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Understanding the Electric Vehicles Tax Credit Program

header image describing the title of the article "Understanding the Electric Vehicle Tax Credit Program"

As consumers become more conscious of their environmental footprint and look for ways to save money, more and more electric vehicles can be seen on the roads today stretching from coast to coast. States are encouraging the purchasing of electric vehicles as well as exampled by California where the governor has taken action to ban the sale of non-electric vehicles after 2035. At this point, most taxpayers know or have heard of an electric vehicle tax credit program, but what they may not know is that there are specific conditions and limitations that must be met, and that some vehicles have actually phased out of the program. If your dealership has an inventory of electric vehicles, make sure your customers know about these tax credits and how they work.

Here’s a rundown of what you need to know about the electric vehicle tax credit, how it works, and what qualifies.

What vehicles qualify for the electric vehicle tax credit?

The new car or truck must:

  • Have at least four wheels and gross vehicle weight of less than 14,000 pounds.
  • Draw energy from a battery with at least 4 kWh hours and recharged from an external source (minimum for the $2,500 credit). Each additional kWh can increase the amount of credit.
  • Be purchased new in or after 2010 and begun driving in the year claiming the credit.
  • Be primarily used in the U.S.

The two-wheel credit has been extended for 2018, 2019, and 2020 vehicles if they can reach speeds of 45 mph or more, draw from a battery with at least 2.5 kWh, and are charged from an external source.

How much is the electric vehicle tax credit?

The tax credit for an electric vehicle can range from $2,500 to $7,500 depending on the vehicle with higher credit amounts for specific battery capacities and vehicle sizes. For two-wheeled vehicles, the credit is 10% of the purchase price up to $2,500.

How is the tax credit applied to my customers?
The non-refundable tax credit is filed on the taxpayer’s federal tax return (for individuals on your 1040), and the liability determines how much credit they qualify for. The non-refundable caveat means that in order to receive the full $7,500 credit, their tax liability must be at least that much. If their liability is only $3,000, they’ll only receive $3,000. They won’t receive the difference in a refund check.

Can my customers get a tax credit on a used or leased vehicle?

Unfortunately, the answer is no to both of those circumstances. The credit only applies to the new purchase and the person who actually owns it. Used vehicle purchases, even transfers to family members don’t qualify, and if leased, the credit actually goes to the manufacturer offering the lease since they still own the vehicle. Some manufacturer dealers offer lower prices on leased electric vehicles as a result of the incentive, but you are not forced to do so.

Does the tax credit run out?

As sales of electric vehicles increase, the tax credit will phase out. Once a manufacturer reaches 200,000 qualified vehicles, the credit begins to phase out with a step-down process over the course of a year. No tax credits are available for Tesla vehicles purchased after Dec. 31, 2019, as they hit their mark in July 2018, and no credits are available for GM vehicles purchased after March 31, 2020, as they hit their mark as well. You can see a list of the vehicles available for credits at fueleconomy.gov.

Are there state tax credits available?

Some states and regions do offer tax credits for electric vehicles and alternative-fuel vehicles, but these often apply to businesses. Individuals may receive incentives such as carpool lane access or free parking. Some states offer rebates for retail buyers. The U.S. Department of Energy offers a chart of state incentives.

For assistance with the electric vehicle tax credit and determining any extra state or local incentives, reach out to us.

To discuss if your vehicle might apply for this tax credit, contact us:

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC

Contact John R. Comunale, CPAView Profile

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