Electric buses at a charging station.
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Plus, the large truck tax credit is worth more money — up to $40,000, as opposed to the $7,500 maximum for passenger cars and small commercial electric vehicles.
“I think it’s going to be a lot simpler and easier to take advantage of than the light-duty vehicle tax credit,” Ingrid Malmgren, director of policy at Plug In America, said of the commercial electric vehicle tax credit. “This really is a great opportunity for business owners to cost-effectively reduce emissions.”
Business owners can get the tax credit for new vehicles purchased on or after January 1, 2023. It is available for 10 years, until the end of 2032.
How and why of the commercial vehicle tax credit
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Here are the basics of commercial vehicle credit.
The tax relief is available to business owners who purchase an electric vehicle or electric “mobile machinery”, including for construction, manufacturing, processing, farming, mining, drilling or mining forest.
The vehicle must be subject to a depreciation allowance, which means it is for business use, according to the Congressional Research Service.
“If you had a flower shop, for example, and you wanted to get flower delivery vehicles, you bought a bunch of vans, you’d be the one claiming the tax credit,” Malmgren said.
There are two thresholds for the business tax credit: vehicles that weigh less than 14,000 pounds are eligible for a maximum of $7,500; those weighing more than that qualify for up to $40,000.
The 14,000-pound line includes Class 4 and above utility vehicles, or largely medium- and heavy-duty trucks and buses.
Medium and heavy trucks “are the fastest growing fuel consumers and greenhouse gas producers in the United States,” according to a 2019 U.S. Department of Energy report.
According to the report, Class 3 through Class 8 trucks make up less than 5% of the total number of US vehicles on the road, but they account for 27% of annual on-road fuel consumption. Gasoline and diesel account for well over 90% of medium and heavy-duty vehicle fuel consumption, he added.
While the market for electrified commercial vehicles is “far behind” the light-duty market, battery performance has improved and battery costs have come down significantly over the past decade, making the electrification of trucks and medium and heavy buses “more attractive”. “, according to the Department of Energy report.
Technically, the commercial vehicle tax credit is worth the lesser of: (1) 30% of the purchase price of the vehicle; or (2) the “additional cost” over a similar gasoline vehicle. (The incremental cost is the net difference in price between the clean commercial vehicle and a similar vehicle equipped with an internal combustion engine.)
Regardless of the amount of this calculation, its ultimate value is capped at $7,500 or $40,000, as previously stated.
Some aspects of the tax relief will not be clear until the US Treasury Department and IRS issue guidance on the new rules, experts said. For example, how will business owners determine the price of a comparable gas-powered vehicle to perform an “incremental cost” analysis?
Since the financial benefit is structured as a tax credit, business owners must have a tax liability to benefit from it. One caveat: Tax-exempt entities can still get a financial benefit in the form of a direct check from the government, said Steven Schmoll, director of KPMG.
Additionally, business owners cannot double their deduction by obtaining tax relief from the consumer side (tax code section 30D) and the business side (code section 45W).
Differences between commercial and consumer electric vehicle breaks
A key difference between the commercial and consumer tax credits for new clean vehicles is the absence of manufacturing and other requirements for the commercial credit.
To qualify for a “clean new vehicle” credit (i.e. the one not intended for business owners), the final assembly of the car must now take place in North America. The Department of Energy has a list of vehicles that meet this standard.
Some additional rules come into force in 2023.
First, there are income limits. A tax credit is not available for single persons whose adjusted gross income is $150,000 or more. The ceiling is higher for others – $225,000 for heads of families and $300,000 for married couples who file joint returns. (The test applies to income in the current year or the previous year, whichever is lower.)
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And some cars may not be eligible depending on the price. Sedans with a retail price over $55,000 are not eligible, nor are vans, SUVs or trucks over $80,000.
Two other rules apply to manufacturing: one has requirements for the supply of critical minerals to the car battery; the second requires that some of the battery components be manufactured and assembled in North America. Consumers lose half the value of the tax credit — up to $3,750 — if any of these requirements are not met; they would lose the entire $7,500 if they failed to meet both.
The five requirements were added by the Inflation Reduction Act, and none of them apply to the clean commercial vehicle credit, Schmoll said.