Inflation Reduction Act Changes Tax Credits Available for Electric Vehicles
On August 16, President Biden signed the Inflation Reduction Act (the “Act”) into law. The Act is a broad legislative package that, in part, addresses climate change, healthcare, and taxes. However, it includes an important provision that could immediately affect electric vehicles (“EVs”) on your lot.
Before today, the federal government provided a $7,500 tax credit to consumers who purchased new EVs, as long as the manufacturer had not sold more than 200,000 qualifying vehicles. Now that the Act has been enacted, the federal government has immediately restricted this tax credit to EVs where the “final assembly” of the vehicle occurs “within North America,” i.e., the United States, Mexico, or Canada. In other words, an EV that was assembled outside of North America no longer qualifies for the federal tax credit. It is important to note that a customer who “entered into a written binding contract to purchase” an EV assembled outside of North America before today will still qualify for the prior tax credit, even if the vehicle is not delivered until a later date.
The Act also has several provisions that affect EVs, which will become effective in the future. For example, vehicles with components from “foreign entities of concern,” including Russia and China, will be excluded from the tax credit as of December 31, 2023. Starting in 2024, dealerships will be able to offer the value of a tax credit up front to buyers, however, car buyers must meet certain income guidelines to be eligible for the tax credit for new EVs. For example, households with an adjusted gross income up to $300,000 will still qualify for the tax credit, but heads of household must be below $225,000 to qualify. Individual filers will qualify only with an income below $150,000. The Act will also allow buyers of used EVs to receive a tax credit, as long as they purchase the used EV from a dealership. The income threshold is lower for used EV buyers with $150,000 for joint filers, $112,500 for a head household, and $75,000 for an individual.
The key takeaway for today is to review your current inventory to determine if the Act has affected any vehicles on your lot. We also recommend that you contact your original equipment manufacturer(s) to determine which EVs will no longer be eligible for the EV tax credit.
If you have any questions about what this new law means for you, we encourage you to consult with Hilary Holmes Rheaume and our Auto & Equipment Dealers practice group.