Guide to energy and clean vehicle tax credits

The Inflation Reduction Act of 2022 brought changes to tax incentives for clean energy and climate change. This legislation, signed into law by President Biden on Aug. 16, 2022, extended and expanded tax credits for clean vehicles and energy-efficient residential improvements. For tax years 2023-2032, taxpayers can benefit from these credits, with some provisions retroactively applying to 2022.

Clean Vehicle Credit

The existing Qualified Plug-in Electric Drive Motor Vehicle Credit (IRC 30D) has been modified and renamed the Clean Vehicle Credit. This credit now applies to new and previously owned clean vehicles.

• New clean vehicles (IRC 30D): To qualify, the vehicle must be placed in service on or after Jan. 1, 2023, and meet specific criteria, including final assembly in North America. The credit amount is up to $7,500, but it is nonrefundable and cannot be carried forward when the vehicle is purchased for personal use.
• Previously owned clean vehicles (IRC 25E): This credit applies to vehicles purchased from a qualified dealer for $25,000 or less. The credit amount is the lesser of $4,000 or 30% of the vehicle’s sale price. It is nonrefundable and has specific eligibility requirements, including a three-year lookback period and the fact that the vehicle could have had only one transfer of ownership after Aug. 16, 2022.

New and pre-owned clean vehicle credits are subject to Modified Adjusted Gross Income (MAGI) limits:

• New clean vehicles (IRC 30D):
  • $300,000 for married filing jointly or a surviving spouse.
  • $225,000 for heads of households.
  • $150,000 for all other filers.
• Previously owned clean vehicles (IRC 25E):
  • $150,000 for married filing jointly or a surviving spouse.
  • $112,500 for heads of households.
  • $75,000 for all other filers.

Tax planning considerations for clean vehicle credits

When advising clients on clean vehicle credits, tax practitioners should consider several factors, including the taxpayer’s MAGI; the vehicle’s MSRP for new clean vehicles or purchase price for previously owned clean vehicles; the Vehicle Identification Number (VIN); date of purchase; and the availability of a dealer report. The IRS provides a list of qualified manufacturers of clean vehicles.

Starting in 2024, eligible taxpayers can elect to transfer new and previously owned clean vehicle credits to dealers. This provides an immediate financial benefit to the taxpayer, and also allows taxpayers that would have been limited to their tax liability to fully use the credit. Tax practitioners are in a unique position to assist their clients in determining whether they qualify for a tax credit transfer. It is imperative that taxpayers do not attempt to transfer a clean vehicle tax credit they are not legitimately qualified for; in this regard, the expertise of a tax practitioner can prove indispensable.

Tax practitioners are in a unique position to assist their clients in determining whether they qualify for a tax credit transfer.

Commercial Clean Vehicle Credit

Businesses can also benefit from tax credits for clean vehicles. The Commercial Clean Vehicle Credit (IRC 45W) applies to vehicles acquired and placed in service before 2033 for business use. The credit amount is the lesser of 15% of the vehicle’s basis (30% for vehicles not powered by gasoline or diesel) or the incremental cost of the vehicle. The maximum amount of tax credit is $7,500 for clean vehicles weighing less than 14,000 pounds, or $40,000 for clean vehicles weighing 14,000 pounds or more. This credit is nonrefundable but can be carried back one year and forward 20 years.

Residential energy credits

The Inflation Reduction Act has also enhanced residential energy credits, including the Energy Efficient Home Improvement Credit (IRC 25C) and the Residential Clean Energy Credit (IRC 25D).

• Energy Efficient Home Improvement Credit (IRC 25C): This credit now offers a 30% credit rate on eligible home improvements, with a $1,200 annual aggregate limit, and an additional $2,000 limit for specific items such as heat pumps and biomass stoves.
• Residential Clean Energy Credit (IRC 25D): This credit remains at 30% of the installation cost for solar, wind, geothermal, and battery storage technology through 2032. It is nonrefundable but can be carried forward.

The Inflation Reduction Act created new opportunities for taxpayers to benefit from clean energy tax credits. Tax practitioners play a crucial role in helping clients navigate these complex provisions and maximize their tax savings. By staying informed about the latest guidance and planning, tax professionals can provide valuable advice on leveraging these credits effectively.