Public and private initiatives to expand electric vehicle offerings are fueling demand for charging stations. As a result, dealerships and individuals alike can benefit from initial-year federal tax credits. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the alternative fuel vehicle refueling property credit to cover such properties placed in service in 2021.
Qualifications and limitations
To qualify for the credit, the property needs to be operational in the tax year and used predominately inside the United States. The property’s use has to have originated with the taxpayer.
Bear in mind these limits, under current law, when claiming the tax credit:
- For business property subject to a depreciation allowance, an income tax credit for all property placed in service at each location is 30% of the cost of the property or $30,000 (whichever is less).
- For property not subject to a depreciation allowance and placed in service at your main home, the income tax credit is equal to 30% of the cost of the property placed in service or $1,000 (whichever is less). So yes, you can qualify for the tax credit by having a charger at your house.
- The “total cost of the property placed in service” includes the cost of the charger and installation. Some of the larger, faster chargers require substantial structural and electrical retrofits. It is yet to be defined whether any portion of those expenses could be considered part of the installation cost.
How taxpayers benefit from the credit
This credit provides a direct reduction of taxes versus a deduction in income, which is then multiplied by the tax rate. The initial cost of the property is reduced by the amount of the credit, and the remaining basis is depreciated over the useful life of the asset. Unless your asset cost is over $100,000, you should not elect to apply accelerated initial year expensing with Section 179 on the asset, as it reduces the cost basis before the credit is calculated.
For example, let’s look at the benefit of installing a charger with a total cost of $40,000, including the charger and the electrical installation work. The amount of the credit will be $12,000. The adjusted depreciable basis is $28,000, which will be depreciated over the next five years. So instead of accelerating depreciation in the first year and getting a $40,000 deduction, you could now get a possible net reduction in income of $60,432 over the life of the asset. The $60,432 comes from the $12,000 credit, which at a 37% tax rate would cover $32,432 of income as well as the remaining $28,000 basis.
How Wipfli can help
Wipfli’s dealership practice has the experience to help you determine your eligibility for this extended tax benefit. If you’d like to learn more about the alternative fuel vehicle refueling property credit, contact us today.
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