IRS issues guidance on transition rules for EV credits

TAX ALERT | August 17, 2022

Authored by RSM US LLP

Executive summary

The IRS released guidance to assist taxpayers with navigating the transition from electric vehicle (EV) credits under prior law to the rules under the Inflation Reduction Act of 2022 (“the Act”). The guidance (a news release and FAQ’s) outlines the rules for written binding contracts prior to Aug. 16, 2022, EV purchases after enactment but before the end of the calendar year, and the new rules for EV purchases beginning in 2023. Aug. 16, 2022, the date on which President Biden signed the Act into law, has become a pivotal date for the transition to new rules governing eligibility for EV credits. From Aug. 16, 2022 through Dec. 31, 2022, the final assembly of eligible vehicles must take place in North America to maintain eligibility for the qualified plug-in electric drive motor vehicle credit. There is one limited exception to the final assembly requirement.

Final assembly requirements and use of written binding contracts dictate credit eligibility for the remainder of 2022

The Inflation Reduction Act’s enactment date (Aug. 16, 2022) is now a pivotal date for the eligibility of certain qualified plug-in electric drive motor vehicles. The credit is being overhauled for vehicles placed in service after Dec. 31, 2022. However, certain transition rules are now in effect for vehicles purchased and placed in service from Aug. 16, 2022 through the end of the calendar year.

Still subject to the rules in effect before enactment, qualified vehicles placed in service from Aug. 16, 2022 through Dec. 31, 2022 are now also subject to the North American final assembly requirement. Final assembly of vehicles must occur in North America to maintain their eligibility for the credit. 

The Department of Energy issued a list of 2022 and 2023 model year vehicles that may meet the North America final assembly requirement. However, it must be noted that not all vehicles of the same make and model undergo final assembly at the same facility. Accordingly, the IRS has encouraged taxpayers to verify the location of their vehicle’s final assembly with the VIN Decoder offered by the National Highway Traffic Safety Administration (NHTSA).  

The timing of the new final assembly requirement may prove problematic for buyers who had reserved EVs and were waiting for delivery prior to enactment. For vehicles with respect to which final assembly took place outside of North America, eligibility for the credit would no longer be available unless the acquisition was subject to a binding written contract entered into before Aug. 16, 2022. In anticipation of this change, some EV manufacturers encouraged their customers on waitlists to sign more formal purchase agreements. The thought was to elevate such customers from those with a refundable reservation for a vehicle to those with a binding agreement to purchase a car before enactment. In turn, those customers would maintain eligibility for the EV credit under the old rules. 

Taxpayers who entered into written binding contracts to purchase otherwise eligible vehicles prior to Aug. 16, 2022 but take possession of the vehicle on or after Aug.16, 2022 may claim the EV credit based on rules in effect before Aug. 16, 2022. It is important to note that the North American final assembly requirement did not apply before Aug. 16, 2022. In other words, a credit for an otherwise eligible vehicle, the assembly of which takes place outside of North America, may still be claimed if a taxpayer takes possession after Aug. 16, 2022 so long as the buyer had a binding contract in place before the date of enactment. The IRS has issued guidance accordingly.

Guidance from the IRS helps clarify what will be respected as a written binding contract. Specifically, the IRS has stated they will look to see whether taxpayers have made a significant non-refundable deposit or down payment on a vehicle as an indicator of a binding contract. Generally, for tax purposes, a down payment or deposit of at least 5 percent of the total contract price is an indication of a binding contract, according to recent IRS guidance. 

Washington National Tax takeaways

Buyers of qualified electric vehicles who entered written binding contract with a dealer or manufacturer should carefully review their contract to determine whether they may be eligible to claim the credit under rules in effect before Aug. 16, 2022. Specific attention should be paid to the date and binding nature of the contract.

Consumers interested in purchasing qualified EVs might consider purchasing a vehicle before additional rules apply in 2023. Additional vehicle eligibility requirements with respect to critical mineral and battery components, vehicle manufacturer suggested retail prices (MSRP), and taxpayer modified adjusted gross limitations are expected to reduce the number of vehicles eligible for this modified EV credit. That said, taxpayers might consider accelerating purchases of qualifying EVs assembled in North America while the vehicles are eligible for the credit.