Looking for a New Car? This Tax Credit Might Help!

July 19, 2018 - 4 minutes read

Electric vehicle

Is it time to purchase a new car? Are you having trouble deciding which car to buy? Internal Revenue Code Section 30D provides a credit of up to $7,500 for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles, small vans and light trucks. The vehicle must be obtained for use or lease and not for resale, and the original use of the vehicle must begin with the taxpayer. The vehicle must also be purchased for primary use in the United States. A vehicle is considered purchased when title to the vehicle passes to the taxpayer under state law. A vehicle is considered sold when it is delivered to the buyer, not when the buyer makes a reservation with the manufacturer.

Section 30D was passed in the Energy Improvement and Extension Act of 2008 and later amended as effective for vehicles purchased after December 31, 2009 by The American Recovery and Reinvestment Act of 2009. The American Taxpayer Relief Act of 2013 further modified this section for some 2 or 3 wheeled vehicles purchased after December 31, 2011 and before January 1, 2014.

The credit is limited to $7,500 per vehicle. It starts at $2,500. You then add $417 for a vehicle which uses propulsion energy from a battery with at least 5 kilowatt hours of capacity, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The manufacturer will provide a certificate that verifies that your vehicle meets specific qualifications that must be met in order to claim the credit and the amount of the credit that is allowable for your vehicle.

The credit starts to phase out when a manufacturer sells, on a cumulative basis, at least 200,000 qualifying vehicles for use in the United States. The one year phase-out period begins with the second quarter after the quarter in which at least 200,000 qualifying vehicles were sold. If the vehicle is purchased in the first two quarters of the phase-out period, the taxpayer is still eligible for 50% of the credit ($3,750). If the vehicle is purchased in the third or fourth quarter of the phase-out period, the taxpayer is still eligible for 25% of the credit ($1,875). Vehicles purchased after the phase-out period are not eligible for the credit at all, meaning you have up to 18 months after the first 200,000 sales until the credit phases out completely and becomes zero.

If a manufacturer sold 200,000 qualifying vehicles by January of 2018, the full $7,500 was available through June. A $3,750 credit is available through December, and a $1,875 credit is available through June of 2019. If a manufacturer sold 200,000 qualifying vehicles by March of 2018, the same credit applies as if this milestone was met in January, shortening the phase-out period to 16 months. If a manufacturer didn’t meet this milestone until April of 2018, the phase-out period would be for 18 months and go through September of 2019. In order to get the full $7,500 credit, the purchase would have to be made before the end of September 2018.

Given these phase-out provisions, it is important to keep track of the manufacturers’ sales and make your reservation to purchase your vehicle earlier rather than later in order to receive the tax benefits of this credit.

The credit under Section 30D can be used against the regular and alternative minimum tax liability.  If your tax liability happens to be less than the credit, there is no carryover for the excess.  Also, the credit is not available to reduce certain other taxes (e.g., self-employment tax).

Natasha Nutall

Natasha Nuttall
Price CPAs

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