NAVIGATING REVISED FEDERAL EV TAX CREDIT AND STATE EV REBATES
With the transition to new, tougher-to-meet - and confusing tax credits for electric vehicles, it can be a head scratcher waiting for more guidance from automakers and the federal government. President Joe Biden last week signed the Inflation Reduction Act into law, triggering a shift from the old $7,500 EV tax credit to a new, more complicated one designed to incentivize domestic EV production, reduce reliance on foreign supply chains and prevent wealthy buyers from getting a discount.
The revised federal income tax credit for electric vehicle purchases, effective August 16, 2022, combined with the State EV rebate, effective July 1, 2022, could knock off as much as $11,500 from the price of a qualifying electric vehicle, if you can successfully navigate the regulatory maze.
REVISED INCOME TAX CREDIT
Until August 16, 2022, a $7,500 federal income tax credit was available to anyone purchasing a fully electric vehicle (EV), provided that the manufacturer of the vehicle had sold fewer than 200,000 EV's. Upon crossing the 200,000 sale threshold, the credit began to phase out (GM, Tesla). Effective January 1, 2023, the cap on sales will be eliminated, meaning that customers can qualify for the credit regardless of manufacturer. However, while the federal government grants with one hand, it takes away with the other. Effective August 16, 2022, the credit will be available only for purchases of EVs where the final assembly occurred in North America. The Department of Energy maintains list of Model Year 2022 and early Model Year 2023 electric vehicles that are likely meet the final assembly requirement. The key word is "likely". Some vehicles on the list are assembled at different factories in different parts of the world, some in North America and some not. The best way to make sure that a purchase qualifies is to use NHTSA's VIN Decoder (site provided by DOT) to determine whether a vehicle was manufactured in North America.
Pending Transactions
Some vehicles that qualified for the $7,500 income tax credit on August 15th do not qualify starting August 16th. For example, the North American assembly requirement may suddenly make a vehicle ineligible for the credit. However, if your customer entered into a "binding contract" to purchase a vehicle before August 16, 2022 but takes possession on or after August 16, 2022, the customer may still claim the credit. The Treasury Department's attempt to define "binding contract" is quoted verbatim immediately below:
What Is a Written Binding Contract?
In general, a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit). While the enforceability of a contract under State law is a facts-and-circumstances determination to be made under relevant State law, if a customer has made a significant non-refundable deposit or down payment, it is an indication of a binding contract. For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount. For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract. A contract is binding even if subject to a condition, as long as the condition is not within the control of either party. A contract will continue to be binding if the parties make insubstantial changes to its terms and conditions.
Generally, under Illinois law, deposits on motor vehicles must be refunded if a customer is unable to complete the purchase, such as when a customer cannot get approved for financing at the quoted rate. If you have specific instances of a "carryover" deal and you are unsure of whether the purchase will qualify for the tax credit, we recommend that you seek counsel.
Coming Attractions
2023
The sales threshold that triggers the phase out the income tax credit will be eliminated, making GM and Tesla eligible once again for vehicles that can meet the North American final assembly requirement.
The Treasury Department will implement a tax credit for pre-owned clean vehicles. We will keep you posted once the Treasury releases information about the pre-owned clean vehicle tax credit.
2024
The $7,500 tax credit is currently constructed as a non-transferable income tax credit, which means that the customer does not realize the benefit until tax time. However, starting in 2024, the credit will become assignable to the selling dealer, which should make it more attractive as it will operate like a "cash on the hood" incentive.
The State $4,000 EV Rebate Program has not changed since it rolled out on July 1, 2022, but a reminder is provided below because the eligibility parameters differ from those for the federal $7,500 income tax credit. Vehicles that qualify for the income tax credit may or may not qualify for the state rebate.
In fact, at this writing, only 10 out of 530 applications for the State EV rebate have been approved.
One note since publication of that bulletin: The Illinois Environmental Protection Agency has developed a VIN lookup tool with a list of vehicles for which the rebate has been awarded and are thereby ineligible for a rebate in the future. Vehicles on this VIN list are not eligible for Illinois rebates: VIN Lookup.
A NOTE ABOUT VIN LOOKUP TOOLS
Use this VIN Decoder tool to determine whether an EV was manufactured in North America: site provided by DOT. A vehicle must be a qualifying EV and manufactured in North America to qualify for the $7,500 Income Tax Credit.
Use this tool to determine eligibility for the $4,000 Illinois EV Rebate. A vehicle that appears on this list is NOT eligible for the $4,000 Illinois EV Rebate: VIN Lookup
If you want to go the extra mile, you can use this VIN lookup tool to determine whether a vehicle has an open recall: Check for Recalls: Vehicle, Car Seat, Tire, Equipment | NHTSA. While recall status does not affect eligibility for the $7,500 Income Tax Credit nor the $4,000 State EV Rebate, an unrepaired recall can provide an opportunity for service business.
