IRS issues guidance on transition rules for EV credits
TAX ALERT | August 17, 2022
Authored by RSM US LLP
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.
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Brent Sabot, Deborah Gordon, Christian Wood and originally appeared on 2022-08-17.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.