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What dealerships should know about the electric vehicle tax credit program

Feb 01, 2021

The world is getting greener. Consumers are becoming more conscious of their environmental footprint and looking for ways to save money. One way they’re doing so is by purchasing electric vehicles. States are encouraging these purchases, too. In California, the governor has taken action to ban the sale of non-electric vehicles after 2035. Furthermore, GM just announced their goal to be 100% EV by 2035.

Many taxpayers have heard of an electric vehicle tax credit program, but they likely don’t know how to qualify. There are specific conditions and limitations that must be met. Some vehicles have actually phased out of the program.

If your dealership has electric vehicles in your inventory, make sure your customers know about these tax credits and how they work. Here’s what to know about the electric vehicle tax credit, how it works and what qualifies.

What vehicles qualify for the electric vehicle tax credit?

The electric vehicle must:

  • Have at least four wheels and a gross vehicle weight of less than 14,000 pounds.
  • Draw energy from a battery with at least 4 kWh and be recharged from an external source. Each additional kWh can increase the number of credit hours.
  • Be purchased new in or after 2010 and begun driving in the year claiming the credit.
  • Be primarily used in the U.S.

There is also a two-wheel credit. It has been extended for 2018, 2019 and 2020 vehicles if they can reach speeds of 45 mph or more, draw from a battery with at least 2.5 kWh and are charged from an external source.

How much is the electric vehicle tax credit?

Depending on the vehicle, the tax credit for an electric vehicle can range from $2,500 to $7,500. There are higher credit amounts for specific battery capacities and vehicle sizes. For two-wheeled vehicles, the credit is 10% of the purchase price, up to $2,500.

How is the tax credit applied?

The electric vehicle tax credit is filed on the taxpayer’s federal tax return, and their tax liability determines how much credit they qualify for. The credit is non-refundable, which means that in order to receive the full $7,500 credit, the customer’s tax liability must be at least that much. If their liability is only $4,000, they’ll only receive $4,000.

Can customers get a tax credit on a used or leased vehicle?

No, the credit only applies to the new purchase and the person who actually owns the vehicle. Used vehicle purchases, even transfers to family members, don’t qualify. If the vehicle is leased, the credit actually goes to the manufacturer offering the lease, since they still own the vehicle. Some dealerships offer lower prices on leased electric vehicles because of the incentive, but you are not required to do so.

When does the tax credit run out?

Once a manufacturer reaches 200,000 qualified vehicles, the electric vehicle tax credit begins to phase out with a step-down process over the course of a year. Tesla and GM electric vehicles already hit their mark, so the tax credits are not available for those brands. You can see a list of the vehicles available for credits at fueleconomy.gov.  

Are there state electric vehicle tax credits?

Some states offer tax credits for electric vehicles and alternative-fuel vehicles, but these often are for businesses, not individuals. You can view a chart of state incentives here.

If you’d like to learn more or need assistance with the electric vehicle tax credit and determining any extra state or local incentives, reach out to us.

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Kevin Cherney, CPA
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