Really, the correct term is “Qualified Plug-In Electric Drive Motor Vehicle Credits,” which is quite a mouthful.  For purposes of this blog post, I’m going to call them EV credits.

Admittedly, I have not personally owned an EV or seriously shopped for one. However, electric motor and battery technology is improving rapidly, the charging network is growing, and the incentives are great, if you can make them work.

I’m going to discuss how EV credits work and how they can benefit, and possibly influence, your next vehicle purchase.

What is an EV Credit?

Put simply, the US government gives you money, in the form of a tax credit, for purchasing a qualified electric vehicle.  The credit has been around for a while.  Maybe you’ve already gotten one.

But, the rules changed in the summer of 2022 with the passing of the Inflation Reduction Act (IRA).  And the changes make the credit less accessible to many taxpayers.

So let’s briefly discuss how EV credits worked before the IRA (pre 2023), and how EV credits work starting in 2023.

EV Credits 2022 and earlier:

If you purchased a qualified electric vehicle, you could claim a non-refundable credit of $2,917 for a vehicle with a battery capacity of at least 5 kilowatt hours, plus $417 for each kilowatt over 5 kilowatts, up to a maximum of $7,500. (Note that “non-refundable” means you can’t get a credit for more than the income taxes you otherwise owe.)

Criteria for EV to qualify:

• purchased brand new
• have an external charging source
• used in the United States primarily
• have a gross weight rating of less than 14,000 lbs
• not purchased to resell
• manufacturer can’t sell more than 200,000 EV’s in the U.S.

BTW, GM sold 200,000 EV’s by Q4 2018, with Tesla reaching 200,000 by Q1 2020 and Toyota reaching 200,000 by Q2 2022.  These brands were ineligible for any more credits under the old rules.

EV Credits 2023 and later:

The maximum credit is still a non-refundable $7,500, but the EV credits work differently with the passing of the IRA.  The IRA broadened the range of vehicles that qualify, but restricted the amount of taxpayers able to take them (more on this later).

First, lets break down the new rules for brand new EV’s.

Criteria for new EV to qualify:

• purchased brand new
• have an external charging source
• used in the United States primarily
• have a gross weight rating of less than 14,000 lbs
• not purchased to resell
• two components; $3,750 credit for critical mineral requirements (critical minerals extracted or processed in the US) and $3,750 for battery component requirements (battery produced or assembled in US)
• produced by qualified manufacturer
• final assembly in North America

Number of units sold is no longer a limitation, and, in an effort to stimulate US manufacturing, the final assembly of a qualified EV must be completed in North America.

The website fueleconomy.gov has a neat search engine to look up qualified EV’s.  You just input year/make/model to check eligibility. You can also find a list of manufacturers and qualified models on the IRS website here. The selling dealer is also required to provide you with a written statement detailing, under penalties of perjury, the maximum allowable EV credit for the vehicle you are buying.

The IRA also opened up the EV credit to used vehicles, and is limited to $4,000.

Criteria for a used EV to qualify:

• must be the first sale other than to the original owner
• vehicle must be at least two years old
• had to be a qualified EV when sold new
• must be sold by a dealer
• have a gross weight rating of less than 14,000 lbs
• purchased in the United States
• credit is limited to 30% of purchase price
• purchase price must be less than $25,000
• can be claimed once every three years

Limitations

Earlier I mentioned EV credits will be more restrictive for a lot of taxpayers.  Gone are the days of trading in your top of the line, six figure Tesla Model S every year for the newest latest and greatest, and subsidizing the initial cash outlay with a nice big $7,500 credit at tax time.

There are now MSRP restrictions and adjusted gross income (AGI) restrictions we need to cover.  Let’s begin with the MSRP restrictions.

MSRP Limits:

You cannot claim an EV credit if MSRP exceeds the following amounts:

• Vans – $80,000
• Sport Utility Vehicles – $80,000
• Pickup Trucks – $80,000
• Other – $55,000

These prices might seem high, but it is easy to cross the threshold when you start adding options to the base price.

For fun, I went to Ford’s website to build a new Lightning truck.  The base price of the Lariat model starts at $69,995.  Add in the extended range battery option and a tonneau cover, and the MSRP jumps to $81,040, making this EV ineligible for any credits.  I guess you’d want to wait on the tonneau cover and buy one with your $7,500 tax credit the following year.

Please note, MSRP does not include tax, title, license, or dealer mark-up fees.  So good news there.

Now let’s cover the new AGI limitations:

AGI Limits:

You cannot claim an EV credit if your AGI exceeds the following amounts:

• Married Filing Jointly – $300,000
• Head of Household – $225,000
• All other taxpayers – $150,000

These are respectable income levels, yes. But I don’t think it is a stretch to assume most (or at least many) people purchasing brand new EV’s likely have an AGI above the threshold.  And there is no phase out, you either qualify or you don’t.

Final Thoughts:

Hopefully no one purchases a new EV and gets surprised they don’t qualify for EV Credits when they file their tax return the following year. This is especially true for the early EV adopters that have already taken EV credits and are not aware the rules have changed, substantially, for 2023.

If the EV credit is a major deciding factor in your car purchasing process, you want to to know how EV credits work. If you follow the rules and don’t make too much money, you should get a nice big tax credit.

Make sure to read our post “Inflation Reduction Act: Tax Credits for Homeowners” for information on additional clean energy property credits.

The post How EV Credits Work appeared first on Evergreen Small Business.

December 27th update: On December 22nd, the IRS published a helpful FAQ available here, which among other things clarified that the $2,000 credit for heat pumps is in addition to the $1,200 credit for building envelope improvements, for a maximum possible credit of $3,200. Huzzah!

On Friday, the House passed the Inflation Reduction Act; it now goes to President Biden for his signature. There are three new tax credits in this law every homeowner should know about: the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Alternative Fuel Vehicle Refueling Property Credit (for electric vehicle chargers).

Note: These credits are nonrefundable—in other words, you need to have at least $500 of tax liability to claim a $500 credit.

The Energy Efficient Home Improvement Credit (IRC § 25C)

Section 13301 of the Inflation Reduction Act rebrands the Nonbusiness Energy Property credit as the “Energy Efficient Home Improvement Credit.” The bill extends the credit to December 31, 2032, and significantly expands the credit to be more generous. These new rules apply to property placed in service after December 31, 2022.

What qualifies for the tax credit?

In general, the credit is equal to 30% of what you spent on qualified energy efficiency improvements, residential energy property, and home energy audits during the year (though there are annual limits, which I describe later).

Qualified energy efficiency improvements

Qualified energy efficiency improvements are building envelope improvements. This includes insulation, energy-efficient windows, and energy-efficient exterior doors.

To qualify for the credit, these improvements to the building envelope need to meet certain criteria:

• Windows – must meet Energy Star most efficient certification requirements.
• Exterior doors – must meet applicable Energy Star requirements.
• Insulation – must meet prescriptive criteria from a recent International Energy Conservation Code.

In addition to these component-specific rules, there are some general rules the improvements must follow, too. The improvement must be installed in the United States, you must be the original user of the improvement, you must reasonably expect to use the improvement for at least 5 years, and the improvement must be to your principal residence (as that term is defined by Section 121 of the Internal Revenue Code).

Residential energy property

Residential energy property is, in a nutshell, energy-efficient versions of appliances that heat or cool the air inside of your home, or heat water in your home. The term includes:

• Heat pumps, central air conditioners, water heaters, furnaces, and boilers as long as the appliance meets the highest efficiency tier (not including advanced tiers) established by the Consortium for Energy Efficiency;
• Biomass stoves and boilers with a thermal efficiency rating of at least 75 percent;
• Certain energy-efficient oil furnaces and hot water boilers; and
• Cost to upgrade a panel to at least 200 amps if the panel upgrade was installed in conjunction with, and enabled the installation and use of, any qualified energy efficiency improvements or other residential energy property (e.g., your home needed a panel upgrade to install an electric heat pump).

You can include labor costs in the total cost of residential energy property when calculating your credit.

As is the case for building envelope improvements, there are some additional rules you’ll need to follow to get a credit for purchasing one of these energy efficient appliances. The property must be installed in the United States, you must be the original user of the property, and the property must be installed on or in connection with a dwelling unit you use as a residence (not necessarily your principal residence).

Home energy audits

A home energy audit is exactly what you’d expect: a home energy auditor comes to your home and identifies the most significant and cost-effective energy improvements you could make. Predictably, the audit must be for a home in the United States and it must be for your principal residence. The Treasury will explain certification requirements for home energy auditors in future regulations.

How will I know if the improvement I purchased qualifies for the credit?

Starting in 2025, the Treasury will have a new system of product identification numbers to verify if property is eligible for the credit. Before then, you’ll have to rely on the definitions in the statute (explained in the previous section).

How to calculate the credit

As mentioned above, the general formula is that the credit is equal to 30% of what you spent on “qualified energy efficiency improvements,” “residential energy property,” and “home energy audits” during the year. But there are limits to the credit.

Annual limits

In my opinion, these caps are too complicated. But we’re stuck with the complexity, so here we go:

Component-specific limits

Windows. Limited to $600 per taxpayer per year. So, you could spend up to $2,000 on new energy-efficient windows in a given year and still get the full credit, since 30% × $2,000 = $600.

Exterior doors. Limited to $250 per door, and $500 for all doors, per taxpayer per year. So, you could spend up to $833 on an energy-efficient door—and $1,667 on multiple energy-efficient doors—in a given year and still get the full credit, since 30% × $833 = $250 and 30% × $1,667 = $500.

Residential energy property. Limited to $600 per taxpayer per year, just like windows.

Home energy audits. Limited to $150 per taxpayer per year.

Total annual limit

The total annual cap to the credit is $1,200 per year. This $1,200 cap applies to almost every type of improvement that qualifies for the credit: e.g., windows, doors, insulation, air conditioners, furnaces, panel upgrades, home energy audits.

Example 1: In 2023, a homeowner spends $2,500 on Energy Star most-efficient windows, $700 on one Energy Star door, $900 on another Energy Star door,  and $5,000 to upgrade their home’s insulation. They calculate their tax credit as follows:

Because it’s an annual limit, you can sometimes get a larger credit if you break a project up over multiple years.

Example 2: Assume the same facts as before, except the homeowner installs the windows and doors in 2023 and the insulation in 2024. In this case, the total credit for the project is $2,260, while in Example 1 it was only $1,200:

The heat pump exception

The $1,200 annual limit and the $600 residential energy property limit don’t apply to heat pumps; instead, heat pumps get their own annual credit cap of $2,000. So, you could spend up to $6,667 on a new heat pump in a given year and still get the full credit, since 30% × $6,667 = $2,000. (This exception applies to biomass stoves and boilers, too.)

Example 3: In 2023, a homeowner spends $6,000 to install a new heat pump. They calculate their tax credit as follows:

One final comment about these credit limits: I suspect the IRS will issue an updated version of Form 5695 within the next several months. (That’s the form you’ll use to claim these credits.) Once that’s available, you can use the form and its instructions as you plan your home improvements to confirm you understand the credit formulas correctly.

How utility rebates interact with the credit

I mentioned this in our blog post on the Inflation Reduction Act for real estate investors, but it’s worth repeating here: there’s a bit of tax law, Section 136, that exempts some utility rebates from taxable income.

More specifically, Section 136 says a taxpayer’s gross income doesn’t include “any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.” This section also says, “no deduction or credit shall be allowed for, or by reason of, any expenditure to the extent of the amount excluded under subsection (a) for any subsidy which was provided with respect to such expenditure.”

That’s potentially relevant for all tax credits I’ll mention in this article, but it’s particularly relevant to the Energy Efficient Home Improvement Credit. It means that when you calculate your tax credit for something like new windows or a new heat pump, you’ll need to first subtract any utility rebates from the cost of the improvement, and then multiply the cost by 30%.

The Residential Clean Energy Credit (IRC § 25D)

Section 13302 of the Inflation Reduction Act rebrands the residential energy efficient property credit as the “Residential Clean Energy Credit”—a fitting name, since this credit is most commonly used for residential solar panels.

The bill extends the credit to December 31, 2034, alters the phase-out schedule, and slightly modifies which property qualifies for the credit. For the most part, the new rules apply to property placed in service after December 31, 2021. Starting in 2023, biomass stoves no longer qualify for a credit under Section 25D, but battery storage technology does.

The new phase-out schedule is:

Example 4: You install a $20,000 solar panel system on your home in 2022. Your credit is 30% of the cost of the system—so, $6,000.

Example 5: You install a $20,000 solar panel system on your home in 2033. Your credit is 26% of the cost of the system—so, $5,200.

A final comment about the Residential Clean Energy Credit: while this credit isn’t refundable, you can carry it forward to reduce your tax liability in future years.

Applying the credits to condominiums and cooperative housing associations

If a cooperative housing association installs property or improvements that qualify for a credit under Sections 25C or 25D, the tenant-stockholders of the corporation claim the credit in much the same way they claim an itemized deduction for property taxes. In other words, the expenditure is allocated to the tenant-stockholder on their “proportionate share” of the expenditure. The tax law uses similar, albeit less detailed, language to explain how to allocate expenditures of a condominium management association.

For example, in my housing cooperative I own 55 shares, which is 2.8947% of the total outstanding stock in the corporation (1,900 shares). If my building spends, say, $60,000 in 2025 to replace some of our windows with Energy Star most efficient windows, I can report on my 2025 personal tax return that I spent $1,737 on those windows (because, well, through the co-op dues I did) and claim a $521 credit for that year.

One final comment about energy credits and housing cooperatives: in 2010, the Office of Chief Counsel noted in IRS Information Letter 2010-0244 that when a tenant-stockholder arranges for and purchases the improvement themselves, they are entitled to a credit based on the entire expenditure (as one would expect).

The EV Charger Credit (IRC § 30C)

I discussed the new EV charger credit in a previous blog post for real estate investors, so I won’t go into too much detail here. But know that a smaller version of the EV charger credit is available for homeowners located in a low-income community or rural area. That credit is 30% of the cost of the charger up to a $1,000 limit. And if you’re a homeowner, you don’t need to worry about the prevailing wage and apprenticeship rules that apply to businesses and real estate investors.

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Tax increases in the bill

Here’s some good news: if you’re a small business owner or real estate investor, the Inflation Reduction Act probably doesn’t raise your taxes.

The major revenue raisers in this bill are:

• A new book minimum tax for large ($1 billion+ average book income) C corporations
• A new excise tax on stock buybacks (only applies to publicly-traded corporations)
• Extension of excess business loss limitation rules from 2026 to 2028
• Increased money for IRS enforcement

The extension of the excess business loss limitation rules will hit some real estate investors. But for most folks in this category, we think the increased money for the IRS will be the most visible and meaningful change to our tax system due to this law. As we’ve frequently noted on this blog, keeping good records and staying on top of your bookkeeping are the two most important ways to protect yourself in an audit.

Tax increases not in the bill

Back in the autumn of 2021, Democrats had proposed significant changes to the federal income tax code. In response to these proposals we wrote a blog post last September on the slow death of the S corporation, had the ideas become law.

Well, it turns out reports of the S corporation’s death were greatly exaggerated; the Inflation Reduction Act contains no changes to the net investment income tax, or NIIT. It also contains no changes to the basis step-up rules for inherited assets, no change to the unified gift/estate tax credit, and no changes to IRA contribution or distribution rules. In fact, we could write a whole laundry list of proposed changes that never found their way into the Inflation Reduction Act—and we have:

• No change to top marginal rate for individuals
• No changes to capital gains tax rates
• No “billionaire tax”
• No changes to SALT
• No changes to 199A
• No change to carried interest loophole
• No change to 21% C corporation rate
• No new limits on deductibility of interest expense for C corporations
• No changes to limit 1202 exclusions
• No changes to expand wash sale rules
• No changes to foreign tax credit
• No changes to GILTI, FDII, or BEAT

So, what else is in this bill? Well, a lot of climate change-related stuff.

Green tax incentives for real estate investors

Real estate investors may be interested in the bill’s tax incentives for green retrofits—especially if your building is in Washington State and subject to the Clean Buildings law.

For multifamily and commercial buildings: a 179D revamp

Section 13303 of the Inflation Reduction Act dusts the cobwebs off Section 179D of the tax code. The 179D deduction is, in essence, a depreciation acceleration trick similar to the Section 179 deduction small business owners are familiar with. The basic idea is if a real estate investor either (1) purchases a new energy efficient building or (2) makes a deep energy retrofit to an existing building, the investor can deduct a large chunk of the cost of that asset in the first year instead of waiting several years to deduct the cost as “depreciation expense.”

The amount a taxpayer can deduct up front is the lesser of either (1) the cost of the retrofit or (2) the result of a complex formula built around an efficiency engineering standard, ASHRAE Standard 90.1. Predictably, then, one of the rules for claiming a 179D deduction is that an independent licensed engineer (or in some cases, an architect) must certify the energy savings targets before the taxpayer can claim the deduction.

We’re not going to go into the nuts and bolts of the formula here, because really the way to claim this deduction is to hire a consulting firm staffed with tax professionals and engineers to design the retrofit to maximize the deduction for you. They’ll calculate your deduction and prepare a report for your regular tax accountant as part of that process. But here are a few key things to understand about Section 179D if you’re interested in this tax savings opportunity.

First, know that this deduction is for larger buildings: think commercial buildings, 4+ story apartment buildings, schools, hospitals, etc.

Second, know that a 179D deduction isn’t something to start thinking about when it’s time to prepare your tax return for the year. You need to decide whether you’ll claim this deduction before you begin the project. That’s because you’ll want to choose a design firm that really knows Section 179D and the ASHRAE standard it rests on, to make sure their design meets the tax law’s requirements. And if you want to claim the full deduction, not just part of it, you’ll need to be sure the building contractor you select for the construction work understands and complies with the Inflation Reduction Act’s new prevailing wage and apprenticeship rules.

Third, for the sake of my own conscience, I feel I ought to point out that the consulting fees for calculating 179D deductions can be very expensive. And some big players have gotten into hot water after being fairly aggressive with this stuff.

Finally, this may be an odd thing for a tax accountant to admit, but there are options for funding deep energy retrofits that go beyond tax deductions and credits. For example, some sophisticated real estate investors in Seattle are experimenting with a novel transaction structure called the “metered energy efficiency transaction structure,” or “MEETS” for short. And King County recently launched a PACE loan program. Of course, we can’t endorse any particular financing idea for you if we don’t know your situation. But we want to acknowledge that there are many options to consider.

For buildings with a sunny roof: the commercial solar panel credit

Section 13102 of the Inflation Reduction Act extends the commercial tax credit for solar panels (in Section 48 of the IRC) to 2034, with a phase-out beginning in 2032. Starting January 1, 2022, your maximum tax savings will be 30% of whatever the panels cost your business or real estate activity.

Example: You install a $20,000 solar panel system on a duplex you own and lease to tenants. If you qualify for the credit and meet the wage and apprenticeship rules, the IRS will pay for 30% of the cost of the system—so, $6,000.

That probably already sounds pretty good. But here’s where the numbers get silly. In addition to getting a (usually 30%) tax credit, Section 48 “energy property” also gets a 5-year asset life under MACRS. What’s more, the section 48 credit reduces the basis for depreciation by only half the credit amount. And while you can’t use the Section 179 deduction on any property you’ve claimed the Section 48 energy credit on, for the next few years you can likely use bonus depreciation to achieve a similar result.

So, just to put this all together: if a landlord installs a solar energy system on a building it owns and rents to tenants, or a small business installs a solar energy system on a building it owns and uses for business, not only will the IRS pay for up to 30% of the cost of the solar panels, but the panels get depreciated over just 5 years (even though in reality the panels will likely last for 25-30 years). What’s more, even though you might think the depreciable basis would be the 70% of the cost of the panel the landlord or business owner paid themselves, really the basis for depreciation is 85% of the total cost of the panels (because only ½ of the credit is subtracted from the depreciable basis). And remember, just like any other 5-year property, the depreciable basis can be (at least partially) expensed using the bonus depreciation rules, depending on what year you install and start using the property.

Now, of course Congress has attached some strings to all of this free money. The panel system must be new, not used, and it needs to be located in the United States. You’ll also need to comply with the Inflation Reduction Act’s new prevailing wage and apprenticeship rules, or the credit is only 6%. And you must hold the property at least 5 years or the IRS will recapture the credit.

One final comment: the Inflation Reduction Act adds 10% to your solar panel credit if you install the panels in a low-income community, and 20% if you install the panels on a qualified low-income residential building project. There are also bonus credits for using domestic content and for installing panels in an “energy community” (think West Virginia coal country).

For parking lots in low income or rural areas: the EV charger credit

Section 13404 of the Inflation Reduction Act extends and modifies the Alternative Fuel Refueling Property Credit. “Alternative refueling property” includes electric vehicle charging stations, so this credit is relevant for any building owner who would like to install EV chargers in their parking garage or parking lot.

The new EV charger credit rules apply to property placed in service after December 31, 2022, and the credit expires December 31, 2032. One notable difference between the Senate Finance Committee proposal and what passed the Senate last Sunday: this credit is now only available to EV chargers installed in low income communities and rural areas. It’s also worth noting that the Inflation Reduction Act modifies section 30C to make bidirectional charging equipment and charging equipment for 2- and 3-wheelers eligible for the credit.

Example: You own a small office building in a low-income community and install 10 level 2 EV chargers in the building’s parking lot for $3,500 each (including parts and labor). If you qualify for the credit and meet the wage and apprenticeship rules, the IRS will pay for 30% of the cost of the chargers—so, $10,500.

Predictably, there are some strings attached. The charger must be new, not used, and it needs to be located in the United States. To get the full 30% credit, you’ll need to comply with the Inflation Reduction Act’s new prevailing wage and apprenticeship rules; otherwise, the credit is only 6%. And the credit is limited to $100,000 per item of property (that limit used to be $30,000 and it used to apply per location, not per item).

The Inflation Reduction Act keeps language in the old statute which says recapture rules “similar to” the rules of 179A apply to the credit. Section 179A has since been repealed, and the IRS never actually put out formal guidance on how the recapture rules work. All we have is an 11-page notice, IRS Notice 2007-43.

For housing developers: the Energy Efficient Home Credit

If you’re a housing developer who specializes in building energy efficient homes, you’ve probably been watching this provision in Build Ba—er, the Inflation Reduction Act—for months. But for the sake of thoroughness, we’ll note that section 13304 extended the Energy Efficient Home Credit (in section 45L of the Internal Revenue Code) to 2032, increased the credit’s size, and modified the eligibility requirements.

The old version of the credit provided $2,000 to eligible contractors for each newly constructed or “substantially reconstructed” home if the home consumed 50% less energy than a comparable dwelling unit and had a building envelope that accounted for at least 1/5 of the energy reductions. The Inflation Reduction Act increases this amount to $2,500 for homes meeting Energy Star requirements and $5,000 for zero energy ready homes, assuming the project meets new prevailing wage and apprenticeship requirements.

The new credit rules apply to dwelling units acquired after December 31, 2022.

How the credits interact with utility rebates

One final thing I’ll mention is how the tax code treats utility rebates, and how those rebates interact with the tax credits I’ve described in this blog post.

In general, utility rebates are taxable income. But section 136 of the Internal Revenue Code says a taxpayer’s gross income doesn’t include “any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.” This section also says taxpayers can’t claim a tax credit or deduction for any amount paid for with this sort of utility rebate.

So, if you claim a rebate from your local utility for a purchase that meets the statute’s definition of an “energy conservation measure,” you won’t need to pay income tax on the amount, which is good. But you’ll also need to subtract that amount from the purchase price first before calculating any tax deductions or credits. For example, if you install solar panels on an apartment building you own and claim a utility rebate for the panels, and the rebate counts as an “energy conservation measure” under Section 136, you’ll need to subtract the rebate from the cost of the panels before calculating the credit.

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