit allowed and any other incentives available for the purchase of such vehicle. The dealer should ensure that the availability, utilization and amount of other incentives are not limited to the taxpayer electing to transfer his credit to the dealer.
3. Amount provided by the dealer to such taxpayer for transfer credit. The amount paid by the dealership, whether in cash or reduction in down payment for the vehicle, should be equal to the credit otherwise permitted to the taxpayer.
If a dealer does not make the required disclosures, the secretary can cancel their registration and the customer will no longer be able to transfer their credit to the dealer.
Auto dealerships receive cash from their customers for the amount of credit transferred to the dealership to either participate in an advance payment plan or to offset their federal income tax liability by the transferred credit. The details regarding advance payment option will be provided by the Secretary after setting up the program.
Alternatively, auto dealers can reduce their federal income tax payments based on the credits transferred. However, auto dealerships must pay close attention to the rules surrounding credit as well as the amount of credit they are claiming. There is a penalty included in the bill if the auto dealership specifies a larger amount of federal income tax paid related to the credit than the actual credit. The penalty for such error is not only the amount of such excessive payment claimed, but also an additional 20% of the amount mistakenly claimed. For example, assume a dealership represents a reduction in federal income tax liability of $750,000. However, upon investigation, the allowable credit was limited to $680,000. The fine imposed on the dealership will be $84,000 ((750,000-680,000) x 120%).
Auto dealers should be aware of the proposed changes in the bill to ensure that the amount claimed is correct. Some of the important changes in the current law are given below.
What is a clean vehicle for credit purposes?
The definition of a clean vehicle is equivalent to the earlier definition of a qualified electric plug-in. A clean vehicle is still required to begin basic use with a taxpayer in order to receive the $7,500 credit, but there is also proposed legislation offering a credit of up to $4,000 for clean vehicles already owned. The proposal also requires that the clean vehicle be purchased from a qualified manufacturer and that its gross vehicle weight is less than 14,000 pounds. However, while the proposed definition would require the vehicle to be driven, largely, by an electric motor drawing power in the form of a battery, the battery must have a capacity of at least 7 kWh, an increase from the previously indicated 4 kWh. Is. law. In addition, the bill also requires that the final assembly of the client vehicle be in North America.
credit amount
The amount of the credit is now determined based on the vital minerals used and the battery components. The percentage of critical minerals and battery components required varies depending on the date the vehicle was kept in service. Provided the appropriate percentage is met, a credit of $3,750 will be granted for asset minerals and battery components, resulting in a total credit of $7,500.
The electric motor must draw power from a battery that contains a specific percentage of vital minerals, as described below, that is extracted or processed in a country with which the United States has a free trade agreement or North America. was recycled.
A battery component requirement establishes that the percentage of the value of the components contained in such battery shall be manufactured or assembled in North America at a percentage equal to or greater than the percentage given in the table below.
Critical Mineral and Batter Component Requirements by Service Date
No credit is allowed for clean vans, sports utility vehicles, or trucks with a manufacturer-suggested price that is above $80,000. For any other clean vehicle, the MSRP cannot exceed $55,000.
credit phaseout
The credit is not available to taxpayers once their modified adjusted gross income exceeds a specified amount. For taxpayers filing either a joint return or as a surviving spouse, modified adjusted gross income cannot exceed $300,000. This decreases to $225,000 for head of household filers, and for all other filers the modified adjusted gross income cannot exceed $150,000.
The proposal allows taxpayers to use the less of the modified adjusted gross income in the current taxable year or for the preceding taxable year. Most dealers will need to rely on previous year tax return filings to ensure the credit is admissible and therefore can be properly claimed by the dealership.
While many may be excited to get an immediate reduction in price related to the offered clean vehicle credit, don’t hit the dealership just yet. The proposal still has to pass the budget reconciliation process and receive full support by all Democratic senators. The final senator still in question is Kirsten Sinema, who may require changes to the bill before she can offer her support. Senator Manchin mentioned earlier this week that he is in communication with Senator Cinema. Senate Majority Leader Chuck Schumer also noted that he is working with all caucus members for support, with the hope that the proposed bill will be put on the floor sometime this week.